1. ©Michael Borrus, 2003 Wisdom from the Wizard of Omaha “Nothing sedates rationality like large doses of effortless money.” Warren Buffet Berkshire-Hathaway Annual Report for 2000 (Net profits rose 113%; earning/share rose 2X) “Despite three years of falling prices, which have significantly improved the attractiveness of common stocks, we still find very few that even mildly interest us. That dismal fact is testimony to the insanity of valuations reached during The Great Bubble. Unfortunately, the hangover may prove to be proportional to the binge.” Warren Buffet March 2003

2. ©Michael Borrus, 2003 The New Economy View up to March 2000 The Internet changes everything The economic model of every business will be transformed Move first, be the Biggest, Fastest Spend and spend; Equity is currency Emphasize marketing hype over real execution Lay-off the risk onto the Public Market

3. ©Michael Borrus, 2003 US Venture Capital Investments 1995 - 2000 1,174 deals 1,676 deals 1,840 deals 2,046 deals 3,317 deals 4,107 deals Source: PriceWaterhouseCoopers (PWC) MoneyTree Survey in partnership with VentureOne, 2000

4. ©Michael Borrus, 2003 Mid-1990sVenture Capital Returns, Select Funds Examples of Funds over 3 years old Fund NameInceptionIRR Summit III199164% Kleiner Perkins VI199239% Mayfield VII199225% Sequoia VI1992110% Accel IV199379% Battery Ventures199423% Summit IV1995101% Kleiner Perkins VIII1996287% Matrix Partners V1997516%

5. ©Michael Borrus, 2003 Mega VC Funds Source: VentureOne, WSJ, 10/8/00

6. ©Michael Borrus, 2003 Venture Capital Investments in the Internet - 5 yr review Source: PWC MoneyTree Survey Report, 2000

7. ©Michael Borrus, 2003 VC Investments by Stage of Development Percentage of Total Deals 1995 – 1999 Misha Petkevich: Source: PWC MoneyTree Survey and VentureOne, 2000

8. ©Michael Borrus, 2003 From Capital Market Bubble to Tech Bubble Tech spending grew by 2x the ’90-’96 rate from ’97-’00; bandwidth by 130% year on year from ’98-’00 Unprecedented venture and borrowing activity (next slide) = huge jump in tech spending, esp. comm infrastructure; amplified competitively as older firms responded Tech vendors exacerbated by vendor financing and investment in start-ups –Impacts on company financials for quarterly reporting –Compensation impacts Self-reinforcing, but ultimately unsustainable tech-capital market cycle

9. ©Michael Borrus, 2003 Size of Telecom Fiasco From 1996-2001, Telecom, a $300 Billion industry: –Borrowed $1.5 Trillion in bank/non-bank lending –Issued $630 Billion in Corporate Bonds Creative Accounting exacerbated impacts –Use of bandwidth swapping to generate phantom revenue –Sales inflation, fraud $$--Billions Source: Thomson Financial; WSJ

10. ©Michael Borrus, 2003 The bursting of the equity market bubble changes everything Maybe the New Economy isn’t so New –Amazon and B2C E-tailing – What assumptions were wrong? –B2B – What assumptions were wrong? Financial Markets: PROFITS and CASH FLOW, not Marketing hype Venture Fund Practice: Conserve Capital –Kill/Dispose of clear losers in existing portfolios –Reinvest to support rest of portfolio Pray for recovery The New New Economy View

11. ©Michael Borrus, 2003 US Venture Capital Investments 1995 - 2002 1,840 deals Source: PriceWaterhouseCoopers (PWC) MoneyTree Survey in partnership with VentureOne, 2002

12. ©Michael Borrus, 2003 US Venture Capital Investments 1995 – 2002, by Quarter Source: PriceWaterhouseCoopers (PWC) MoneyTree Survey in partnership with VentureOne, 2003

13. ©Michael Borrus, 2003 US Venture Capital Investments by Stage of Development 1997-2003 % of total deals

14. ©Michael Borrus, 2003 Shifts in VC Industry Sector Focus Shift to “safer” investments Shift out of tech to bio Shift to enterprise value creation from infrastructure (x- wireless)

15. ©Michael Borrus, 2003 Venture-Backed IPO and M&A activity by quarter Source: Venture Economics and the National Venture Capital Association

16. ©Michael Borrus, 2003 Exit Strategies for Venture-backed Companies M&A IPO Source: Securities Data Corporation

