the role of venture capital in the us economy
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National Venture Capital AssociationVenture Capital’s Voice:Public Policy & American CompetitivenessRobert E. GradyManaging Director, The Carlyle GroupChairman, NVCAChicago, IllinoisDecember 6, 2006TRANSCRIPT
National Venture Capital Association
Venture Capital’s Voice:Public Policy & American Competitiveness
Robert E. GradyRobert E. GradyManaging Director, The Carlyle GroupManaging Director, The Carlyle GroupChairman, NVCAChairman, NVCAChicago, IllinoisChicago, IllinoisDecember 6, 2006December 6, 2006
The Role of Venture Capital in the US
Economy
Venture Capital has grown up
Source: 2004 NVCA Yearbook, prepared by Venture Economics, page 18
At Year End
# Venture Firms
Capital Under Mgt
1970 28 $1B 1980 89 $4B 1990 399 $31B 2001 943 $257B 2004 1,068 $261B
Venture Capital Has Been Good for Investors
Fund Type 1 Year 3 Year 10 Year 20 Year
All Venture 16.2 9.0 20.8 16.5
All Buyouts 27.3 16.3 8.9 13.4
NASDAQ 5.6 10.2 6.2 11.7
S&P 500 6.7 9.2 6.6 9.8
Investment Horizon Performance - as of 6/30/06
Venture Capital: America’s Job-Creating Engine In 2003, venture-backed companies:
Provided 10.1 million US jobs (9.4% of all US employment) Had sales of $1.8 trillion (9.6% of all US GDP) 10% of US economy on < 2% of capital invested since 1970
VC-backed companies outperformed during economic softness:
Between 2000 and 2003: US private sector jobs down 2.3%... Venture backed companies grew jobs by 6.5%
Sales nationally up 6.5% Sales at venture backed companies up 11.6%
Source: Venture Impact 2004 by Global Insight (Wharton/DRI)
Venture capital is invested broadly in the US
Northern California
24%
Southern California
5%
New England
14%
New York5%
Texas12%
Northwest1%
Mid-Atlantic2%
Midwest3%
Southwest12%
South Central
1%North
Central4%
Other4%
Southeast12%
Colorado1%
Source: NVCA and Thomson VentureXpert, 2006.
1970
New England
13%
Texas14%
Northwest1%
Mid-Atlantic8%
Midwest5%
Southwest2%
New York7%
Southern California
11%
Northern California
25%
South Central
2%
North Central
3%
Other0%
Southeast4%
Colorado5%
1980
Northwest3%
Mid-Atlantic7%
Southwest1%
Midwest7%
Texas5%
New York7%
New England
15%
Southern California
12%
Northern California
33%
South Central
0%
North Central
2% Other0%
Southeast5%
Colorado3%
1990
Northern California
35%
Southern California
12%
Southwest3%
Midwest4%
Mid-Atlantic7%Northwest
4%
Texas5%
New York8%
New England
12%
South Central
0%
North Central
1% Other0%
Southeast6%
Colorado3%
2005
Jobs in All 50 States California 2.5MM Texas 899,000 Massachusetts 712,000 Pennsylvania 604,000 Georgia 551,000 Tennessee 543,000 New York 471,000 Washington 400,000 Virginia 333,000 Illinois 235,941
Source: Venture Impact 2004 by Global Insight
VC’s Contribution to Productivity:Annual Productivity Growth: 1970s vs. 1990s
2.2% 2.1%
3.0%
3.4%
3.9%
1.2%
3.5%
2.7%2.6%2.3%
0.1%0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Source: U.S. Bureau of Economic Analysis, 2006.
1
2.1%
(1.3%)(0.5%)
0.7%1.2%
3.4%
(2.9%)
2.6%3.4%
3.7%
0.3%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980
Gro
wth
in o
utp
ut
per
per
son
Gro
wth
in o
utp
ut
per
per
son
Market Trends:Venture Capital Today
VC Fundraising 1996 – 2006 (thru Q3)
0.0
20.0
40.0
60.0
80.0
100.0
120.0
$B Gross 7.8 10.1 11.6 18.1 30.6 58.2 106.6 38.0 3.9 10.7 18.6 27.0 25.4
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 20052006 (Q3)
Source: VentureXpert™ Database by VE & NVCA
Computer Hardware Sales$473.2
$429.8
$387.2
$366.9$392.1
$401.7
$335.9
$266.0
$212.7
$164.8
$132.7$107.8
$92.4$80.5
$67.6$63.8
$0.0
$100.0
$200.0
$300.0
$400.0
$500.0
1990199119921993199419951996199719981999200020012002200320042005
Source: U.S. Bureau of Economic Analysis, 2006.
