Scalevp-marketview-dec2008

VC Market Update for Entrepreneurs

December 2, 2008 Copyright 2008 Scale Venture Partners

Confidential

1

Agenda !

Investment Outlook – Impact of Recession

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Deployment of Dollars in 2009 – Where & How?

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Exit Environment

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Long Term Outlook

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Scale Venture Partners

Copyright 2008 Scale Venture Partners

Confidential

2

Investment Outlook

Copyright 2008 Scale Venture Partners

Confidential

3

Context for Current Economy

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2000: Tech Bubble: Silicon Valley Exported Its Irrational Exuberance to Wall Street – Near Term Results: NASDAQ Down 80% – Long Term Impact: Less Venture Dollars, Each Company More Cash Efficient

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2008: Wall Street Sent Its Credit Squeeze to the World: – Near Term Results: NASDAQ Down 40% – Spiraling into Global Recession – Long Term Impact: TBD

Copyright 2008 Scale Venture Partners

Confidential

4

VC Market Environment More Rational Than 2000

2000

2007

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$104 BN Raised

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$35 BN Raised

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264 IPO’s – Most Unprofitable

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86 IPO’s - Most Profitable

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7903 VC Investments

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3931 VC Investments

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Nasdaq Peak: 5048

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Nasdaq Peak: 2859

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Nasdaq PE at Peak 64+

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Nasdaq PE at Peak 22

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Nasdaq Peak to Trough:

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Nasdaq Peak to Current:

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Down 80%

Copyright 2008 Scale Venture Partners

!

Down 50%

Confidential

5

Economic Contagion More Dangerous Today

2000

2007

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S&P Peak to Trough – 50%

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S&P to Date Down 42%

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Worst Sector - Technology

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Worst Sector - Financials

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No Real Systemic Risk

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Clear Systemic Risk

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9/11 External Threat Drove Second Leg

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Subprime First Leg

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De-leveraging Second Leg

Result “Typical” Post War GDP Decline: Sub 2%

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Global Recession Third Leg

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Range of Outcomes from Tough Recession to GD II

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1929-1933 GDP down 30%

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A More Rational Venture Environment will Confront a More Virulent Recession Copyright 2008 Scale Venture Partners

Confidential

6

Risks In Today’s Economy !

Venture-backed Company Execution – Execution, Clinical, Product Risks

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Impact of Economy on Revenue Growth – Hardest on “GDP Dependent” Businesses

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Financing Risk – Much Harder Today to Raise Money

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Valuation Risk – Will the Market Reward Companies with Appropriate Returns? – Eventually Risk Will Resolve Itself • Strong Fundamentals Get Rewarded • Investors Ultimately Looking for Return

All Risks Except the First are Impacted by the Economy

Copyright 2008 Scale Venture Partners

Confidential

7

Business Exposure to Changes in GDP Exposed: Consumer Products, Brand Advertising, Elective Surgery

Resistant: Open Source, Virtualization, Low Cost Recurring Revenue Models

Immune: Cure Cancer , Cost Saving Non-Elective HC Services

Confidential

8

Financing Risk

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See Sequoia Slides… http://tinyurl.com/3erkjz

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Better Since 2000 – Industry Burnt Once… – Leaner Burn Rate Overall – Bootstrapped Companies Use Venture to Scale Final Commercial Phase – “Just-in-time” Expense Build Up For Growth

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Pockets of risk – Reduced Pools of Equity Capital as VC’s Tend Existing Portfolio – Series B Without Traction – Syndicate Weakness – Assume Fewer Strategic Investors/Partners – Clean Tech Cap Ex Projects – Limited Debt Sources

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Confidential

9

Deployment of Dollars in 2009 Where? How?

Copyright 2008 Scale Venture Partners

Confidential

10

Bulk of Dollars Into Expansion & Later Stage Deals Investments By Stage – Q3 2008

Total Amount Invested ($B)

$8

$7

$6

$2.5

$5

$4

$3.0

$2.3

$2.4

$2.8

$3.1

$3.2

$3.2

$3.0

$2

$2.8

Last Four Quarters

23%

$3.3

$3.0

$2.6

$2.3

$2.6

$1.2

$1.1

$1.1

$1.2

$1.4

$1.6

Q3'05

Q4'05

Q1'06

Q2'06

Q3' 06

Q4 '06

$1.7

$3.3

$2.1

$3.1 $3

$2.8

$1

$3.1

$1.3

$2.4

$3.1

39% $3.3

$2.6

$2.7

38%

$1.8

$1.5

$2.0

$1.7

$1.8

$1.7

Q4'07

Q1'08

Q2'08

Q3'08

$0

Seed/Early Stage

Q1'07

Q2'07

Expansion

Q3'07

Later Stage

PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report Based on Data from Thomson Reuters

