Quigley Report: A Venture Capital Revival is Upon Us
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A Venture Capital Revival Is Upon Us R.I.P.
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Venture capital was one of the best asset classes in the world before the dot-com bubble burst. Over the next 10 years, returns plummeted as a result of too much capital in the sector and a lack of public market liquidity. Then, just as the start-up world was recovering from the tech bubble of the last decade and the negative effects of the ill-considered Sarbanes Oxley legislation, the 2008 financial erupted. So today, the venture capital community finds itself at a cross roads. While the asset class has been largely abandoned by institutional investors, this disinterest will paradoxically lead to superior returns in the future. Consider…….1. Venture capital is no longer be considered a “necessary asset class” to invest in by many limited partners given the sectors insignificant size relative to the financial assets LPs have under management3. Limited partners, who generally look retrospectively to determine their portfolio allocations, not progressively, have shunned the asset class.4. But, as a result of this shaking out of the venture capital sector (in terms of #’s of firms and amount of capital raised by those firms) conditions are now actually favorable for sustained long term returnsTaking a data-driven prospective, this presentation argues that the conditions today in the private and public capital markets bode well for superior performance to return to the venture capital asset class this decade. Specifically, therewards accruing to private investors in the leading tech companies of today far exceed what private investors used to earn from their investment in the best companies of previous tech cycles. Several things have changed in the past 5 years or so that have led to this change. This presentation explores what those changes have been.
Transcript of Quigley Report: A Venture Capital Revival is Upon Us
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
