Informal Investors, Angels and Venture Capitalists: A ...• China and India are hot markets – 20%...

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Andrew “Zach” Zacharakis The John H. Muller, Jr. Chair in Entrepreneurship Arthur M. Blank Center for Entrepreneurship Babson College, USA Informal Investors, Angels and Venture Capitalists: A Worldwide View

Transcript of Informal Investors, Angels and Venture Capitalists: A ...• China and India are hot markets – 20%...

Page 1: Informal Investors, Angels and Venture Capitalists: A ...• China and India are hot markets – 20% of US VCs plan to invest in China – 18% plan to invest in India • Investing

Andrew “Zach” ZacharakisThe John H. Muller, Jr. Chair in EntrepreneurshipArthur M. Blank Center for EntrepreneurshipBabson College, USA

Informal Investors, Angels and Venture Capitalists: A Worldwide View

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Equity Funding Food ChainEquity Funding Food Chain

VCs

Shepherd, D.A., & Zacharakis, A.L. (2001)

Trust

Control

Friends & FamilyAngels

Self

Co-founders

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GLAMOROUS

AMBITIOUSECONOMIC

CORE

CONSTRAINEDIn

nova

tion

GrowthHighLow

High

Low

Classification of CompaniesClassification of Companies

SuperStars

Classic venture capital

$37.3 B.in 11,006companies

$600 Billion in33 MillionCompanies

Informal Investments

Kirchhoff’s innovation-growth classification

Informal investment funded99.963% of all companies& provided 91.00% of the totalamount of funding.

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Why not Venture Capital Why not Venture Capital ItIt’’s not Seed/Startup Capitals not Seed/Startup Capital

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Year

# o

f D

eals

0

20,000

40,000

60,000

80,000

100,000

120,000

(000

) U

SD

Total # of Deals # of Seed/Startup Deals Total Investment Seed/Startup Investment

Source: VentureXpert

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SelfSelf--Funding Funding by U.S. Entrepreneursby U.S. Entrepreneurs

•Entrepreneurs themselves provide 67.9% of the capital for their new ventures.

•Total capital needed to start a new venture is $62,594.

•Entrepreneurs provide $42,501.

•External informal investors provide $20,093.

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Percent Sources of Funding TotalClose Family 48.9%Other Relative 8.4%Work Colleague 7.7%Friend or Neighbor 26.4%Stranger 5.8%Other 2.7%Total 100.0%

Relationship of Informal Investorto Entrepreneur

(All GEM Nations)Percent of Sources of Funding EntrepreneursClose Family 32.9%Other Relative 14.5%Work Colleague 14.7%Friend or Neighbor 15.3%Stranger 7.3%Bank or Other Financial Institutions 42.2%Government Programs 19.7%Other 12.3%Total is more than 100% as entrepreneurs cited multiple sources.

Entrepreneur's Expected Sources of Financing(All GEM Nations)

Expected versus Actual Sources of CapitalExpected versus Actual Sources of Capital

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Informal Investor Prevalence RateInformal Investor Prevalence Rate

Chi

leSw

itzer

land

New

Zea

lan d

USA

Nor

way

S. K

orea

Chi

naT

haila

nd

Mex

ico

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and

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roat

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Pola

ndB

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rael

Fran

ceIt

aly

UK

Net

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ands

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rgen

tina

Rus

sia

Hun

gary

Slov

enia

Indi

a

Spai

nFi

nlan

dSw

eden

Irel

and

Can

ada

Hon

g K

ong

Tai

wan

Den

mar

kS.

Afr

ica

Sing

apor

eG

erm

any0

1

2

3

4

5

6

7

82002 2001

Prev

a len

c e R

ate ,

Pe r

cen t

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Thai

land

Braz

ilFi

nlan

dIsr

ael

Russi

aAr

gent

ina

Belg

ium

Hun

gary

Norw

ayIr

eland

Mex

icoCa

nada

Denm

ark

Swed

en UKAu

stral

iaH

ong

Kon

gUS

AG

erm

any

Neth

erla

nds

Indi

aSw

itzer

land

S. A

frica

Icela

ndSi

ngap

ore

Spai

nNe

w Ze

alan

dCh

ileCh

ina

Taiw

anS.