Computer Software Sales
$206.2
$195.0
$177.3
$169.7$173.8
$176.2
$157.2
$129.4
$108.8
$84.1
$71.6$65.1
$59.3$53.0$45.1
$39.9
$0.0
$50.0
$100.0
$150.0
$200.0
$250.0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Source: U.S. Bureau of Economic Analysis, 2006.
RFID Hardware Sales$1,944.0
$1,530.0
$1,134.0
$810.0
$540.0
$372.0$275.8
$0.0
$500.0
$1,000.0
$1,500.0
$2,000.0
2004 2005E 2006E 2007E 2008E 2009E 2010E
Source: Gartner, Sept 2005.
$6,741
$5,994
$4,954 $4,832$5,057
$6,352 $6,243$6,775
$6,226
$5,695
$6,300
$5,635$5,785
$5,191$5,558
$4,817
$4,318
$4,534$4,517
Tot
al A
mt I
nves
ted
($M
)
0
100
200
300
400
500
600
700
800
900
# C
os. F
inan
ced
Venture Capital InvestmentQ1 2002 – Q3 2006
Source: PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report; Data: Thomson Financial
Cell Phone Users2,236
2,124
1,987
1,846
1,685
1,519
0
500
1,000
1,500
2,000
2,500
2004 2005 2006 2007 2008 2009
Source: IDC, April 2005.
(# in mils)
Mobile Device Explosion2,236
2,124
1,987
1,846
1,685
1,519
1,000
1,500
2,000
2,500
2004 2005 2006 2007 2008 2009
Source: IDC, April 2005Source: IDC, April 2005
(# in mil)
Source: Motorola, October 2006
Time to achieve 1st billion users:Time to achieve 1st billion users: 20 20
yearsyears
Time to achieve 2nd billion users:Time to achieve 2nd billion users: 3 3
yearsyears
Time to achieve 3rd billion users:Time to achieve 3rd billion users: 2 2
yearsyears
Source: Frost & Sullivan
Rapid Growth in Medical Devices
Market size: $63.8 billion (2004)
Key Growth Drivers: Tech innovation Aging of population Rise in wealth Physician/patient
acceptance CAGR of 11.7% from
2004-2011, to $139.9 billion
$47.2 $50.8$57.6 $63.8
$71.7$80.1
$89.4$99.1
$110.2$123.5
$139.9
0
20
40
60
80
100
120
$140
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Rev
enu
es
s
($ in billions)
U.S. MEDICAL DEVICE INDUSTRY: REVENUE FORECASTS, 2001 – 2011
Software as a Service/”On Demand” CAGR (’04-’09): 28% (IDC) Benefits:
Pricing Measurability Security Manageability
U.S. On-demand software revenues
1,4411,999
2,577
3,299
4,050
4,881
0
1,000
2,000
3,000
4,000
5,000
6,000
2004 $2,005 2006 2007 2008 2009Source: IDC
$ in mil
2004-09 CAGR: 28%
Source: America’s Growth Capital
Tech IPOs Enter 6th Year of Darkness
Venture Exit Counts- IPOs and M&A by Year
0
100
200
300
400
500
600
700
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
'00
'01
'02
'03
3Q
06
Year
Nu
mb
er
of
Tra
nsacti
on
s
M&A
IPO
Source: Thomson Financial/National Venture Capital Association
M&A vs. IPO for Venture Exits
263242
37 21 2783
45
240317
353 316 293339
344
0%
20%
40%
60%
80%
100%
1999 2000 2001 2002 2003 2004 2005
IPO M&A
Source: National Venture Capital Association.
