A Venture Capital !Revival!Is Upon Us

R.I.P.

RT @MarkTwain The reports of my death have been greatly exaggerated.

C L E A R S T O N E William Quigley Managing Director

10 Years ago… The decade began on a high note… but quickly

evolved into extraordinary difficult times."

C L E A R S T O N E William Quigley Managing Director

Unstable Situation "Venture Capital Environment - Circa 2000/2001 "

2000 / 2001 Trend Direction…

Valuations Very high Falling

Capital availability Substantial Beginning to tighten

Fund commitments $83B & Big Overhang Shrinking

# of Active Firms 1338 At a high but going down

Tracking index – NASDAQ 4000 Falling rapidly

Technology spending Historically High Dropping quickly

0  

10  

20  

30  

40  

50  

60  

70  

80  

90  

1996   1997   1998   1999   2000   2001   2002   2003  

 $12      $17    

 $27    

 $57    

 $83    

 $45    

 $19      $9    

$B  

$  

VC Fundraising and Performance "

Plummet After a 7X Increase in Capital in Just 4 years

Source: DowJones VentureSource, NVCA.

In the 2000s"Venture Capital Exits Shifted from IPOs to Less Valuable M&A

IPO  58%  

M&A  42%  

VC  Exits:  ‘91  –  ‘00  

IPO  12%  

M&A  88%  

VC Exits: ‘01 – ‘09 VC  Exists:    ‘01  –  ‘09  

Source: NVCA.

10 Years Later….

C L E A R S T O N E William Quigley Managing Director

The market is now poised for "

breakout performance.

Conditions have improved considerably helped by a "

reduction in capital and firms.

Venture Capital Fundraising"Has Been in Decline Since 2007

Source: DowJones VentureSource.

$0  

$10  

$20  

$30  

$40  

$50  

$60  

$70  

$80  

$90  

2000   2001   2002   2003   2004   2005   2006   2007   2008   2009   2010  

 $83    

 $45    

 $19      $9    

 $21    

 $28      $30    

 $37    

 $27      $15      $12    

$B  

Venture capital funding

commitments to IT are even less than meets the eye.

Because……

Much of the recent LP funding to venture capital has gone into

Cleantech

Cleantech Share "Venture Investments Up 8X

Cleantech investments have crowded-out other sectors, further decreasing funds directed towards IT investing.

Source: NVCA.

The US economy has grown

almost 50% since 2000 "

yet…

There is less venture capital under

management today than there was 10 years ago.

Venture capital investments are now outpacing new funding commitments by LPs, draining the pool of investable capital."

$225  $253   $253   $254   $262   $270   $277  

$255  

$204  $179  

0  

50  

100  

150  

200  

250  

300  

2000   2001   2002   2003   2004   2005   2006   2007   2008   2009  

Source: NVCA.

Venture Capital Assets Under Management Are "Lower Today Than They Were a Decade Ago

$B

Venture Capital Fundraising As a % of GDP "Has Rapidly Fallen

$10.0   $10.3   $10.6  $11.1   $11.9   $12.6  

$13.4    $14.1   $14.4   $14.1   $14.7  

0.0%  

0.2%  

0.4%  

0.6%  

0.8%  

1.0%  

$0  $2  $4  $6  $8  

$10  $12  $14  $16  

2000   2001   2002   2003   2004   2005   2006   2007   2008   2009   2010  

$T  

Venture Capital fundraising as a % of GDP has been declining since 2000.

Source: DowJones VentureSource, Bureau of Economic Analysis.

Consider…

C L E A R S T O N E William Quigley Managing Director

American Reinvestment and Recovery Act of 2009

$787 Billion  

New Commitments To Venture Capital Funds in 2009?

$15 Billion  

But After a Long Shake Out, "

Attractive Conditions Ahead…"•  Venture capital fund commitments down for last 3 years

–  Positive contra-indicator

•  Early stage valuations stable… –  While late stage and IPO valuations growing

•  Strong public market appetite for growth stories –  Recent IPOs in the enterprise and consumer

services sectors well received

Source: DowJones VentureSource.

Active Investors Down" – 712 active investors in 2000 versus 313 in 2009, a 56% decline."Average Fund Size Increased" – $165M in 2000 versus $200MM in 2009."

