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Page 1: Ken Morse Nextgen Vcs

© 2001 Massachusetts Institute of Technology

“NextGen VCs – After the Storm”

PolyTechnos Venture-Partners GmbH

Third Annual Meeting “CEO Day” Berlin

06 November 2001

Kenneth P. Morse, Senior Lecturerand Managing Director

MIT Entrepreneurship Center

Page 2: Ken Morse Nextgen Vcs

2© 2001 Massachusetts Institute of Technology

Desired Outcomes of this Presentation

Provide a basis for a stimulating discussion

Respond to your questions

End on time, so we can enjoy our luncheon (and networking).

I want to express special thanks to

Jesse Reyes, Venture Economics andJohn Taylor, NVCA

for their permission to use their excellent data, analysis, and presentations from VentureXpert™, the Venture Capital Institute, and the DRI-WEFA study which were just released in the USA.

Page 3: Ken Morse Nextgen Vcs

3© 2001 Massachusetts Institute of Technology

1. Our Mission & Focus

2. Past Business and Venture Cycles

3. Current Scene: Trends in Start-ups and VC

4. Future Outlook

Proposed Outline

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4© 2001 Massachusetts Institute of Technology

MIT Entrepreneurship Center MissionTo train and develop leaders who will make high tech ventures successful

MIT President Charles M. Vest, July 1996

“I want you to be the premier global center for entrepreneurship, and to be recognized as such.”

“We must not only be the best. We must also serve as a model for others and ensure that, together, we all make a significant global impact in this vital field.”

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5© 2001 Massachusetts Institute of Technology

Why Focus on High Tech?

Continuous creation of new, technology-based enterprises enables great leaps forward.

Rising living standards underpin democracy.

At MIT, we believe our distinctive competence is forging innovations in Science, Engineering, & Management to achieve revolutions, not evolution.

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6© 2001 Massachusetts Institute of Technology

To Compete Successfully…

University of Cambridge (UK)

The Cambridge Network

CEC

Ireland (3 universities)

Taiwan (3 universities)

Germany?

“MIT startups must attack global markets.”

To teach global high tech entrepreneurship effectively, we need a network of partners:

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7© 2001 Massachusetts Institute of Technology

1. Our Mission & Focus

2. Past Business and Venture Cycles

3. Current Scene: Trends in Start-ups and VC

4. Future Outlook

Proposed Outline

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8© 2001 Massachusetts Institute of Technology

The Inevitable Business Cycle

“In times of great commercial prosperity there has been a tendency [toward] over-speculation on several occasions. The success of one project generally produces others of a similar kind. Popular imitativeness will … drag a community too anxious for profits into an abyss …”

- Charles Mackay, 1841

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9© 2001 Massachusetts Institute of Technology

The Impact of US Venture Capital

Venture firms now account for: 7.9 million employees Annual revenues of $1.56 trillion,

These figures represent: 6.1% of US payroll 14.0% of US GDP 7.9% of US company revenue.

DRI-WEFA Study – Commissioned by NVCA:

Source: DRI-WEFA (analysis as of 8/2001)

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10© 2001 Massachusetts Institute of Technology

Key Findings - Preliminary

For every dollar invested in 1970-1999, there was $9 in revenue during 2000

For every $21,627 of venture capital investment in 1970-1999, there was one more job in the year 2000

Not bad for an industry which was:<1.0% in 1970-1995 2.1% in past 5 years

Source: DRI-WEFA (analysis as of 8/2001)

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11© 2001 Massachusetts Institute of Technology

The VC Industry has Grown Dramatically in the Past Few Years

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Source: VentureXpert™ Database by VE & NVCA

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12© 2001 Massachusetts Institute of Technology

Venture Capital Fundraising Continues at a Strong Pace

Source: VentureXpert™ Database by VE & NVCA

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This does not include money available for investment by Corporate Venture groups.

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13© 2001 Massachusetts Institute of Technology

The US Venture Industry Has Grown

Year # Venture Firms

Capital Under Mgt

1980 87 $3B

1990 375 $32B

2000 693 $210B

Source: 2000 NVCA Yearbook

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14© 2001 Massachusetts Institute of Technology

How Big is Big in a Venture Fund?Have VCs Abandoned Seed?