Kor

ea0

1

2

3

4

5

6

7

Informal investment as percent of GDPInformal investment as percent of GDP

Classic venture capital comprises investments in seed, early, startup, and expansion stage companies.

GD

P

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Startup Amount Startup Amount vsvs Annual Amount per Informal Annual Amount per Informal InvestorInvestor

y = 34.969x0.8139

R2 = 0.7764

0

50,000

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250,000

- 10,000 20,000 30,000 40,000 50,000

Annual Amount per Informal Investor ($)

Amou

nt to

Start a

Busin

ess ($

)

Philippines

Netherlands

Iceland

USA

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Amount of Startup Money vs GDP

y = 0.0225x1.47

R2 = 0.74

0

20,000

40,000

60,000

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200,000

0 10,000 20,000 30,000 40,000 50,000 60,000

GDP per capita ($ PPP)

Star

tup

amou

nt ($

)

AE

INID

JM

PH

PE CO

CN TH

BR

UY

RU MYMX

CL ARZA

HU

HRLV

CZ

SL SG

GR

IT

SE

FI

ES

FRUK DE

NL

BE

AU

CA

DK IE

NO

USATR

IS

JP

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Annual Amount per Informal Investor vs GDP

y = 0.0012x1.57

R2 = 0.71

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10,000

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0 10,000 20,000 30,000 40,000 50,000 60,000

GDP per Capita (PPP $)

Annu

al Am

ount

per

Info

rmal

Inve

stor

($

)

IN JM PH PE BR MX RU

ID

GR

CN TRCO

LVUY

TH

SLCZ

HR

HUARZA

MYFI

BE

AE

IS

DKIE

NL

SG DE

NO

USCA

ITES

UKSE AU

JPFR

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Expected IRR for Entrepreneurs &Informal Investors

0%

10%

20%

30%

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60%

≤0% 0 - 10% 10 - 20% 20 - 40% 40 - 100% ≥100%

Expected IRR

Perc

ent o

f Ent

repr

eneu

rs &

Info

rmal

Inve

stor

sEntrepreneursInformal Investors

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Maximum ReturnMaximum Return

ExpectedExpectedAnnualAnnual HoldingHolding

StageStage ROR%ROR% PeriodPeriodSeed and StartSeed and Start--upup 5050--100+ 100+ ~10+years~10+years1st Stage1st Stage 4040--6060 55--10102nd Stage2nd Stage 3030--4040 44--77Expansion and BridgeExpansion and Bridge 2020--3030 33--55LBOsLBOs 3030--5050 33--55TurnaroundsTurnarounds 50+50+ 33--55

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Driving Forces Impacting VCDriving Forces Impacting VC• Worldwide Savings Glut*

– $11 trillion worldwide in 2005– Chinese savings increasing and spreading worldwide– Corporations not distributing excess cash– Housing bubbles in Spain, US and elsewhere

• VC Driving Forces– Larger Funds– More Funds– Move to International Markets– Follower/Herd Mentality

•Too Much Money; A global savings glut is good for growth -- but risks are mounting.Rich Miller, Jack Ewing, Stanley Reed, Laura Cohn, Frederik Balfour and David Henry.Business Week 3942 (July 11, 2005): p58.

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Key QuestionsKey Questions• How is worldwide glut impacting VC today and into the future?• Where is VC money going?

– Geographic– Stage– Industry

• Where should it go?• What pressures are building?

– Too much money chasing too few deals– Valuations heating back up

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Venture Capital AcrossVenture Capital AcrossThe WorldThe World

• $53.8B worldwide in 2006– $41B in US– $8.3B in Europe– $2.8B in Asia

Source: VentureXpert.

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Fundraising is Picking Back UpFundraising is Picking Back UpCommitments to Venture Capital FundsCommitments to Venture Capital Funds

Fund

s Ra

ised

($B

)

$22.2$18.7

$13.1$13.1

$50.2

$83.2

$57.6

$26.7

$17.1$12.7

$7.1

$0

$20

$40

$60

$80

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Source: Dow Jones: Venture Source.

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Although Overhang is StabilizingAlthough Overhang is Stabilizing

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1998

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2002

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al C

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mitt

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apita

l ($M

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Reyes, J. (2004) Private Equity Performance 2004: The Coming Shakeout.

