Venture Capital in the US: “A machine for business building” Mikko Suonenlahti, Partner, 3i March 22, 2004

Predominantly a US Phenomenon Non U.S. (28%) Massachusetts (16%) California (40%) U.S. (72%) Investments by State 100% = $21.2B Source: PWC MoneyTree Survey Global Venture Capital Market – % = $29.4B A machine for business building Other (44%) NB. Corporate R&D in G7 countries was $442B in 1999

The European Perspective of Venture Capital Q A machine for business building UK Germany France Sweden Other 100 % Source: Venture Source

U.S. venture capital activity: Total equity investments into venture-backed companies Source: PWC MoneyTree Survey, 3i A machine for business building Free market mantra: Telecom Financial Technology Advances: Internet Y2K

Financial Returns* A machine for business building 1 YR 5 YR20 YR S&P 500-2%-3%12% All Private Equity-7%6%14% -- Buyouts3%6%12% -- Early Stage Venture Capital-26%48%20% *As of June 30, 2003 Source: NVCA

The US Venture Industry A machine for business building #VC Firms Capital Under Management $’s Billion Average Capital Per Firm $ $ $ $ X est $300 Source: NVCA

Venture Capital in the US Venture funded firms account for:  12.5 million employees, 11% of US payroll  1.1 trillion in annual revenues, 11% of US GDP  More Federal taxes per $1,000 in assets than their peers – paid $58.8 billion of Federal taxes and $7.8 billion in state and local taxes  More sales per $1,000 in assets than their peers  $13.8 billion of net income, $21.7 billion of exports and invested $157.3 billion in R&D A machine for business building Source: NVCA

Venture Capital in Massachusetts A machine for business building 9 major Universities: MIT, Harvard, Boston University World’s highest patents per capita ratio Route 128: America’s Technology Highway 1970’s and 1980’s >30,000 hi-tech firms 41 early stage VC backed spin-offs from DEC alone 688,000 jobs in VC backed companies – 23% of Massachusetts workforce VC backed businesses generated $47B of revenues in 2002 Many serial entrepreneurs have been backed by VC’s since the 1960’s Q investments in 77 VC deals at $655MM Winter Street, Waltham, is the world’s second largest concentration of venture capital with >$1B of investments per year Receives 60% of Defense R&D $’s Today 113 VC backed public companies with market cap > $100MM Several multibillion dollar market cap VC backed public companies – includes 3i US legacy investments Technology Hot Bed Seasoned Management Teams Availability of Financing Liquidity

A machine for business building Venture backed IT businesses in New England 1970 – 2000 PrimeFirst 32-bit computers. Funded by Greylock in IPO in ApolloFunded by Greylock in First computer to use integrated circuits developed at MIT. IPO in 1983 Acquired by HP in 1989 for $476MM. Data GeneralFunded by Greylock in IPO in Acquired by EMC for $1.1B in LotusAcquired by IBM in 1995 for $3.5B. DECAcquired by Compaq for $9.6B in 1998.

3i US Venture Capital investments which have gone public* - a selection of 29 IPO’s:  Idec - cancer drugs, $5.6B  LSI Logic – custom semiconductors, systems on a single chip, $3.0B  Amylin Pharma – diabetes drugs, $2.1B  Dura Pharma – asthma drugs. Elan acquires for $1.7B  Medisense – diabetes monitoring systems. Abbott acquires for $0.8B  RSA Security – identity management solutions, $0.6B  Biopure – oxygen therapeutics, $0.2B  Transwitch – VLSI solutions for global communications equipment supplies, $0.1B A machine for business building *Market caps July, 2003, for 3i US legacy business investments

A machine for business building Venture backed IT businesses which are publicly quoted in New England in 2003* AkamaiFirst financing round of $8.2MM in Investors Battery and Polaris. IPO value $2.4B. Market cap $653MM, peaked at $18B. Analog DevicesMarket cap $12.8B. Parametric Technologies First financing round of $3.7MM in IPO value $90MM, market cap $944MM. SonusFirst financing round Investors Castile, Charles River, Matrix, Northbridge. IPO value $1.5B, market cap $1.1B. SycamoreFirst financing round of $5.5MM in Investors Matrix, Northbridge. IPO value $3.2B, market cap $1.1B. *Market caps June, 2003

A machine for business building

A Model for investing $ Million in VC Funding Financing Rounds Target $ Million liquidity event* A machine for business building *Sweet spot of M&A market is $20-100MM in July, 2003

US Venture Capital - Q A machine for business building Source: Money Tree, 3i Analysis # Deals $’s Invested Average Round Size California239$1.6 B$6.7 MM New England77$655 M$8.7 MM Other326$1.7 B$5.3 MM 642$4.0 B

Venture Capital in 2002* A machine for business building *Technology Only Source: NVCA, EVCA, CVCA, FVCA, 3i analysis

Venture Capital in 2002* A machine for business building *Technology Only Source: NVCA, EVCA, CVCA, FVCA, 3i analysis

Venture Capital in 2002* A machine for business building *Technology Only Source: NVCA, EVCA, CVCA, FVCA, 3i analysis

A machine for business building Christopher Columbus was the first to explore uncharted seas to the West – backed by venture capital – and options. A crew of 87 experienced seamen accompanied Christopher on the Nina, Pinta, and Santa Maria

Attitude towards risk – 14,000 venture backed companies A machine for business building 20% find a safe harbour 10% shipwrecks

NVCA Long Term Public Policy Agenda 1.Access to Capital and Liquidity  Tax policy favoring capital formation  Open, fair and vibrant capital markets  Increased basic R&D Funding 2.Enhanced Human Resources  Open immigration policies  Aggressive adult and youth education policies  Broad use of options for all employees A machine for business building

NVCA Public Policy Agenda 2003  Capital gains reduced from 20% to 15%  Oppose mandatory expensing of options, encourage transparency  Prevent payroll taxes on options  Ensure corporate governance roles (Sarbanes-Oxley), continue to allow for full VC participation in private and public companies  Work with SEC to reform IPO process  Broadband deployment  Etc. A machine for business building

NVCA in the 1970’s  Persuaded Congress to reduce capital gains taxes.  Removed barriers to pension fund investing in venture capital as an asset class. A machine for business building