the international venture capital industry

The International Venture Capital Industry

Where are we at? Where are we going?

Dr. Gordon Murray

London Business School

IFISE Meeting, Pavia: Gordon Murray@London Business School

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Where are we at. Where are we going?

A short review of both practice and contemporary issues in the

International Venture Capital industry


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Where are we at. Where are we going?

How can one best sum up the way in which governments of all complexions and political stances are seeing the present growth in the importance of the New or Knowledge Economy?

We’re ALL Californians now!


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Descriptives

A Simple Taxonomy of Venture Capital

Size

Growth Trends

Stage of Investment

Returns to Investors


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Global Venture Capital Funds in 1999

CountryCapital underManagement

($ billions)USA 400.0

UK/Europe 92.0

Asia 38.3

Canada 11.2

Israel 10.4

Latin AmericaEx NVCA, 2000

6.0

$557.9 billion


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US Capital Commitments

$46.1 billion

0

5

10

1520

25

30

35

40

45

50

19791981

19831985

19871989

19911993

19951997

1999


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US Disbursements

$48 billion

0

10

20

30

40

50

60

19801981

19821983

19841985

19861987

19881989

19901991

19921993

19941995

19961997

1998


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European Capital Commitments (€ million)

€2.54 billion

0

5000

10000

15000

20000

25000

30000

19891990

19911992

19931994

19951996

19971998

1999


10

European Disbursements (€ million)

€ 2.5 billion

0

5000

10000

15000

20000

25000

30000

19881989

19901991

19921993

19941995

19961997

19981999


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US Disbursement by Investment Stage1999

Value

Early Stage22%

Later Stage18%

Expansion56%

MBO/MBI/Acquisition

4%

Early Stage

Later Stage

Expansion

MBO/MBI/Acquisition


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European Allocation by Investment Stage 1999

Value

2% 11%

30%

5%

52%

Seed

Start-up

Expansion

ReplacementCapital

MBO/MBI


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US Disbursements by Technology 1999

On-line Specific

46%

Computer H/ware

3%

Computer S/ware & Services

18%

Medical/Health

6%

Semi-conductors

4%Bio-technology

3%

Communic-ations20%

On-line Specific

Bio-technology

Semi-conductors

Medical/Health

Communications

Computer H/ware

Computer S/ware &Services


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The Attraction of Technology -e.g. UK Venture Capital Investment in £ millions

inc. MBOs

0

200

400

600

800

1000

1200

19841985

19861987

19881989

19901991

19921993

19941995

19961997

19981999

UK VC Investment in Technology


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Technology Growth in European VC Investments

0

1000

2000

3000

4000

5000

6000

7000

1995 1996 1997 1998 1999

Ann

ual I

nves

tmen

t

0

5

10

15

20

25

30

% T

echn

olog

y

Annual Investments € million Technology as a % Total Investment


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The Attractions of High Tech Firms

(Quality) Employment Growth

Efficiency of Innovation

Export Intensity

Regional Development

Reciprocal Relationship with Large Firms

Increase Industry Competitiveness


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FACT: for most UK venture capitalists, technology historically* has not been a success

Investment Stage

Number of funds

Pooled IRR

Mean IRR

Median IRR

Min Max Range Standard Deviation

Early Stage 17 8.2 6.9 8.1 -9.6 18.9 28.5 8.7 Development 34 9.1 4.6 4.8 -17.7 32.9 50.6 11.6 Mid MBO 27 16.4 15.7 14.9 -6.6 40.6 47.2 9.8 Large MBO 26 17.8 22.3 20.5 -3.0 67.3 70.3 15.3 Generalist 30 12.0 8.1 7.9 -9.9 32.0 41.9 9.8

All Funds 134 14.3 11.3 10.8 -17.7 67.3 85.0 13.1

Technology Funds only

26 9.8 10.2 9.1 -0.2 20.2 20.4 6.2

Source: LBS calculations

Range of Returns of Mature Funds *1980-95 by Investment Stage in %


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Exceptions - not the rule ...


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US Venture Capital Returns to 1998

Source; Burgel 2000

Investment Focus Oneyear

ThreeYear

FiveYear

TenYear

TwentyYear

1998 1996-98 1994-98 1989-98 1979-98

Early / SeedStage

25.7 37.7 33.7 19.7 16.8

Later StageVenture

26.5 27.3 29.8 23.9 18.2

BalancedVenture

10.8 23.6 24.2 16.1 14.0

Total VentureCapital

17.2 27.9 27.4 17.7 15.1

Buy-outs 10.9 19.2 17.2 16.4 19.6Mezzanine 11.7 10.4 10.4 10.2 10.8Total 12.8 22.0 20.5 16.9 17.1


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Contemporary Issues

Relationship Government and VC

How to manage early-stage investments

How to understand technology investments

How to manage a European context

The academic/investment inter-face

The Corporate Venturing phenomena

What happens when the bubble bursts?


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Everyone wants their own Silicon Valley

Industry policy is back

Creating enabling environments

Identification of market barriersinformation

taxation

incentives

Finance a key issue


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Early-stage investment is really important

S O L O N G A S SOMEONE ELSE D O E S IT

ergo: several schemes to attract venture capital activityGovernment as backer

Government as underwriter

Government as syndicate partner

Government as provider


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Technology Investment Challenges

Until very recently, European VCs have not had the skill sets to be sufficiently technologically informed. Issues of:

information asymmetries

agency costs

appraisal and monitoring

technology networks


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European Context

Venture capital has been/is about networksergo, it has been highly parochial

The geographical scope is changing:internationalisation of technology

‘weight of money’

integration of economies

the half-life of technologies


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Academic-Industry- Investor Interface

Historically ‘separate lives’

US model becoming dominant

University finances becoming conditional on external support esp.. expensive science

Often fraught relationship

Government encouraging greater awareness and contact. IN UKUniversity Challenge Fund

Science Enterprise Challenge


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The Corporates Cometh

In 1999, US based corporations invested $9.5 billion in 1021 investee companies. i.e. 20% by value and 28% by volume of total US venture capital activity.

In 6mnths of 2000, corporations placed a further $7.4 billion into 901 companies.

This is in excess of a ten fold increase in investment activity in three years.


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CVC Activity is growing very, very fast

Derived from Venture Economics data. Includes subsidiaries and affiliates of industrial corporations and corporate partnerships according to the definitions of Venture Economics. Pension funds and financial corporations are excluded.

Annual Corporate Venture Capital Investments and the Number of CVC Investors

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

1962

1963

1964

1965

1966

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

Ann

ual C

VC

Inve

stm

ents

($U

S B

illio

ns)

0

50

100

150

200

250

300

350

400

Num

ber

of C

VC

Inve

stor

s

Annual CVC investments ($US Billions) Number of CVC investors


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Challenges to the VC boundaries?

Traditional VC

Funds

Corporate Venture

Capitalists

IncubatorFunds


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and finally ...

the VC industry is heavily dependent on stock market performance, particularly (volatile) high tech stock performance

we have seen an exception period of bullish markets in the 1990s, and in the 2000s?

VC is investment this year estimated to be $70 million - a 12 fold increase in 5 years

Investors are coming to expect 1 year net IRRs of 62.5%

Is the current rate of growth sustainable?

the international venture capital industry

Economy & Finance

billioncountry capital

us capital commitmentschart50

us portfolio companies

porfolio company stage

billionfunds conc

present growth

new york1514

individuals families2