Venture Capital Firms"Only the Strongest Survived the Post-Bubble Shake-Out

626   726   724   672   591   613   597   572   614   572  

712   514   398   381   449   405   416   426   375   313  

0  200  400  600  800  1000  1200  1400  1600  

2000   2001   2002   2003   2004   2005   2006   2007   2008   2009  

#  of  Ac=ve  Firms  

Ac=ve  Informa=on  Technology  Investors  

>3  Deals/yr  

<=3  Deals  

Venture-Backed IPOs Will Return to Pre Financial Crisis Levels in 2011

57   57  

86  

6  12  

72  80  

0  

20  

40  

60  

80  

100  

2005   2006   2007   2008   2009   2010   2011E  No.

of V

entu

re-B

acke

d O

PO

’s

A new generation of large market cap tech companies will increase the field of acquirers.

Source: NVCA and Clearstone analysis. Selected IPO’s shown in 2011. LinkedIn and Pandora have filed for IPO. Facebook and Groupon IPO are market speculation.

VC Environment Today"Attractive Conditions

2011 Trend Direction…

Valuations Moderate Rising in Certain Growth

Markets

Capital availability Adequate Stable

Fund commitments $~12B Stable but trending down

# of Active Firms ~300 1/2 of the high & shrinking

Tracking index – NASDAQ

2800 Stable with IPO market open

Technology spending Stable Good and rising in some sectors

Economic Situation"

Have you heard the maxim “the venture model is broken” in the last 6

months?

That question was really asking

“are VCs being rewarded for their work anymore?”

The Answer?

YES!

More so than earlier tech cycles, private investors are being

rewarded for potential break out value at IPO….

Lets look back at the so called venture capital golden age…..

The Golden Age

C L E A R S T O N E William Quigley Managing Director

How were the iconic tech companies of the past

valued when they went public?

IPO Date: 1986 CY 1986 Revenues: $198M CY 1987 Revenues: $346M

IPO Valuation?

$650M ~1.8X Revenue

IPO Date: 1990 CY 1990 Revenues: $69M CY 1991 Revenues: $183M

IPO Valuation?

$225M ~1.25X Revenue

IPO Date: 1997 CY 1997 Revenues: $148M CY 1998 Revenues: $610M

IPO Valuation?

$440M ~0.7X Revenue

IPO Date: 1999 CY 1999 Revenues: $103M CY 2000 Revenues: $647M

IPO Valuation?

$1.5B ~2.2X Revenue

IPO Date: 1989 CY 1989 Revenues: $64M CY1990 Revenues: $102M

IPO Valuation?

$73M ~0.7X Revenue

How do the Golden Age companies compare to

Today’s leading tech companies?

$0.23 $0.44 $.065

$12

$40

$70

$0

$10

$20

$30

$40

$50

$60

$70

Cisco Amazon Microsoft VMware Google Facebook

$B

More Value Accruing to Venture Investors, "Not Public Shareholders

Source: Facebook Pre-Money IPO valuation $70B per SharesPost private market exchange – February 2011.

Earlier Tech Cycles

New Tech Cycle

Pre-Money IPO Valuations

Public investors participated in 99% of the

terminal value of these companies

IPO Valuations Now Exceed the Level "Reached During the Tech Bubble

Mean pre-money IPO valuations of venture backed companies have increased at a 16% CAGR since 1990, while company age at IPO has remained relatively even.

9   9   9   9  11  

9   8   8   7  5  

7  

12  15  

9   8   8  10   9   10   10  

0  

200  

400  

600  

800  

1000  

1200  

1990   1992   1994   1996   1998   2000   2002   2004   2006   2008  

Mean  Company  Age  at  IPO   Mean  Pre-­‐Money  ValuaKon  

$  Millions  

$  

Source: NVCA.

So why are early stage companies capturing more

value?

3 Things Have

Changed

C L E A R S T O N E William Quigley Managing Director

1.  Internet Growth Internet Companies Can Reach Critical Mass Faster

 22.5    

 124.0    

 47.1    

 5.0    

 5.0    

 24.0    

 3.1    

 15.4    

 8.5    

 19.0    

 420.0    

 239.2    

 99.1    

 81.0    

 72.0    

 65.1    

 59.7    

 51.4    

 44.6    

 39.4    

China*  

United  States  

Japan  

India  

Brazil*  

Germany  

Russia  

UK  

France  

South  Korea  

2000  vs.  2010  Number  of  Internet  Users  (millions)  

2000  2010  

21.4%

12.2%

5.0%

3.7%

3.3%

3.0%

2.6%

2.3%

4.1%

2.0%

% Global Users

Source: Internet World Stats. 2010 data as of June 2010 *China figures do not include SAR Hong Kong, SAR Macao and Taiwan. Brazil data for 2009

2. Capital Markets Better Informed Proliferation of technology specialists in the public markets

 -­‐    

 2,000    

 4,000    

 6,000    

 8,000    

 10,000    

 12,000    

0.0  

0.4  

0.8  

1.2  

1.6  

2.0  

1990  

1991  

1992  

1993  

1994  

1995  

1996  

1997  

1998  

1999  

2000  

2001  

2002  

2003  

2004  

2005  

2006  

2007  

2008  

2009  

Hedge  Fund  Industry  Growth  

Number  of  Hedge  Funds   $AUM  

More hedge funds = more specialized public investors who understand the growth prospects of tech companies.