Storm Clouds Confronting the U.S. Venture Capital Industry (partial list)
Stock Option Expensing and 409(A)
U.S. Budget Priority Setting and the R & D Enterprise
The Search for Talent and H-1B Visas
The Next Generation and K-12 education
Sarbanes-Oxley
Smooth Functioning of the Capital Markets
What We Are Doing About It:
NVCA’s Public Policy Agenda
“MAGNET USA”: A Competitiveness Agenda for America Invest in R & D
Federal commitment to sustained funding for basic science Attract the Best and the Brightest
Companies need access to hire key talent Reverse unduly onerous post-9/11 procedures Increase Caps on H1B Visas
Reform K-12 Education Long-term approach to attracting talent to math and science Market-oriented reforms for teachers
Improve Our Capital Markets “Sliding Scale” Sarb-Ox Implementation for Small Firms Steps to Ensure Research for Small Companies
Announced at NVCA Annual Meeting April 2006
NVCA Public Policy Philosophy Bi-partisan Approach
PAC Giving to Pro-Growth Members of Both Parties
$929K Given in 2006 Cycle 181 Candidates Supported
Federal Focus Cooperation with Regional Associations on
State Issues Policies that Support Capital Formation,
Company Formation and Innovation The Voice of High Growth Companies, and the
Firms That Back Them, in Members’ States and Districts Is Critical
Sarbanes-Oxley/Capital Markets Reform NVCA Board Meetings at White House Sept 14, 2006
Chief of Staff Josh Bolten Chief Economic Advisor Allan Hubbard OMB Director Rob Portman Deputy Domestic Policy Advisor Tevi Troy
Met with SEC Chairman Christopher Cox October 2, 2006
NVCA Represented on SEC Advisory Committee on Small Businesses (Ted Schlein, Kleiner Perkins)
Press Outreach and Education WSJ, NY Times, Business Week, San Jose Mercury, etc. Regional Roundtables
Sarbanes-Oxley/Capital Markets Reform
NVCA/Business Week Research on Sarb-Ox Companies with revenues between $1 million
and $5 billion (n=763) 77% SOX not improved transparency of financials 83% SOX not improved confidence in company 77% SOX not improved corporate governance 76% SOX not improved discovery of weaknesses 49% SOX diverts resources from core business
Commission on Capital Markets Reform (“The Scott Commission”) Correct Identification of the Problem
Declining competitiveness of US capital markets High cost of regulation and litigation
Correct Principles in Addressing Problems Weigh costs and benefits in regulation Better definition of “material weakness”
A “Popgun” for a Solution No fix for micro and small caps No “design only” standard No legislation recommended Weaker than SEC Advisory Committee CEOs of PWC and Deloitte were on the panel
Will the US continue as the home of the capital markets?
519
195
0
100
200
300
400
500
600
700
800
900
1,000
US Exchanges AIM*
# 2005 New Listings
$22
$186
$0
$50
$100
$150
$200
US Exchanges AIM*
2005 Average Deal Size for New Listings($ mil)
Immigration and H1-B Visas
Research on Contribution of Foreign-born Nationals to US Economy: “American Made”
National Foundation for American Policy
Released November 15, 2006 Press Coverage:
CNBC, WSJ, Bloomberg, AP, NY Times, NPR, Miami Herald, San Diego Union Tribune, etc.
Copies Provided to All Members of Congress
Highlights of “American Made” 25% of venture-backed companies which have come
public since 1990 were founded by foreign-born nationals
40% in high tech sector Includes Intel,Yahoo,Google,Yahoo,Sun,Ebay Total market cap of such companies > $500 billion 47% of responding privately-held venture-backed
startups were founded by foreign-born nationals 46% of immigrant entrepreneurs came to the U.S. as
students 69% became American citizens
Immigration: Where We Stand
Senate bill would raise H1-B cap from 65,000/yr. to 115,000/yr.
Also exempts Masters and Ph.D. students from cap
No House provision Candidate for lame duck action – now
unlikely
Declining number of H1-B visas
Source: Bureau of Consular Affairs, U.S. Department of State.
5361
7684
76
93
193
232
204208217
229
181
0
50
100
150
200
250
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
(‘000s)
R&D Funding
NVCA has supported bi-partisan authorizing legislation and “competitiveness” initiatives by both parties
Appropriations likely subject to Continuing Resolution – could be same as FY ’06
Participation in Tech Transfer Conference at BU
Education
NVCA focus has been bi-partisan legislation to increase supply of math and science teachers and offer scholarships for math and science teachers
Outreach to multiple groups across the nation: National Foundation on Teaching Entrepreneurship BUILD FIRST (For Inspiration and Recognition of Science and
Technology) New Schools
Entrepreneurship Week USA Big Ideas essay event
Legislative/Regulatory Challenges Ahead
Sarb-Ox Reform Immigration Reform Education Reform Basic Research Funding FDA and CMS Reauthorization Hedge Fund Registration/Regulation
How We Can Work Together Members Care About Job Creation in Their
States Entrepreneurs Funds
Local Press Education and Features Regional Roundtables
Role of Venture Capital in the US Economy Still Not Well Understood in Washington or in State
Capitals
www.nvca.org