1. 70-397 Venture Capital InvestingFall 2002 Slide 1 The History and Current State of The Venture Capital Market © Andrew W. Hannah

2. 70-397 Venture Capital InvestingFall 2002 Slide 2 Agenda Review of last class Venture capital history Current state of the market Winning Angels comments Assignments Next class © Andrew W. Hannah

3. 70-397 Venture Capital InvestingFall 2002 Slide 3 Review of Last Class Sources of entrepreneurial equity Main differences between angels and venture investors Source of capital Size of investments Number of investments Stage of deals © Andrew W. Hannah

4. 70-397 Venture Capital InvestingFall 2002 Slide 4 Review: Venture Investment Cycle Sourcing Evaluating Valuing Structuring Negotiating Supporting Harvesting © Andrew W. Hannah

5. 70-397 Venture Capital InvestingFall 2002 Slide 5 What did you learn??? Article Review © Andrew W. Hannah

6. 70-397 Venture Capital InvestingFall 2002 Slide 6 VC History 1400’s: Chris and Isabella Pre 1939: angels, government, families (Rockefeller/Mellon) 1939: Venture Capital is first used as a term at a banker convention 1946: JH Whitney & Co./ARD launches first VC funds Vision – institutionalize risk capital and the investment process, invest in people Whitney: Minute Maid ARD, General George Doroit: DEC 1956: Thermo Electron launches first “incubator” 1958: SBIC act passed: loan guarantees/low interest loans 1965: less than $100M in new ventures © Andrew W. Hannah

7. 70-397 Venture Capital InvestingFall 2002 Slide 7 VC History (Continued) Late 1960’s: Bull IPO market Pinnacle: DEC, a 1958 investment of $70K from ARD proved model can work 77% ownership, $350M market cap in 1970, ARD owned 10% Early 1970’s: First crash: minis and semi conductors Largest fund: $80 million from Chicago State Street (insurance) Mid 1970’s: No IPO’s – 7 year slump Late 1970’s: The turnaround begins 49% cap gains slashed to 28% Removal of stock option taxes Prudent man rules – prevents pension funds from investing Small business Investment Incentive Act – pension funds as limited partners 1980: VC’s raised and invested less than $600 million Family money largest source © Andrew W. Hannah

8. 70-397 Venture Capital InvestingFall 2002 Slide 8 VC History (Continued) 1983: Second VC Crash – painful but shorter Result of excesses of pc run up and too much money But venture captial was strategically important 1988: VC’s raised and invested $3.7 billion Early 1990’s: A different scene, an IPO boom Only 3.3% of funds were going into early stage deals Pension investments = 50% of VC money 1993: Biotech bust Late 1990’s: VC’s raised= $26 billion The pinnacle: 1999 new Investments: $48 billion 41% into early stage (50% of all funded companies) 2000: The Crash! Why? 2002: VC’s raised only $2.3 billion raised in Q1 2002 © Andrew W. Hannah

9. 70-397 Venture Capital InvestingFall 2002 Slide 9 The State of the VC Market Today How did we get here today? Internet Raising too much money too fast The fallout – returning money, reducing fees, less investment But venture capital is strategic – necessary to get return up What type of deals are getting done these days: Internet? Software? Applied Materials? Healthcare? Internet deals Q1 2000: $8 billion Q1 2002: $434 million (back to 1998 levels) M&A Markets © Andrew W. Hannah

10. 70-397 Venture Capital InvestingFall 2002 Slide 10 Winning Angels Know Statistical Significance How many deals do you have to do to get a winner? What is the lesson? Know Expected Value Cameron’s Lemonade: 1:10 will be winners Ultimate value = $1 million Your share = 10% What should you invest? After 20 investments your likelihood is 88% FASTRETURNS.COM example © Andrew W. Hannah

11. 70-397 Venture Capital InvestingFall 2002 Slide 11 Overview: sourcing and screening Investment Model Deal Filter Due Dil Deal Markets Stage Management Markets Products Detail Review Terms and Structure © Andrew W. Hannah

12. 70-397 Venture Capital InvestingFall 2002 Slide 12 For The Next Class WA pp 31 – 71 Info Card B: Venture Investors Question Card A: Venture Capitalists, deal structure, and filtering The Venture Capitalist case © Andrew W. Hannah