Venture Capital and Entrepreneurial Finance Ken Weakley August 9, 2018

Key Ideas: VENTURE CAPITAL & ENTREPRENEURIAL FINANCE Today Historical Perspective Matters Does history repeat, why? How can you benefit from this knowledge? History The Cycle of Boom & Bust VC and Entrepreneurial Finance 8/9/2018

The Essence of VC VENTURE CAPITAL & ENTREPRENEURIAL FINANCE VC and Entrepreneurial Finance 8/9/2018

Where they are... VENTURE CAPITAL & ENTREPRENEURIAL FINANCE VC and Entrepreneurial Finance 8/9/2018

Funding over time... VENTURE CAPITAL & ENTREPRENEURIAL FINANCE VC and Entrepreneurial Finance 8/9/2018

Distribution of sources... VENTURE CAPITAL & ENTREPRENEURIAL FINANCE Distribution of sources... VC and Entrepreneurial Finance 8/9/2018

The Lessons of History VENTURE CAPITAL & ENTREPRENEURIAL FINANCE VC and Entrepreneurial Finance 8/9/2018

A lot can happen in 100 years! VENTURE CAPITAL & ENTREPRENEURIAL FINANCE A lot can happen in 100 years! VC and Entrepreneurial Finance 8/9/2018

A lot can happen in 100 years! VENTURE CAPITAL & ENTREPRENEURIAL FINANCE A lot can happen in 100 years! VC and Entrepreneurial Finance 8/9/2018

Fiscal Realities VENTURE CAPITAL & ENTREPRENEURIAL FINANCE VC and Entrepreneurial Finance 8/9/2018

A Decade to Remember! VENTURE CAPITAL & ENTREPRENEURIAL FINANCE VC and Entrepreneurial Finance 8/9/2018

Not the First Time! VENTURE CAPITAL & ENTREPRENEURIAL FINANCE Tulip Mania: 1637 South Sea Bubble/Mississippi: 1720 Most the 19th Century! 1907: Kickerbocker Trust & JP Morgan 1929: The Great Crash and Depression 1980s: Latin America Debt and “1987” 1989: Japan peak 1997: Asia 2007: The Great Recession 2012: Euro/Greece VC and Entrepreneurial Finance 8/9/2018

More History VENTURE CAPITAL & ENTREPRENEURIAL FINANCE VC and Entrepreneurial Finance 8/9/2018

More History VENTURE CAPITAL & ENTREPRENEURIAL FINANCE VC and Entrepreneurial Finance 8/9/2018

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VC, Exit and the Market VENTURE CAPITAL & ENTREPRENEURIAL FINANCE VC and Entrepreneurial Finance 8/9/2018

The Impact of Public Markets VENTURE CAPITAL & ENTREPRENEURIAL FINANCE The Impact of Public Markets VC and Entrepreneurial Finance 8/9/2018

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VENTURE CAPITAL & ENTREPRENEURIAL FINANCE Venture Capital Defined A firm that pools capital to provide early-stage equity or equity-linked financing to high-potential entrepreneurial opportunities – that can be harvested for substantial profits. At what point do Venture Capital firms traditional invest in a business?

VENTURE CAPITAL & ENTREPRENEURIAL FINANCE Venture Capital – Industry Preferences 1960-80s – Computers / Hardware 1970s – current / Life Sciences, Biotech 1980s – current / Software 1980s – current / Telecom, Mobile 1990s – current / Internet, E-Commerce 2000s – current / Storage, Cloud computing 2000s – current / Green technologies

VENTURE CAPITAL & ENTREPRENEURIAL FINANCE Venture Capital – Benefactors Entrepreneurs / Wealth effect, credibility Investors / Access to high risk/reward deal flow Employees / High paying jobs, Wealth effect Government / New tax base Consumers / Better, cheaper products, break-thru medical treatments, etc.

VENTURE CAPITAL & ENTREPRENEURIAL FINANCE Venture Capital – Historical Development

VENTURE CAPITAL & ENTREPRENEURIAL FINANCE Venture Capital – Historical Development Still very young – cottage industry up until the 1970s. Pre-World War II Era: Most venture investing came from wealthy individuals and families 1946 :George Doriot / ARD Beginning of Professional VCs Formation of American Research & Development (ARD)

VENTURE CAPITAL & ENTREPRENEURIAL FINANCE Venture Capital – Historical Development ARD’s Early Performance $3.5 million was raised ($2 million from institutional investors) By end of 1947, ARD had invested in eight ventures, six of which were startups By 1951 the performance was still lack-luster (stock price was at $19 down from the initial offering price of $25 in 1946)

VENTURE CAPITAL & ENTREPRENEURIAL FINANCE Venture Capital – Historical Development ARD’s Later Performance: In 1957, ARD had invested $70,000 in the startup company Digital Equipment Corporation (DEC) 1972, ARD was sold for $813 Per Share Original ARD investors received a compound annual return of 14.7% due primarily to DEC Without the DEC investment, the rate of return would have been only 7.4%

VENTURE CAPITAL & ENTREPRENEURIAL FINANCE Venture Capital – Historical Development 1953: Small Business Administration (SBA) was formed. Government began focusing on new business formation 1958: SBA Created Small Business Investment Companies (SBICs). Due to tax and leverage advantages, the SBIC became the primary vehicle for professionally managed venture capital

VENTURE CAPITAL & ENTREPRENEURIAL FINANCE Venture Capital – Historical Development Late 1960s-Early 1970s: Vietnam / Recession destroyed capital formation. SBICs began having operating problems due to the mixing of risky venture investments & high financial leverage (debt service commitments) Total of $10MM raised by Venture Funds in 1975.

VENTURE CAPITAL & ENTREPRENEURIAL FINANCE Venture Capital – Historical Development Late 1970s-Early 1980s: ERISA changes “Prudent Man” standard to allow pension funds to invest with VCs. Tax Revenue act of 1978 lowered cap gains tax Apple & Genentech go public Confluence of above events triggered a cycle of heavy VC activity throughout the 80s

VENTURE CAPITAL & ENTREPRENEURIAL FINANCE Venture Capital – Historical Development Late 1990s-Early 2000s: Another boom/bust period Netscape IPO in 1995 kicked off internet era. Tons of capital raised to invest in internet companies/technologies. Market crashed and investors lost appetite for internet plays. Lots of funds cratered as the value of their portfolio companies dropped below the value of invested capital.

VENTURE CAPITAL & ENTREPRENEURIAL FINANCE Venture Capital – Historical Development Today: Approximately 900 active Funds Hot areas: Life Sciences / Green Technologies / Social & Mobile media Overall investments are still below 1998-99 levels.