Venture World 2005

Michael Danaher

Wilson Sonsini Goodrich & Rosati

October 2005

2

Venture World – 2000

IT’S A MAD MAD MAD MAD WORLD

3

Venture World – 2002

WATERWORLDBudget = $175,000,000 • Box Office = $88,246,220

4

Venture World – 2005

MASTER AND COMMANDER: THE FAR SIDE OF THE WORLD

5

1. The Nasdaq Force Field Continues

2. Valuation Trends

3. Deal Terms

4. Exit Strategies

5. Tilting Towards Asia

6

1. The Nasdaq Force Field Continues

7

The Nasdaq Force Field Continues FUND INFLOWS

Source: Bloomberg, Nasdaq 1994-2005

$9.4

$17.8

$9.2$13.1

$50.5

$82.8

$58.8

$26.9

$17.1$12.7

$7.0$5.4

$0

$20

$40

$60

$80

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1H05

* Annual projectionSource: “Venture Capital Industry Overview,” VentureSource, October 2005

Fun

ds R

aise

d ($

B)

$18.8*

8

2005 Fund Formation

Roman Numeral Funds Dominate

• Accidental result of year 2000 venture market

9

2005 Fund Formation

Increased Focus on China and India

• More geographic funds

• More talk about Asian strategies

10

So Goes Nasdaq... FUND OUTFLOWS

Source: Bloomberg, Nasdaq 1992-2005

$6.4$9.2

$13.1$17.9

$49.5

$94.6

$36.2

$22.0$19.2

$21.5

$16.2

3257

222621442375

6310

4591

25472211

1912

1315

$0

$25

$50

$75

$100

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 YTD05*

0

1000

2000

3000

4000

5000

6000

7000

* YTD05 = 1Q05-3Q05 ** Annual projectionSource: “Venture Capital Industry Overview,” VentureSource, October 2005

$21.6**Am

ount

Inve

sted

($B

)

Num

ber of Deals

1605

11

So Goes Nasdaq... LIQUIDITY EVENTS

Source: Bloomberg, Nasdaq 1992-2005

Source: “Venture Capital Industry Overview,” VentureOne, October 2005

$15.1

$34.7

$17.3 $18.5

$62.6

$23.6

$12.4 $14.4

$28.3$22.5

$117.3

413

554

471

359400424

352 321306

660

$0

$20

$40

$60

$80

$100

$120

$140

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 YTD05*

0

100

200

300

400

500

600

700

Am

ont P

aid

($B

)N

umber of T

ransactions

$30.0**

* YTD05 = 1Q05-3Q05 ** Annual projection

284

12

For Venture Funds, It’s Still a “Hits” Business

THE BLAIR WITCH PROJECT

Budget = $60,000

Box Office = over $150 million

13

2. Valuation Trends

14

Median Pre-money Valuations by Round

Source: “Venture Capital Industry Overview,” VentureOne, October 2005

$29

$25

$14$13

$5$6

$3$3

$0

$10

$20

$30

$40

2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05

Later Stage Second Round First Round Seed Round

15

WS Investments

Percentage of Series A Deals Increased—But Valuations Did Not

2001 2002 2003 2004 1H2005

15% 36% 31.3% 34.2% 46.3%

Series A Deals as a Percent of Total

Source: WS Investment Data, October 2005

16

WS Investments

Quarter

Average Pre-Money Value of Top 10 Deals

($m)

Average Pre-Money Value of Top 3 Deals

($m)

Q104 $63 $96

Q204 $46 $71

Q304 $44 $73

Q404 $76 $101

Q105 $85 $179

Q205 $50 $85

Q305 $82 $145

Source: WS Investment Data, October 2005

17

WSGR Venture Financing

Up Rounds Are Up

Source: WSGR Transaction Data, October 2005

Price Change Q1 04 Q2 04 Q3 04 Q4 04

Q1-Q4 2004 Q1 05 Q2 05 Q3 05

Q1-Q3 2005

Up 59% 64% 54% 61% 59% 70% 69% 63% 68%

Flat 11% 12% 15% 14% 13% 11% 8% 19% 12%

Down 30% 24% 31% 25% 27% 19% 23% 19% 20%

18

3. Deal Terms

19

Deal Terms

Plain Vanilla Is In

20

Deal Terms

Liquidation Preference

Senior to last round 56%

Participating preferred• w/ cap

69%

35%

More than 1x 11%

Source: WSGR Transaction Data, October 2005

21

Deal Terms

Source: WSGR Transaction Data, October 2005

Anti-Dilution RightsWeighted average 93%

Ratchet 4%

None 2%

Pay-to-Play 15%

Cumulative Dividends 9%

Redemption Rights 30%

(9% in 2004)

(13% in 2004)

22

Deal Terms

New Trend?

• Partial Founder cash-outs in later stage deals

23

4. Exit Strategies

24

IPOs still Down

0% 20% 40% 60% 80% 100%

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

YTD05*

IPOs M&As

Source: “Venture Capital Industry Overview,” VentureOne, October 2005

* YTD05 = Q105 – Q305

25

Who’s Killing the IPOs?

Multiple Theories

• The SEC and the accountants?

• Higher perceived liability risk?

• Higher certainty of M&A exits?

• Investor impatience?

• Reduced market receptivity to young companies?

• Reduced supply of candidates?

• The butler?

26

Reckless Prediction #1

IPO Rates to Double in 1-2 years

• Capital markets will want high-growth companies

• Lots of good companies being built

• Regulatory and accounting costs will be reined in

27

Reckless Prediction #2

The “Build to Sell” Business Model Will Become More Common

• e.g.

– Spin-in’s

– “Bio wells”

28

Is Cisco Marxist?

John Chambers Karl Marx

29

5. Tilting Towards Asia

30

Venture Investment in Asia

Intel

• 600 venture deals

• 300 in China

WSGR

• Approaching nearly 2 financings per week in China

• Approaching nearly 1 financing per week in India

India

• 5 years behind China

• Venture financings: $884 million in 2003, $1.3 billion in 2004