Dixon Doll
Chairman-elect US National Venture Capital
Association;
Cofounder and General Partner, DCM
35 years of US Venture Capital —
A Historical Perspective for China
2007 CVCA Annual Meeting
& China Venture Capital/Private Equity Summit
November 2, 2007
Agenda
 Evolution
of U.S. VC industry, why a flourishing
VC industry is important for China
 Proper
role of public policy
 Putting
U.S. lessons learned in context for China
going forward – key messages
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US Venture Capital Investment in Perspective





US GDP $12.5 trillion annually
Hedge fund intake $1.5 trillion over last 3 years estimated
Mutual fund intake $158 billion in 2006
Buyout intake $103 billion in 2006
Venture capital intake $28.6 billion in 2006
• Venture capital fundraising & investment Is 0.2% of total GDP
Source: BLS website, Investment Company Institute, Thomson Financial, NVCA
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Venture-Backed Employment
VC-Backed US Jobs (millions)
As a % of total US Pvt Jobs in 2006
VC-Backed
Jobs = 9%
Outpaces 2003 - 2006
Total US Job Growth
Source: Venture Impact 2006 by Global Insight
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Global Insight Study

In 2006, venture backed companies:
•
Provided 10.4 million U.S. jobs
•
Had sales of $2.3 trillion
Represents 17.6% of GDP


Still dominated venture-created sectors
•
56% of biotech revenue
•
78% of computer and peripherals revenue
•
94% of computer and peripherals jobs
•
88% of software sector jobs
Outgrew the economy 2003-2006 in every sector
Source: Venture Impact 2006 by Global Insight
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“Buy Low… Sell High” Is Easier if You
Really Buy Low!
Company
Cisco
eBay
Amazon.com
Apple
YouTube
Google
JetBlue
WebVan
Total Venture
Investment $M
Recent Market
Cap/ Acq Price
$M (4/2007)
3
7
8
9
12
40
173
441
163,000
45,890
18,640
78,000
1,650
150,000
2,000
0
Source: PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report, Data: Thomson Financial
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VC Investment Peaked in 2000;
Recently 20-23% of Peak; 2006 Was Higher
Source: PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report, Data: Thomson Financial
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IPO Levels Jumped in 2004 but not Sustained;
New Hope in 2007?
Source: Thomson Financial/National Venture Capital Association
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State of Venture Capital – at Steady State
Deal Flow and Equity into Venture-Backed Companies
$87.7
Dollars Raised by U.S. VC Funds ($B)
Amount Invested ($B)
$46.3
$36.4
$22.2
$9.2
$11.2
$12.5
Source: PricewaterhouseCoopers – NVCA Moneytree™ report,
Data: Thomson Financial
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$19.7
$22.5
$24.0
$26.7
Key U.S. VC Building Blocks…

Capital formation
Prudent man rule – enabled pension investment
• LP laws
• Capital gains tax reduction
•

Empowered entrepreneurs
•
Capital gains tax reductions
• Stock options/team building tools
• Reasonable bankruptcy laws





Protect companies – IP laws
Abundant customers willing to do business with SMEs
Exit markets – the NASDAQ
Face-to-face investing/proximity
Cultural acceptance
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Building Blocks of the U.S.
Venture Capital Industry

Unparalleled university research
 High quality universal education
 Proximity to talented entrepreneurs and engineers
 Deep, liquid transparent capital markets
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The Number of U.S. VC Firms has
Peaked . . . Thankfully
At Year End
# Venture
Firms
Capital
Under Mgt
1970
1980
1990
2000
2001
2006
28
89
395
881
946
798
$1B
$4B
$30B
$228B
$255B
$235B
Source: 2007 NVCA Yearbook, prepared by Thomas Financial
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Number of Active IT VC Firms Declining
United States
Europe
Israel
- 56% Since 2000
- 60% Since 2000
- 65% Since 2000
974
2206
376
862
299
1767
661
556
1364
1157
420
1012 960
Note: Chart scales vary for clarity
Source: Ernst & Young/Dow Jones Venture One
221
205
205
391
130
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Globalization of VC and Technology

VC is truly a global business
• Entrepreneurs live and start companies everywhere
• Low-cost centers of technological excellence distributed globally
• Other potential markets to emerge (India, Eastern Europe, Russia)

Portfolio companies are increasingly global
• Companies must utilize global centers of technological excellence
• International markets more important for select disruptive technologies
• Companies must access many international markets from the get go

Emergence of many new important sectors like Cleantech
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Cleantech Investments (US $M)
21%
CAGR
25%
CAGR
195%
CAGR
Source: Dow Jones VentureOne and Ernst & Young
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Important VC – Related Public Policy Issues

Tax policy encouraging risk taking and
company formation
 Long-term support for University,
government R&D
 Creating entrepreneur friendly
•
Legal system (creating law)
• Court system (enforcement)

Intellectual property protection
 Investor friendly, confidence inspiring,
securities regulatory system
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Government Policies Can Be Harmful to VC