17. ©Michael Borrus, 2003 Global M&A Activity (2000-2002) Global M&A Activity has cratered 1997-2000, headcount grew by 40% and remuneration by 88% 2001, revenues fell 13%, employment 8% Retrenchment is continuing – estimated 30K-50K investment banking jobs eliminated Unit = $$ Billions Source: Wall Street Journal and P&P estimates

18. ©Michael Borrus, 2003 Venture Economics Post-Venture Capital Index (PVCI) Annualized Returns Source: Thomson Financial & National Venture Capital Association. As of 2/28/03

19. ©Michael Borrus, 2003 Net Returns of Venture Capital Funds A mature asset class? $60-70 billion in un- invested, committed capital Limited partners are seeking return of un- invested capital More asset write-downs to come $4-5 billion in secondary market sales estimated for 2002 Source: Thomson Financial/Venture Economics & National Venture Capital Association

20. ©Michael Borrus, 2003 Recent-vintage Venture Fund Returns Examples of Funds less than 3 years old Fund NameInceptionIRR Menlo Ventures VIII1999- 34% Softbank V1999- 30% Oak IX1999- 34% Worldview Tech. III1999- 50% Sequoia IX1999- 4% Battery Ventures VI2000- 34% Kleiner Perkins XA2000- 15% Accel VIII2000- 22% Matrix Partners VII2001- 39%

21. ©Michael Borrus, 2003 Mega Fund Cuts

22. ©Michael Borrus, 2003 Fallout on Wall Street Lots and lots of suits by investors, states and SEC Basic conflict of interest between banking and equity research/brokerage functions Analysts recommended ‘buys’ to clients while their firms sold sold sold Other issues: –IPO allocations in return for trading commissions Buy Recommendations as a % of all recommendations Sell Recommendations as a % of all recommendations

23. ©Michael Borrus, 2003 Top 20 Countries by Investment (2000) Source: PWC Global Private Equity Report by US $ Billion

24. ©Michael Borrus, 2003 Top 20 Countries based on Investment Growth (1995-2000) Source: PWC Global Private Equity Report Over 5 years, by percentage

25. ©Michael Borrus, 2003 Asia Private Equity Bubble Tracks US with Lag 10,455 2002

26. ©Michael Borrus, 2003 Asia Venture Bubble Subsides 2002 2,990

27. ©Michael Borrus, 2003 Locational Composition of Asian Private Equity Investment, 2001

28. ©Michael Borrus, 2003 Asian Private Equity: Composition by Investment Stage, 2002 Source: AVCJ

29. ©Michael Borrus, 2003 Asian Private Equity: Industry Composition, 2002 Source: AVCJ

30. ©Michael Borrus, 2003 New York Venture Capital Prior to 1950s – Individuals in the finance sector 1946 – Family funds begin operations Early 1960s – Formal VC funds emerge 1969 – Citicorp Venture Capital and its progeny 1980s – Later stage investment for other regions 1980s – Buyouts, refinancings, bridge financings Mid 1990s – Silicon Alley Source: Prof. Martin Kenney, Work in Progress, 2000

31. ©Michael Borrus, 2003 San Francisco Bay Area Venture Capital 1958 SBIC Act prompts them to incorporate to leverage Federal funds 1960s – Limited partnership form mergers to gather larger amounts of capital. 1970s – Larger deals still dependent on East Coast for funds 1970s – Technology industry veterans join the VC industry 1980s – SV begins to achieve financial independence due to pension fund monies 1980s – Deal making accelerates and all prominent VCs must have office in Silicon Valley –East Coast VCs establish branch offices –San Francisco-based VCs move to Menlo Park Source: Prof. Martin Kenney, Work in Progress, 2000

32. ©Michael Borrus, 2003 Amazon’s Improving Margins Sources: Company 10Q filings

33. ©Michael Borrus, 2003 Amazon: Pro Forma earnings vs. GAAP Losses Sources: Public filings Amazon’s “pro forma operating profitability” number is computed by ignoring lots of expenses Profit numbers exclude stock-based compensation, restructuring expenses, and investment losses Staggering $2.2 Billion in Debt Today, shares are down over 70% from the peak

34. ©Michael Borrus, 2003 Has Amazon Turned the Corner? (Q/Q growth and Inventory Turns) Source: Company Reports

35. ©Michael Borrus, 2003 Has Amazon Turned the Corner? (Sales Efficiency of Capital Spending) Source: Company Reports