The Danish-American Entrepreneurship Summit Insights Into the US Venture Capital Markets How to Create A Winning Strategy? Clare Fairfield
Do Innovation Development Systems Matter? In 2003, venture backed companies: Provided 10.1 million US jobs Had sales of $1.8 trillion Represented huge slice of US economy (10%) Between 2000 and 2003, venture backed companies defied gravity US private sector jobs down 2.3% Venture backed companies grew employees 6.5% Source: Venture Impact 2004 by Global Insight
Creation of a Sustainable Venture Development System Does not happen overnight Models do exist Silicon Valley & Southern California Boston & New England Texas DC/Northern Virginia/Maryland Defense spending matters Models cannot be copied verbatim Requires the simultaneous presence of key venture development factors
Innovation Factors Opportunity People Education & Training Infrastructure / Community Capital Venture Capital is the Essential Catalyst
What is Venture Capital? Venture capital is viewed as a prudent investment class by institutional investors Professionally managed pools of money Active, involved management Equity investment with long term perspective Source of patient capital that is supportive through multiple rounds of investment Commercializer Innovation engine Research magnet Leadership & contacts
Private Equity & Venture Capital Private Equity Generally equity investments in non-public companies Venture Capital Leveraged Buyouts Mezzanine Financing Venture Capital Stage Risk Technology Risk Management Risk Market Risk
Venture Industry Summary Statistics 1980 1994 2004 VC Firms 89 395 897 VC Funds 126 660 1,678 Professionals 1,308 4,345 9,239 Ave. Fund Size $31.6 $53.2 $155.4 Ave. Firm Size $44.8 $89.0 $290.6 NVCA/Thompson Venture Economics
Evolution of the US Venture Capital Market 1960 s s & 1970 s 1980 Evolution of the US Venture Industry Size Firms Capital Under Management Venture Capitalists Geographic Concentration Sector Specialization Deal Size Issue of Scale and Compensation Flows of Money Tell the Tale
Stages of Investing Pre-Seed Seed Stage Early Stage Expansion Stage Later Stage Pre-seed: seed: Idea Stage, Incorporation Seed: Team Established, Plan Creation, Prototype Development Early: Initial Revenues, Negative cash flow Expansion: Company Expansion, Crossing the Chasm Later: Pre-IPO, Sub-debt, Bonds, etc
70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% Venture Capital Investment By Stage 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Startup-Seed Early Expansion Later NVCA/Thompson Venture Economics 1980 Percentage of Total VC Invested
2005 VC Investments By # 98 24 1,054 6 2 21 29 1 1 13 62 1 136 37 3 10 2 1 10 39 2 16 7 2 17 2 27 47 4 4 107 63 54 49 2 18 1 RI 11 CT 25 NJ 50 DE 6 MD 86 DC 7 MA 290 HI 4 51 NVCA/Thompson Venture Economics
2005 VC Investments By Millions $ 749 27 3 138 105 10,316 8 148 248 4 612 88 6 1,141 233 68 10 247 118 13 9 1 95 119 96 11 32 66 5 6 205 1,059 469 402 507 35 NH 114 MA 2,366 RI 77 CT 209 NJ 830 MD 443 DC 30 HI 16 363 NVCA/Thompson Venture Economics
Per Capita VC Investment By State $450 $400 $350 $300 $250 $200 $150 $100 $50 $- MA WA NH MD UT MN GA PA NC VA HI OK NM KS KY MO WI VT WV IA WY SC ID MS MT NE NVCA/Thompson Venture Economics 2004
Current Venture Capital Environment Heavy geographic concentrations 80 / 91.5 / 8.5 Large funds getting larger Early stage venture capital becoming increasingly scarce Globalization Capital base institutionally dominated
Investment Capital Sources Private and Public Pension Funds Financial Services & Insurance Firms Endowments & Foundations Corporations Wealthy Individuals Foreign Investors
Sources of Venture Funds Pension Funds 42% Financial & Ins 25% Corps (as LPs) 2% Individ & Fam 10% Endow & Found 21% NVCA/Thompson Venture Economics
Venture Fund Institutional Investors Heavy use of gatekeepers Balancing desire to invest in name brands with shrinking fund sizes and closed funds Private Equity domination Desire to Manage Risk at Investor Level Strong herd instinct Bias against smaller funds Bias against first time funds
Importance of Angel Investing In 2004 Angels Invested $22.5 Billion 87% of Angel Investing Goes Into Seed and Early Stage Companies In 2004 Total Professional Venture Firm Investments in All Stages Was $21 Billion Venture Capital Firms Tend to Dismiss the Importance & Potential of Angel Investors
Concerto Factors Angel Investing Blood Sport Investing Pay-to to-play Environment Difficult to Establish Relationships Professional Services Firms Downstream Funding Sources Strategic Institutional Significant Time Commitment Often Resource Strapped Potentially Rich Source of Opportunities
University Challenges Bias against profit Ultimate bureaucratic environment Academic vs. Commercial pace Confusing RPM S S with MPH History of counterproductive tech transfer Flawed business model Tech Transfer Commercialization Lack of commercialization experience Venture community has moved the bar Remain source of Innovation Maximize
Lessons From the US VC Experience Support the Chemical Reaction Support Innovation Systemically Institutional Investment Support Angel Investment Support Compensation of Venture Capitalists Experience Matters VC s, Entrepreneurs, Educators, Investors Experience & Education are Expensive & Painful Jump In with Commitment to Evolutionary Adaptation Be Honest & Realistic About Universities Public / Private Partnership