Misguided overreaching U.S. government policies,
regulations, like Sarbox have harmed domestic VC
industry by
•
Sharply reducing IPOs
• Increasing costs of going public, ongoing compliance
Beware of Unintended Consequences
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A Tale of Two Markets
There are significant disparities
between tech markets and capital markets in general
Dow
+ 11%
11,723
NASDAQ
13,063
5,049
(50%)
2,525
2000 Peak
(1/14/2000)
4/30/2007
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2000 Peak
(3/10/2000)
4/30/2007
Tech IPOs Continue to Decline
180
# of U.S. VC Backed Tech IPOs
$90B
Amount Invested ($B)
$87.7
$80B
$70B
$60B
108
105
$50B
$46.3
$40B
$36.4
60
$22.2
46
$9.2
$11.2 $12.5
10
6
$24.0 $26.7
$22.5
$19.7
10
18
11
20
$30B
$14.5
17
$20B
$10B
0
Source: VentureSource and National Venture Capital Association MoneyTree™ Report
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M&A Has Become the Primary Venture Exit
Number of Exits
M&A
IPO
Annualized
Source: Thomson Financial/National Venture Capital Association
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Global Private Equity Market
More U.S. Companies Have Gone Private but Q3’07 May See a Slowdown
20%
15%
10%
5%
0%
Source: Marketview
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% of U.S. M&A Volume
Private Equity Volume ($USB)
25%
Weak US Capital Markets Offset by Global Strength
North America
4 Exchanges
$19.9 Trillion
NYSE $14.4T
NASDAQ $3.7T
Europe
18 Exchanges
$13.4 Trillion
London $3.4T
Euronext $3.4T
Asia-Pacific
17 Exchanges
$10.2 Trillion*
Tokyo $4.4T
Hong Kong $1.4T
Latin & South
America
7 Exchanges
$1.1 Trillion
Middle East &
Africa
4 Exchanges
$0.8 Trillion
Source: World Federation of Exchanges, 10/23/06
* Osaka & the National Stock Exchange of India are not included
in the total for Asia-Pacific to avoid double counting Tokyo & Bombay
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Capitalization of Global Markets
Development of Markets Abroad is Healthy
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Source: World Federation of Exchanges, 2006
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Tax Policy is an Important Lever
Tax Revenue in Billions
Capital gains tax revenue forecast vs actual in billions
Bush tax cuts
2003
Latest CBO estimates
Source: Treasury Department and Congressional Budget Office
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Individual Long-Term Capital
Tax Rates 2005-2006
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
*
10%
12.5%
14.5%
Currently
15%
15%
17.6%
19%
After Lapse (2011)
20%
20%
20%
20%
23.5%
25%
26%
28%
28%
30%
32%
43%
The rates are based on long-term capital gains tax rates applicable to gains on sales of share.
*Long-term capital gains listed securities are exempt.
Source: Individual Taxes 2004-2005, Worldwide Summaries (PricewaterhouseCoopers), European Tax Handbook 2005 (International Bureau of Fiscal Documentation)
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and various government web sites.
Total U.S. Tort Costs
2.5%
300
2.0%
250
200
1.5%
150
1.0%
100
0.5%
50
0.0%
0
Source: Towers Perrin, 2006
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Tort Costs ($B)
Tort Costs as % of GDP
Cost of Litigation is Growing in the U.S.
Percentage of World Population
% of
World
Population
20.35
19
4.81
4.35
U.S. China
U.S. China
Source: Stocks for the Long Run and Future For Investors, Jeremy J. Siegel
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Percentage of World’s GDP
% of
World’s
GDP
21
19
14
10
U.S. China
Source: Stocks for the Long Run and Future For Investors, Jeremy J. Siegel
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U.S. China
Top Markets Where the Cost of Complying With
Corporate Governance Regulation is Too High
U.S
UK & Canada
Ireland
India
Austria,
Israel
Germany,
Liechtenstein,
Switzerland
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China
Nordic France, Benelux
Countries Italy,
Monaco,
Portugal,
Spain
Top Markets Where Regulation is Too Lax and
Creates Additional Business Risk
India
Central/
Eastern
Europe
China
CIS &
Latin Other Asia Middle Africa
Russia America
East
(excl Israel)
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Israel
South
Korea
Top Markets Where Intellectual Property Laws
Create Additional Financial Risk
China
India
U.S.
Israel
Other
Asia
Canada
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South
Korea
Latin
America
Middle Central &
East Eastern
(excl. Europe
Israel)
Public Policy Implications for China

Establishment of one industry voice, CVCA, is
an important positive step
 Creation of the domestic Shenzhen, Shanghai
Exchanges also desirable
 Caution against overregulation which could
discourage new company formation and restrict
foreign capital inflows
 Importance of strong capital market oversight
and governance agencies like CSRC
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Key Messages Summarized
 China
VC industry today still in very early stage
(roughly same as U.S. in late 70’s)
 Industry always has been cyclical – new cycle
every 10-12 years. Anticipate downturns.
 Flourishing VC industry a crucial element for
leveraged job creation, innovation, and longterm economic growth
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Key Messages Summarized (cont.)
 Public
policy plays major role in successful
evolution of VC industry
•
Taxation, Legal, R&D Support, Governance, Etc.

Excessive government intervention has periodically
damaged U.S. VC industry (Sarbox)
 NVCA in U.S. has played important role in
influencing public policy - I strongly encourage
CVCA to do the same in China
Thank You.
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