2. Overview of Venture Capital …and why it matters ! Jerome S. Engel September 2005

3. Jerry Engel tUC Berkeley -Founder and Executive Director of the Lester Center for Entrepreneurship and Innovation -Chair of the Entrepreneurship Faculty -Teach Entrepreneurship, Venture Capital & Private Equity, Technology Commercialization in the MBA and Executive Education programs tOutside of Academe: -Monitor Venture Partners, General Partner -Co-founded: Kline Hawkes Capital, AllBusiness.com, ElectraScan Inc., Maxis, CardioProfile, and more… -Angel Investor, Board member, Advisor t1980s - Ernst&Young, Managing Partner lEntrepreneurial Services lApple, Intel, Genentech, Sun, Autodesk, more.. t1970s – KPMG tAcademic - Wharton

6. Probing upper thermospheric neutral densities at Mars using electron reflectometry

7. Overview of Venture Capital …and why it Matters! tEntrepreneurship is a key driver of value creation in the 21 st century American economy tAn approach to that starts with the recognition and pursuit of opportunity tThe opportunity must be compelling to enable the entrepreneur to attract the necessary resources tSpecial mechanisms exist to enable resource alignment with the best opportunities tVenture Capital is such a mechanism tVenture Capital is more than money tIt is a market mechanism tIt is this subtlety that makes rare

8. Technology / Opportunity Value Entrepreneurship Bridges the Gap Entrepreneurship

9. The pursuit of Opportunity beyond the Resources you currently control

10. Entrepreneurial Process tIdentify -Need -Solution -‘Unfair Advantage’ } } Opportunity Resources tAcquire: -Technology rights - People -Money

11. Entrepreneurial Process tKey Mechanism: -Mobile Technology -Mobile People -Mobile Money People MoneyTechnology

12. The Entrepreneurial Venture FOUR PERIODS of DEVELOPMENT Time Cash Flow IIIIIIIV

13. Time “Pure entrepreneurship” Cash Flow The Entrepreneurial Venture FOUR PERIODS of DEVELOPMENT

14. The Entrepreneurial Venture PERIOD I: “Pure Entrepreneurship ” tDefining the concept of the business tGathering financial resources tAssembling the startup team tIdentifying customers tAnalyzing the competition tBuilding the prototype tGetting your first ‘customer’ Time Cash Flow IIIIIIIV

15. Time “Strategic focus” Cash Flow The Entrepreneurial Venture FOUR PERIODS of DEVELOPMENT

16. The Entrepreneurial Venture PERIOD II: “Strategic Focus” Time Cash Flow IIIIIIIV tWhat business aren’t we in? t IMPLEMENTING the business are we in! tKnowing better than ANYONE else: -What will people pay -How many will they buy -How to distribute -How to service the customer tIdentifying strategic partners tDeveloping relations with suppliers tGoing beyond the prototype to a truly scaleable product tRecruiting a complete team tRaising ‘institutional’ money

17. Time “Systems building” Cash Flow The Entrepreneurial Venture FOUR PERIODS of DEVELOPMENT

18. Time Cash Flow IIIIIIIV The Entrepreneurial Venture PERIOD III: “Systems Building” tFinancial controls tStable division of labor tReporting relationships and authorities tDeveloping systems of internal control tFormalizing the terms of a sale tOperational systems -Production, outsoucing -Distribution, sales -Service, warraties

19. Cash Flow Time “Corporate management” The Entrepreneurial Venture FOUR PERIODS of DEVELOPMENT

20. Time Cash Flow IIIIIIIV The Entrepreneurial Venture PERIOD IV: “Corporate Management” tHiring “outsiders” tGoing public tAdding the follow-on product[s] tShedding those who can’t keep up tFormalizing the culture tRationalizing the strategy

21. The Professional Entrepreneur Time Cash Flow IIIIIIIV Visioning the Future into the Present

22. New Venture Funding Stream Sales $ Time Cash Flow $1 $8 Venture Capital Rounds Financing to Milestones $20 $40 $80 IPO

23. New Venture Funding Stream Sales $ Time Cash Flow $1 $8 Venture Capital Rounds $20 $40 $80 IPO Investment Corporate “Window” and Spin-outs

24. New Venture Funding Stream Sales $ Time Cash Flow $1 $8 Venture Capital Rounds $20 $40 $80 IPO Acquisition Investment Corp Growth Corporate “Window” and Spin-outs

25. U.S. Example: Private R&D Spending Increasing TOTAL PRIVATE FEDERAL Note:Expenditures are deflated using the GDP implicit price deflator. Source: National Science Board (2000) and Economic Report of the President (2002)

26. The Proportion of Research Expenditure at Our Largest Corporations is Decreasing Original - H. Chesbrough, 2003 Updated J. Engel 2003 Source: National Science Foundation, Science Resource Studies, Survey of Industrial Research Development, 1991,1999 and 2000.

27. The State of the Venture Capital Industry September 2005 Jerome S. Engel Venture Capital & Private Equity Reminder: Entrepreneurs Forum Thursday night

28. Entrepreneurs Perspective Limited Partners Perspective General Partners Perspective Investment Opportunity Venture Capital and Private Equity …require a convergence of interests

29. Instutional Investors Perspective VC is a sub-category of Private Equity What is Private Equity? tVenture Capital [our principal focus] tLeveraged Buyouts tMezzanine Investments tBuild-ups/Roll-ups tDistressed Debt Characteristics: tGenerally structured as a partnership tHuge growth in funds [$5b in 1980 to over $250b today] tStill a relatively small allocation [only $1 for every $40 in public equities] tInstability and volatility in valuations and funds flows tDemand and Supply likely to expand, especially overseas

30. 20 Years of Venture Capital ? 279% Sources: Asset Alternatives, Cambridge Associates, CSI, Inc.