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Industry DynamicsIndustry Dynamics

1997 2003 2005No of Firms/Funds 515/885 1027/1954 1714/4157

Professionals 4,914 10,833 11,138

Total Cap Mgt $64.6 B$13m/professional

$251.4 B$23m/professional

$406.8B$36m/professional

Avg Firm Size $135.3 M $245.7 M $237M

Avg Fund Size $94.0 M $103.5 $98M

First time funds 61 38 27

Largest Fund $1,158. M $1,100 M $1,250M

Reyes, J. (2004) Private Equity Performance 2004: The Coming Shakeout.2005 data from VentureXpert.

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Later Stage Valuations SkyrocketLater Stage Valuations SkyrocketMedian Premoney Valuations by Round Class (All Industries)Median Premoney Valuations by Round Class (All Industries)

Med

ian

P rem

oney

Val

uati

on (

$M)

$40.7

$20.3

$13.6$11.7

$5.3$6.4

$1.6$2.3$2.9$3.2

$0

$10

$20

$30

$40

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

Later Stage Second Round First Round Seed Round

Source: Dow Jones: Venture Source.

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Fund Type 1 Yr 3 Yr 5 Yr 10 Yr 20 YrSeed/Early Stage VC 8.3 3.1 -10.9 41.5 20.4Balanced VC 24.3 11.7 -3.5 18.9 14.6Later Stage VC 6.9 8.6 -4.1 11.3 13.5All Venture 15.6 7.5 -6.8 23.7 16.5NASDAQ 5.2 14.2 -2.2 7.7 12.4S&P 6.3 10.1 -1.1 7.3 11.0

Thompson FinancialsThompson Financials’’US Private Equity Performance IndexUS Private Equity Performance IndexInvestment Horizon through 12/31/05Investment Horizon through 12/31/05

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Returns By PercentileReturns By Percentile

-100-35.45-47.88-31.45-1000.00th percentile

-10.05-11.23-19.37-9.77-14.7510.00th percentile

-2.75-3.3-11.13-6.51-7.2820.00th percentile

-0.570-6.53-0.99-1.8130.00th percentile

1.492.56-1.41.730.7840.00th percentile

5.045.562.583.944.3650.00th percentile

9.529.177.258.468.6260.00th percentile

13.3913.4913.7110.6313.4370.00th percentile

18.4519.3622.5917.0819.6980.00th percentile

31.2832.251.6225.6438.9890.00th percentile

209.16195.22721.04257.82721.04100.00th percentile

LaterBalancedEarlySeedOverall Percentile Group

Sample size : 1164

Cumulative IRR as of 12/31/2005 Venture Capital

Source: VentureXpert

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IMPLICATIONSIMPLICATIONS

• Capital overhang is working through. • Size of VC firms continues to grow

– $ outpace partners– Later-stage (lower risk?) deals

• Remain focused on high-tech– Investing larger amounts at later rounds, tech has most potential to

achieve returns• Less co-investing/syndication

– Need to put more money into each deal– Lowers learning and network reach

• Valuations Heat Up– Hurts returns– Increases risk

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A MOVE TO NEW MARKETSA MOVE TO NEW MARKETS• 50% of US VCs expect to invest globally by 2010

– Following the entrepreneurs (many US trained)• China and India are hot markets

– 20% of US VCs plan to invest in China– 18% plan to invest in India

• Investing Strategy– Co-invest with local investors (42%)– Strategic alliances with local VC firms (39%) – Open new office with local talent (30%)– Transfer partners (10%)

VC Outlook 2010: A Brave, Global WorldMark Jensen and Mark Heesen. Venture Capital Journal. Wellesley Hills: Aug 1, 2005. pg. 1

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What Does it Mean?What Does it Mean?

• Search for better deals?– Breeder for Technology

• Energy• Water

– Developing Economies– Later, larger absorptive capacity deals

• Who fills in that larger, increasing gap?– Angels, FFFF, Bootstrapping

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For those wanting moreFor those wanting more……

Bygrave & Zacharakis (2004) The Portable MBA in Entrepreneurship

Timmons, Zacharakis & Spinelli (2004) Business Plans that Work.

Timmons, Spinelli & Zacharakis (2005) How to Raise Capital

Bygrave & Zacharakis (2007) Entrepreneurship