1. THE VENTURE FINANCE ECOSYSTEM Michael Danaher Wilson Sonsini Goodrich & Rosati October 2004

2. 2 1. So Goes Nasdaq... 2. The New Economies Continue 3. What’s with Valuations? 4. What’s with IPO’s? 5. The LP Glut 6. The Coming Crisis

3. 3 1. So Goes Nasdaq...

4. 4 The Venture Ecosystem Food Chain Nasdaq LPs Portfolio Companies OPEX CAPX GPs

5. 5 So Goes Nasdaq...FUND INFLOWS Source: Bloomberg, Nasdaq 1992-2004 * Annual projection

6. 6 So Goes Nasdaq... FUND OUTFLOWS Amount Invested ($B) Number of Deals $20.8* 2002* $10.4 $18.4 $21.6 $36.1 $94.5 $49.4 $17.9 $13.1 $9.2 $6.4 $4.4 $3.6 1001 2024 2307 3221 6262 4563 2543 2211 1912 1315 1075 959 $0 $25 $50 $75 $100 199319941995199619971998199920002001200220031H04 0 1,000 2,000 3,000 4,000 5,000 6,000 Amount Invested ($B) Number of Deals Source: “Venture Capital Industry Overview,” VentureOne, October 2004 * Annual projection Source: Bloomberg, Nasdaq 1992-2004

7. 7 So Goes Nasdaq... LIQUIDITY EVENTS YTD04 = 1Q04 – 3Q04 Aggregate # of M&A/IPO Aggregate Value ($B) Source: “Venture Capital Industry Overview,” VentureOne, October 2004 * YTD04: 1Q04-3Q04 Source: Bloomberg, Nasdaq 1992-2004

8. 8 2. The New Economies Continue

9. 9 New Economies Continue Run Silent, Run Cheap  Continued frugality in the portfolio companies  Continued productivity gains - more with less  Outsourcing to India and China became a torrent WSGR setting up 1 Indian sub a week

10. 10 Median Amount Invested ($M) $10.0 $14.4 $8.0 $9.0 $5.1 $5.0 $1.0 $1.5 $0 $2 $4 $6 $8 $10 $12 $14 2Q013Q014Q011Q022Q023Q024Q021Q032Q033Q034Q031Q042Q04 Later RoundSecond RoundFirst RoundSeed Round Deal Size Remains Constant Source: “Venture Capital Industry Overview,” VentureOne, October 2004

11. 11 3. What’s with Valuations?

12. 12 Median Pre-money Valuation by Year Source: “Venture Capital Industry Overview,” VentureOne, October 2004

13. 13 Median Pre-money Valuations by Round Median Pre-money Valuation ($M) $0 $10 $20 $30 $40 $50 2Q013Q014Q011Q022Q023Q024Q021Q032Q033Q034Q031Q042Q04 Later RoundsSecond RoundFirst RoundSeed Round $25 $45 $15 $18 $5 $8 $3 Source: “Venture Capital Industry Overview,” VentureOne, October 2004

14. 14 The View From the Ground  More deal competition, more bidding wars  More up-rounds  More eyebrow-raising rounds

15. 15 WSGR Venture Financing * Top 5 avaerage, top 2 values Quarter Average Value of Top 10 Deals (by Pre-Money Valuation) ($m) Top 3 Deals (by Pre-Money Valuation) ($m) Q303$42$77; $66; $47 Q403$46$90; $65; $60 Q104$63$115; $112; $60 Q204$46$82; $72; $60 Q304$59$125; $125; $100 10/4/2004*$44$100; $70

16. 16 4. What’s with IPO’s?

17. 17 Number of IPO’s *YTD04: 1Q04-3Q04 Source: “Venture Capital Industry Overview,” VentureOne, October 2004

18. 18 IPO’s vs. M&A 0%20%40%60%80%100% 1995 1996 1997 1998 1999 2000 2001 2002 2003 YTD04* IPOsM&As *YTD04: 1Q04-3Q04 Source: “Venture Capital Industry Overview,” VentureOne, October 2004

19. 19 Why the Decline?  Public market profitability requirements  Perceived volatility vs. M&A security  Sarbanes burden  Decreased research coverage

20. 20 Earnings Matter More Year Percent profitable in IPO year 199949% 20009% 200131% 200230% 2003100% 200460% The WSGR IPO Universe

21. 21 5. The LP Glut

22. 22 The LP Glut  Portfolio companies are staying frugal  GP’s are staying frugal—fund sizes remain down But  LP’s Increasing fund investments in proportion to public market Increasing percentage allocation to VC asset class = Global Warming in the Venture Ecosystem?

23. 23 The LP Glut “Why Venture Funds Don’t Want Your Cash” -N.Y. Times “Too Much Money Chasing Too Few Good Funds” -Venture Capital Journal

24. 24 The LP Glut The Fishing Fleet Example  Fleet profitability  Gill nets and trollers  New fishing grounds

25. 25 New Fishing Grounds  China and India  Domestic  Energy/Clean tech

26. 26 6. Crisis in the Making?

27. 27 Crisis in the Making?  Global technology competition is increasing rapidly Funding Talent Activity  Historically, the U.S. competes by attracting the best and brightest from around the world

28. 28 Crisis in the Making? The Department of Homeland Sabotage  Foreign applications to graduate school down one-third!  Visa process discouraging visits by foreign students and businessmen  Work visa limitations reducing high tech talent