31. VC Investment 1980 – The Long View ($ in billions) Annual Venture Capital Investments 1980 to YTD Q3 2004

32. U.S. Fundraising

33. Fundraising Running at ’96-’97 levels Commitments to Venture Capital Funds

34. Median Fund Size Continues to increase after the shake-out Median VC Fund Size (for funds greater than $20M)

35. Half of Funds Closed > $100M in Size Allocation of Fund Size by Number of Funds Raised per Vintage Year

36. U.S. Investment: Overall

37. Amount Invested ($B) Number of Deals Deal Flow and Investment On Track with 2004 Deal Flow and Equity into Venture-Backed Companies Source: Dow Jones VentureOne/Ernst &Young

38. IT dominates VC Investing [Health Care #2] Deal Flow Allocation by Industry Sector % of Total VC Rounds Source: Dow Jones VentureOne/Ernst &Young

39. Investment in IT Steady in 2Q’05 Equity Investment in Information Technology Companies Amount Invested ($B) Number of Deals Source: Dow Jones VentureOne/Ernst &Young

40. Comm’s Share of IT Dollars Highest Since 4Q’02 IT Investment Allocation by Sector % of Dollars Invested Source: Dow Jones VentureOne/Ernst &Young

41. Healthcare Activity Strong and Steady Equity into Venture-Backed Healthcare Companies Amount Invested ($B) Number of Deals Source: Dow Jones VentureOne/Ernst &Young

42. Biopharm & Devices Dominate HC Investment Healthcare Investment Allocation by Sector % of Dollars Invested Source: Dow Jones VentureOne/Ernst &Young

43. More than half of VC deals are seed or first round Deal Flow Allocation by Round Class % of Total VC Rounds *Seed and First Rounds Combined Source: Dow Jones VentureOne/Ernst &Young

44. Round Allocation Mirrors Mid-’90s Levels Deal Flow Allocation by Round Class (Annual) % of Total VC Rounds *Seed and First Rounds Combined Source: Dow Jones VentureOne/Ernst &Young

45. More than ½ of Dollars Go To Later Rounds Investment Allocation by Round Class (Annual) % of Dollars Invested *Seed and First Rounds Combined Source: Dow Jones VentureOne/Ernst &Young

46. Median Deal Sizes Relatively Consistent Median Amount Invested Per Financing Round Median Amount Invested ($M) Source: Dow Jones VentureOne/Ernst &Young

47. Median Round Sizes Steady in 2Q ’ 05 Median Amount Invested Per Financing Round, VC Only Median Amount Invested ($M) Source: Dow Jones VentureOne/Ernst &Young

48. Early Stage Deals are ½ Size of Later Rounds Median Amount Invested by Round Class, VC Only Median Amount Invested ($M) Source: Dow Jones VentureOne/Ernst &Young

49. Amount Invested in Rounds at Late 90’s Levels Median Amount Invested by Round Class (Annual), VC Only Median Amount Invested ($M) Source: Dow Jones VentureOne/Ernst &Young

50. U.S. Investment: Regions

51. Bay Area Draws Most Dollars, NY Metro 2nd Regional Investment in the United States 2Q’05 Source: Dow Jones VentureOne/Ernst &Young

52. 2 Out of 5 Deals in California Regional Deal Flow in the United States 2Q’05 Source: Dow Jones VentureOne/Ernst &Young

53. Most Deals are Syndicated Number of Investors Per Round Source: Dow Jones VentureOne/Ernst &Young

54. U.S. Investment: Valuations

55. Valuations Continue Upward Trend Median Premoney Valuation by Year

56. Valuation has a strong corellation to round Median Premoney Valuations by Round Class (All Industries)

57. U.S. Liquidity

58. M&As Remain Primary Exit Option Percentage Breakdown of Venture Backed Liquidity Events: IPO vs. M&A

59. IPO Activity slows in 1H’05 after a strong ‘04 Deals and Amount Raised Through IPOs Amount Raised ($B) Venture-Backed IPOs

60. Fewest Venture-Backed IPOs in 7 Quarters Deals and Total Amount Raised Through IPOs Amount Raised ($B) Venture-Backed IPOs

61. Half of 2005 IPOs from Vintage Years ’99-’00 Median Time From Initial Equity Funding to IPO Number of Years

62. IPOs have raised Greater amounts of VC before going public Median Amount Raised Prior to IPO Median Amount Raised Prior to IPO ($M)

63. European Investment: Overview

64. Perspective on European Market Equity Investment in Venture-Backed Companies, US vs. Europe ($) Overall Investment Amount Invested ($B) Source: Dow Jones VentureOne/Ernst &Young

65. Biopharm & Software Lead 1Q’05 Investing Equity Investment in European Venture-Backed Companies by Industry, 1Q‘05 Source: Dow Jones VentureOne/Ernst &Young

66. UK Leads 1Q’05 European Investment Investment in Europe by Country, 1Q’05 Source: Dow Jones VentureOne/Ernst &Young

67. Top European Investors, 1Q’05 Number of Equity Investments in European Venture-Backed Companies

68. So What Have We Learned?