Slide 1
The History and Current State of
The Venture Capital Market
70-397 Venture Capital Investing
Fall 2002
© Andrew W. Hannah
Slide 2
Agenda
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Review of last class
Venture capital history
Current state of the market
Winning Angels comments
Assignments
Next class
70-397 Venture Capital Investing
Fall 2002
© Andrew W. Hannah
Slide 3
Review of Last Class
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Sources of entrepreneurial equity
Main differences between angels and venture
investors
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Source of capital
Size of investments
Number of investments
Stage of deals
70-397 Venture Capital Investing
Fall 2002
© Andrew W. Hannah
Slide 4
Review: Venture Investment Cycle
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Sourcing
Evaluating
Valuing
Structuring
Negotiating
Supporting
Harvesting
70-397 Venture Capital Investing
Fall 2002
© Andrew W. Hannah
Slide 5
What did you learn???
Article Review
70-397 Venture Capital Investing
Fall 2002
© Andrew W. Hannah
Slide 6
VC History
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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
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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
70-397 Venture Capital Investing
Fall 2002
© Andrew W. Hannah
Slide 7
VC History (Continued)
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Late 1960’s: Bull IPO market
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Pinnacle: DEC, a 1958 investment of $70K from ARD proved
model can work
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Early 1970’s: First crash: minis and semi conductors
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Largest fund: $80 million from Chicago State Street (insurance)
Mid 1970’s: No IPO’s – 7 year slump
Late 1970’s: The turnaround begins
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77% ownership, $350M market cap in 1970, ARD owned 10%
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
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Family money largest source
70-397 Venture Capital Investing
Fall 2002
© Andrew W. Hannah
Slide 8
VC History (Continued)
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1983: Second VC Crash – painful but shorter
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1988: VC’s raised and invested $3.7 billion
Early 1990’s: A different scene, an IPO boom
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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
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Result of excesses of pc run up and too much money
But venture captial was strategically important
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
70-397 Venture Capital Investing
Fall 2002
© Andrew W. Hannah
Slide 9
The State of the VC Market Today
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How did we get here today?
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The fallout – returning money, reducing fees, less investment
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But venture capital is strategic – necessary to get return up
What type of deals are getting done these days:
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Internet
Raising too much money too fast
Internet?
Software?
Applied Materials?
Healthcare?
Internet deals
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Q1 2000: $8 billion
Q1 2002: $434 million (back to 1998 levels)
M&A Markets
70-397 Venture Capital Investing
Fall 2002
© Andrew W. Hannah
Slide 10
Winning Angels
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Know Statistical Significance
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Know Expected Value
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How many deals do you have to do to get a winner?
What is the lesson?
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
70-397 Venture Capital Investing
Fall 2002
© Andrew W. Hannah
Slide 11
Overview: sourcing and screening
Investment Model
Management
Markets
Products
Deal Filter
Due Dil
Deal
70-397 Venture Capital Investing
Markets
Stage
Detail Review
Terms and Structure
Fall 2002
© Andrew W. Hannah
Slide 12
For The Next Class
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WA pp 31 – 71
Info Card B: Venture Investors
Question Card A: Venture Capitalists,
deal structure, and filtering
The Venture Capitalist case
70-397 Venture Capital Investing
Fall 2002
© Andrew W. Hannah