Source: Hedge Fund Research.

Trillions  

3. Going Global, Faster Start-ups Expanding Offshore Earlier in their Lifecycle

 $1.2    

 $5.7    

2000   2010  

China  GDP  

 $0.6    

 $2.0      

2000   2010  Brazil  GDP  

 $0.5    

 $1.4    

2000   2010  India  GDP  

Source: International Monetary Fund.

Groupon  already  has  35  interna=onal  offices!    $  Trillions  

•  Conditions are better today for private investors than they have been in over a decade

•  Fewer VC investors are putting capital to work •  Public investors are shifting their allocations back to

emerging growth stories  

•  This is not a repeat of the dot com and telecom bubbles circa 1999-2000

•  Today’s tech cycle leaders have global reach and hyper attractive economics

•  A new era technology start-up era has emerged •  Companies are scaling faster and accruing value

sooner than ever before

A Venture Capital Revival Is Upon Us

•  Overallocated to right sectors •  The best funds are sector funds •  IPO market will be healthy •  New sources of liquidity like second market

So what will drive venture returns this decade?

The Venture Capital Model Will Evolve

•  Greater liquidity to LPs provided by an increasingly active secondary position market

•  Shortening of the VC investment cycle. Funds will shift from 5 year investment terms to 3 years

•  Growth in sector focused funds

Mobile

C L E A R S T O N E William Quigley Managing Director

Mobile is a Burgeoning Market, Driven by Smartphone Sales and…

 -­‐    

 10    

 20    

 30    

 40    

 50    

 60    

 70    

 80    

 90    

 100    

Millions  

Apple  iPhone:  Cumula=ve  Units  Shipped  

iPhone  

Source: Apple company filings

…Tablet Proliferation

Source: Forrester

0  10  20  30  40  50  60  70  80  90  

0  

10  

20  

30  

40  

50  

2010   2011   2012   2013   2014   2015  

2010  –  2015  Tablet  Sales  and  Users  (Millions)  

Total  Tablet  PC  Users  (US)   Tablet  PC  Sales  (US)  

Tabl

et P

C

Sal

es

Tabl

et P

C

Use

rs

Cloud

C L E A R S T O N E William Quigley Managing Director

Mass Adoption of Cloud Computing is Expected to Help the Market Grow to

$150 Billion by 2013

$46  $56  

$71  

$89  

$114  

$150  

$0  

$20  

$40  

$60  

$80  

$100  

$120  

$140  

$160  

2008   2009   2010   2011   2012   2013  

Cloud  Services  Market  Size  (Billions)  

Source: Gartner

Mass Adoption of Cloud Computing is Expected to Help the Market Grow to

$150 Billion by 2013

0   0  15%  

29%   36%   38%   38%   38%  

8%   17%  

15%  

13%  12%   12%   12%   12%  

46%  44%  

39%  34%  

32%   32%   33%   34%  46%   39%   30%   24%   20%   18%   17%   16%  

2008   2009   2010   2011   2012   2013   2014   2015  

Percentage  of  PC  Unit  Sales,  US  

Desktops  

Notebooks/laptops  

Netbooks/minis  

Tablets  

“With Microsoft, Google, and others investing in consumer cloud services, we anticipate a virtuous cycle of adoption of tablets driving adoption of cloud services and vice versa.” -Forrester

Source: Forrester

Social Networking & Online Games

C L E A R S T O N E William Quigley Managing Director

Money flows to where people spend their

time…..

Social Networks and Online Games Increasingly Dominate Internet Usage

Source: Nielsen

Social  Networks,  23%  

Online  Games,  10%  

E-­‐mail,  8%  

Portals,  4%  Instant  Messaging,  

4%  Videos/Movies,  4%  Search,  4%  

Soeware  Manufacturers,  3%  

MulK-­‐category  Entertainment,  3%  

Classified/AucKon,  3%  

Other,  34%  

Share  of  Time  Online:  June  2010  

Social networks and online games grew 31% in 2010 and now account for 33% of all time online

Presented By:"

William Quigley Managing Director

C L E A R S T O N E