Confidential

11

…But Early Stage Companies Being Funded Q3 2005 – Q3 2008

Number of investments by stage 320

309 278

236

274 276

241

299

334 294

271

258

294

314

224

360

339

329

Q3' 06

272

256

271

Q3'05

Q4'05

Q1'06

Q2'06

312

347

329

321 263

286

327

307

307

333

Seed/Early Stage

375

Q4 '06

420 306

Q1'07

Q2'07

Expansion

357

382

362

378

350

Q3'07

Q4'07

Q1'08

Q2'08

Q3'08

Later Stage

PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report Based on Data from Thomson Reuters Confidential

12

Software, Biotech, Medical Devices Dominate Investments By Industry – Q3 2008

IT Investments ($M) $1,343

IT

$2,835.7 Mil

$403

Software

$396

IT Services

$323

Semiconductors

Telecom

$178

$120

Networking & Equipment

Electronics & Instrumentation

$73 Computers & Peripherals

Life Sciences Investments ($M) $1,350 $896

LS

$2,301.9 Mil $56 Biotechnology

Medical Devices and Equipment

Healthcare Services

PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report Based on data from Thomson Financial Confidential

13

Clean Tech Investment Remains Strong Q3 2005 – Q3 2008

Internet-Specific Investments ($M) 300

$1,644

$763

$836

$1,002

$998

250

$1,401 $1,352

$1,256 $1,182 $1,088 $1,226 $1,061

$1,057

200 150 100 50 0

Q3'05

Q4'05

Q1'06

Q2 '06

Q3 '06

Q4 '06

Q1'07

Q2'07

$ Invested

Q3'07

Q4'07

Q1'08

$1,172 $886

$123

Q3'05

Q4'05

$289

$377

Q1'06

Q2 '06

$508

Q3'08

# of deals

Clean Tech Investments ($M)

$112

Q2'08

$470

$887

$1,036

$708

$578

$245

Q3 '06

Q4 '06

$ Invested

Q1'07

Q2'07

Q3'07

Q4'07

Q1'08

Q2'08

70 60 50 40 30 20 10 0

Q3'08

# of deals PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report Based on Data from Thomson Reuters

Copyright 2008 Scale Venture Partners

Confidential

14

Less Investment – Better Risk/Reward Balance !

VC’s Will Have Less Money to Spend – More Allocated to Reserves

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Stage? Sectors? It Will Go into Risk Reduced Deals – Lower Exposure to GDP – Lower Burn Rate

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Valuations - Who is Right? – Public Values Adjust Quickly – Over React? – Private Values Lag – Under React? – Prices Still Appear High Today, Particularly with Little 2009 Visibility

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Returns – Public Markets Have Ceded 2 Years of the Growth Cycle Back to Venture Investors – Winnowing out Occurs in Private vs. Public Markets – Result is Few, Bigger IPO’s with Better Metrics and Fewer Competitors

Copyright 2008 Scale Venture Partners

Confidential

15

Exit Environment

Copyright 2008 Scale Venture Partners

Confidential

16

Venture Exit Counts - IPOs and M&A by Year

Number of Issues

700 600

M&A

500

IPO

400 300 200 100 0 91 92

93

94 95

96

97 98

'08 99 '00 '01 '02 '03 '04 '05 '06 '07 9 mo

M&A 17 76 74 100 98 118 172 221 248 327 388 341 299 351 371 387 361 220 IPO 156 181 220 166 202 270 136 77 260 264 41 22 29 93 57 57 86 6

Year

Source: Thomson Reuters & NVCA Confidential

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IPO Exit Environment – Market Feedback !

86 IPO’s in 2007 – High Water Mark until 2010 – But 2010 is Expected to be Stronger than 2007

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To Resume, Will Need: – Multiples to Expand – Volatility to Decrease – Earnings Visibility to Increase – 1- 3 Quarters of Cash Flow Positive Operations

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M&A – Will Face Pressure – Accretive Transactions Still Getting Done

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Banker Quotes: – “Harsh Winter Is Good As Leaves More Room for Winners to Survive” – “Fortunes Will Be Made in Next 12 Months…by Buying Not Selling”

Copyright 2008 Scale Venture Partners

Confidential

18

Long Term Outlook

Copyright 2008 Scale Venture Partners

Confidential

19

Venture Backed Companies Lead the Economy Tech & Healthcare Companies !

Amgen

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Apple

!

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Tech Sector is 18% of S&P

Boston Scientific

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Healthcare is 14.3% of S&P

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Cisco

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Genentech

Venture Backed Companies Represent 18% of US GDP

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Genzyme

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Job Growth 2-1/2x the Market

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Google

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Intel

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Microsoft

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Oracle

Copyright 2008 Scale Venture Partners

Confidential

20

What Does History Tell Us? !