2000 Funds by Size:$0-$25M 100$25.1M-50M 80$50.1M-$250M 213$250.1M+ 106

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Source: VentureXpert™ Database by VE & NVCA

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15© 2001 Massachusetts Institute of Technology

Corporate Venture Capital Groups Have Become Very Involved

Source: VentureXpert™ Database by VE & NVCA

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$ Billion $0.28 $0.53 $1.00 $1.90 $10.62 $17.12 $3.19

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16© 2001 Massachusetts Institute of Technology

Corporate VC Groups are Involved in more than ¼ of all Deals

Source: VentureXpert™ Database by VE & NVCA

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% of $ 4.80% 4.50% 5.80% 8.40% 18.10% 16.60% 14.00%

% of Deals 7.50% 7.70% 11.90% 16.20% 28.40% 33.10% 25.60%

1995 1996 1997 1998 1999 2000 1H2001

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17© 2001 Massachusetts Institute of Technology

Recent Quarters Portend a Return to Traditional Activity Levels

Source: VentureXpert™ Database by VE & NVCA

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18© 2001 Massachusetts Institute of Technology

2000 IPOs Edge Out 1999 Record Levels Despite a Bouncy Road

Source: VentureXpert™ Database by VE & NVCA

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19© 2001 Massachusetts Institute of Technology

Acquisitions are an Increasingly Important Exit Strategy

Source: VentureXpert™ Database by VE & NVCA

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20© 2001 Massachusetts Institute of Technology

Why Invest If You Can’t Find the Exit Door?

Source: VentureXpert™ Database by VE & NVCA

IPO Markets are Dormant

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21© 2001 Massachusetts Institute of Technology

These are Increasingly ImportantAcquisition Markets Have Slowed Down Too

The “currency” of the average NASDAQ company has lost 50.4% in the past year.

Most acquirers of venture backed companies are publicly-traded high technology companies (often themselves venture backed).

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22© 2001 Massachusetts Institute of Technology

Average Early and Seed Stage Round Sizes Have Crested

Source: VentureXpert™ Database by VE & NVCA

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23© 2001 Massachusetts Institute of Technology

Venture Capitalists Continue to Fund Early and Seed Stage Companies – Future Pipeline

Source: VentureXpert™ Database by VE & NVCA

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24© 2001 Massachusetts Institute of Technology

First Venture Rounds into Internet-Related Companies Continue

Source: VentureXpert™ Database by VE & NVCA

Although at a Much-Reduced Level from 2000

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$ Mil 1,243 2,260 3,471 6,422 8,378 8,374 6,776 3,727 2,492 1317.6

1999-1 1999-2 1999-3 1999-4 2000-1 2000-2 2000-3 2000-4 2001-1 2001-2

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25© 2001 Massachusetts Institute of Technology

Scaling the Industry: Growth in VC Principals Has Not Kept Up With Growing Fund Sizes

Source: VentureXpert™ Database by VE & NVCA

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26© 2001 Massachusetts Institute of Technology

Venture Principals are Busier than Ever!

Source: VentureXpert™ Database by VE & NVCA

2.0

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Taylorian Coefficient

showing relative

workload of VC principals

as function of # of investees

Ratio 3.2 3 2.7 2.7 2.7 2.6 2.5 2.4 2.8 3.2 3.4 3.8 4.1

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

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27© 2001 Massachusetts Institute of Technology

Source: Venture Economics

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28© 2001 Massachusetts Institute of Technology

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29© 2001 Massachusetts Institute of Technology

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30© 2001 Massachusetts Institute of Technology

Source: Venture Economics

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31© 2001 Massachusetts Institute of Technology

Source: Venture Economics

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Source: Venture Economics

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Source: Venture Economics

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Source: Venture Economics

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Source: Venture Economics

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Source: Venture Economics

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37© 2001 Massachusetts Institute of Technology

Source: Venture Economics

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Source: Venture Economics

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Source: Venture Economics

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Source: Venture Economics

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41© 2001 Massachusetts Institute of Technology

Source: Venture Economics

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42© 2001 Massachusetts Institute of Technology

Source: Venture Economics

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43© 2001 Massachusetts Institute of Technology

Source: Venture Economics

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Source: Venture Economics

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45© 2001 Massachusetts Institute of Technology

Source: Venture Economics

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46© 2001 Massachusetts Institute of Technology

Source: Venture Economics

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47© 2001 Massachusetts Institute of Technology

Source: Venture Economics

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48© 2001 Massachusetts Institute of Technology

Source: Venture Economics

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49© 2001 Massachusetts Institute of Technology