IBM During Great Depression 70

350

60

300

50

250

40

200

30

150

20

100

10

50

IBM Annual Revenue ($M) GDP ($B)

0

!

0

Mid 1980’s and Late 1990’s Tech Bubbles – When Venture Fundraising Declines, Returns Increase – True in Mid 1980’s & History Repeated Itself in the Mid 1990’s – Best Companies Were Built During Troughs: Microsoft, Cisco, Google

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Today – Venture Funding on Secular Decline – If History Repeats Itself, Good Time to Invest

Copyright 2008 Scale Venture Partners

Confidential

21

Venture Capital Summary !

Venture Is Not Dead

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Innovation Expected to Lead US Economy Out of Recession

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However…Venture Is Not Immune to Current Economy

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Therefore…It Will Require More Time & Money Per Company to Exit – Higher Failure Rates – Winners Will Do Better - Healthier Companies with Fewer Competitors – Fund Returns May Be at Strong Multiple

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Venture Contraction Will Continue…& Leave Survivors Healthier – Short Term Dislocation – Continuous Since 2000 – Benefit to Industry Overall

Copyright 2008 Scale Venture Partners

Confidential

22

A Letter to Venture-Backed CEOs

“don't forget that surviving is not winning, and winning requires more than cutting.”

Copyright 2008 Scale Venture Partners

Confidential

23

Scale Venture Partners

Copyright 2008 Scale Venture Partners

Confidential

24

About Scale Venture Partners !

Formed in 2000

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Invest in Technology & Healthcare

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Invest Throughout U.S. – 50% ex-Silicon Valley

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Since Fund Formed: – 33 M&A Exits – 11 IPO’s – 4 Exits in 2008

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Proactive, Theme-based Investment Strategy

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Partners Have Worked Together > 10 Years – Significant Operating Experience in Investment Sectors

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www.scalevp.com

Copyright 2008 Scale Venture Partners

Confidential

25

Investing in the Middle of the Risk-Reward Continuum We Invest Early in a Company’s Evolution but After experimentation Is Over … The Benefits:

! ! ! !

Early

Reduced Risk Faster Time to Exit Significant Ownership Ability to Add Value

ScaleVP

Higher Risk / Higher Return

ScaleVP:

Lower Risk / Lower Return ! ! ! !

Copyright 2008 Venture Partners Financial Data as Scale of 9/30/08

Late

Proprietary Deal Sourcing Over 40% of Deals Series A 17% Average Ownership 1st/2nd Largest Investor Confidential

26

Consistent Track Record of Quality Exits Has Built Reputation and Network Over $8.6B in Value Created in 33 Exits in 8 Years (11 IPOs)

2000

2002

2004

2006

2008

Financial Data as of 9/30/08 pro forma Copyright Financial Data 2008as Scale of 9/30/08 Venture Partners

Confidential

27

ScaleVP Among Top Venture Firms for Exits All Deals Post-Bubble 2003-2007

Rank

Firm

# of Deals >$200M

Value Created ($Ms)

Rank

Firm

# of Deals >$200M

Value Created ($Ms)

1

KPCB

9

$185,067

14

DFJ

3

$3,770

2

Sequoia Capital

12

$184,597

15

Foundation

6

$3,751

3

TA

6

$12,424

16

Apax

6

$3,734

4

Accel

12

$11,547

17

Greylock

7

$3,670

5

Battery Ventures

9

$10,210

18

ScaleVP

8

$3,626

6

NEA

16

$8,853

19

Charles River

6

$3,567

7

Madison Dearborn

3

$7,776

20

Versant

10

$3,565

8

Benchmark

12

$7,212

21

Vertical Group

1

$3,562

9

Warburg

6

$6,512

22

TCV

8

$3,534

10

Domain

16

$6,278

23

Globespan

4

$3,533

11

Venrock

9

$4,003

24

Sprout

6

$3,484

12

Menlo Ventures

8

$3,893

25

August Capital

4

$3,479

13

JP Morgan

5

$3,785

Source: Venture Source for US Venture Capital Exits 2003 to 2007. Includes all exits > $200M at time of IPO or M&A. Credit given to board member investors only. Ranked by most recent market capitalization on 5/21/2008. Copyright 2008 Scale Venture Partners

Confidential

28

Scale Venture Partners

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Contact: Scale Venture Partners 950 Tower Lane, Suite 700 Foster City, CA 94404 phone: (650) 378-6000 fax: (650) 378-6040

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Email: [email protected]

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Web: www.scalevp.com

Copyright 2008 Scale Venture Partners

Confidential

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