Source: Venture Economics

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50© 2001 Massachusetts Institute of Technology

Source: Venture Economics

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51© 2001 Massachusetts Institute of Technology

Source: Venture Economics

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52© 2001 Massachusetts Institute of Technology

Source: Venture Economics

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53© 2001 Massachusetts Institute of Technology

Source: Venture Economics

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54© 2001 Massachusetts Institute of Technology

Source: Venture Economics

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55© 2001 Massachusetts Institute of Technology

Source: Venture Economics

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56© 2001 Massachusetts Institute of Technology

Source: Venture Economics

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57© 2001 Massachusetts Institute of Technology

Five Year Performance TrendsUS Venture vs Buyouts

Source: Venture Economics

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58© 2001 Massachusetts Institute of Technology

US Private Equity Performance BenchmarksUS Limited Partnerships Formed 1969-1999Investment Horizon Returns Net to Investors as of 9/30/2000

Source: Venture Economics

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59© 2001 Massachusetts Institute of Technology

US Limited Partnerships Formed 1969-2000Investment Horizon Returns Net to Investors as of 12/31/2000

Source: Venture Economics

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60© 2001 Massachusetts Institute of Technology

Companies Receiving First Venture Round (Series A) During Last Downturn (1/1990-6/1992) Artisoft

Starbucks

Intuit (FKA ChipSoft)

McAfee

Xpedite

Palm Computing

Cutter & Buck

RF Micro Devices

eFax.com

Shiva Corporation

Wind River Systems

FTP Software

CheckFree

SPSS

Page 61: Ken Morse Nextgen Vcs

61© 2001 Massachusetts Institute of Technology

1. Our Mission & Focus

2. Past Business and Venture Cycles

3. Current Scene: Trends in Start-ups and VC

4. Future Outlook

Proposed Outline

Page 62: Ken Morse Nextgen Vcs

62© 2001 Massachusetts Institute of Technology

Current Scene: B2B = Back to BasicsThe Laws of Gravity Were Never Repealed

Entrepreneurs need to have outstanding: Team Technology Value Proposition Market Customers

Applies to VCs as well…

Page 63: Ken Morse Nextgen Vcs

63© 2001 Massachusetts Institute of Technology

Entrepreneurs: Building Your Company Need an “A” Team – “3K” experience

Serious Technology – sustainable advantage

Solve an important, valuable problem…

For clients who have money …

Who want to pay well…

With a short sales cycle…

And will buy more, soon …

YOUR VALUE PROPOSITION MUST BE COMPELLING, QUANTIFIABLE, PROVEABLE, REFERENCEABLE, AND EASILY EXPLAINABLE…

Page 64: Ken Morse Nextgen Vcs

64© 2001 Massachusetts Institute of Technology

Our Message to Entrepreneurs: – Selecting Your Financial Partners Seek True Value Added – “Blue” Money

Operating Experience Rolodex/Network Awesome Portfolio (in your space) Cool Limiteds (in your space) Deep pockets / courage to stay the course

Keep Realistic Expectations Time to Market Revenue growth Valuations

Page 65: Ken Morse Nextgen Vcs

65© 2001 Massachusetts Institute of Technology

Entrepreneurs’ Funding: Many Options Your Personal Funds

“3F” – Friends, Family, and Fools

Personal Credit Cards and Other Borrowings

Business Angels

Venture Capital

Corporate Direct Investment

Venture Leasing

Mezzanine Financing

Merger and Acquisition

Initial Public Offering

Secondary/Follow-on Public Offering

Private Placements – Debt & Equity

Buyout/Acquisition Financing

Corporate Debt

Page 66: Ken Morse Nextgen Vcs

66© 2001 Massachusetts Institute of Technology

1. Our Mission & Focus

2. Past Business and Venture Cycles

3. Current Scene: Trends in Start-ups and VC

4. Future Outlook

Proposed Outline

Page 67: Ken Morse Nextgen Vcs

67© 2001 Massachusetts Institute of Technology

Future Outlook: After the Shakeout

The superficial VC gamblers are dying or dead.

A line of bull + .ppt is no longer enough. DAD >> MBBB

The number of MIT spin-offs and $50K teams have not decreased significantly.

Serious entrepreneurs, angels, and VCs are quietly and carefully moving forward.

This is a great time to be starting a company:Expectations and time horizons are realistic.

Recruiting top talent is easier.

Office space is available, at more reasonable prices.