The MoneyTree Shook - Q4 2006

Colleague Mark Radcliffe was kind enough to invite me to today's Shaking the MoneyTree^TM event held at the DLA Piper offices in East Palo Alto. PricewaterhouseCoopers and the NVCA put out the report quarterly, based on data provided by Thomson Financial. The report is in its 12th year. The Master of Ceremonies for this event was Steve Bengston of PwC, who did a very nice job talking to the current trends in the Venture Capital industry.

I don't have a pointer to the slides presented, but you can find the Q4 2006 Press Release here.

Panel attendees (who also did a very nice job and kept the discussion lively) included:

• Vish Mishra, Clearstone Venture Partners


• Ken Haas, Abingworth Management


• Mark Radcliffe, DLA Piper


• John Stockton, Mayfield


• Ken Elefant, Opus Capital


• George Pavlov, Tallwood Venture Capital

Some highlights that I found particularly interesting include:

• 2006 VC investments of $25.5B ranked it as fourth largest year ever (beat out only by 1999, 2000, and 2001).


• 1980 total VC was just $600M - compare that to 2006, where a single investor, Intel, made an investment of more than that amount in a single deal!


• Called this the "Decade of Life Science and SoCal".


• My previous home state of Colorado had a tough Q4 in terms of deals, withh only 16 deals, down 70.8% from the previous quarter (on the year they were down 4.9% from 2005).


• Current VC investment levels "feel" like what it was like in 1996-1998, depending on the metric you dig into (e.g., Q4 2006 Series A dollars invested were higher than the Q1 1999 Series A numbers for Silicon Valley, but comparing # of deals feels more like 1997).


• The money is slowly moving to Biotechnology and Medical Devices. While Software investments continue to lead, Biotechnology is right behind, and if you combine Biotech and Medical Devices, they exceed Software by some 50% margin.


• "About one-third of the money is going into Life Science". Good thing I'm invested in 5AM Ventures!


• First investments, or "Series A", used to be exclusively the domain of Seed-Stage or Early-Stage companies. Today, we find about 30% of Series A dollars going into Expansion-Stage companies. This is a notable change from the VC investments in days gone past.


• Early-Stage companies are getting roughly $7-9M Pre-Money valuations, which seems about the right number to me.


• However, what's interesting about the valuations is that the Later-Stage companies are seeing Pre-Money valuations of $80-90M. That's hard to reconcile with the fact that the average M&A exit valuation for VC-backed companies is just north of those numbers. I.e., lots of Later-Stage VC investors are making poor deals/not making much money on each deal. This is also a more recent development in the industry.


• Most VCs are "Early-Stage" because that's where the money is, historically. Early-Stage still leads the 20-year return numbers over pretty much everybody else (Later-Stage, Buyouts, Mezzanine, etc). However, returns of late for Earl-Stage have been pretty crappy. Personally, I'm an Early-Stage guy and an Early-Stage investor. I agree that it is the best place to get the best returns (and the best investors will prove that out way beyond what the "averages" in these reports show).


• "Overhang continues to grow" - i.e., there's plenty of money out there for the best companies. Raising money should not be a problem. If it is, you've probably got a fundamental problem with your business.


• Advertising dollars to Internet/Mobile is currently about 5%. However, we spend about 20% of our time online and mobile. I.e., massive amounts of ad money will be flowing into these spaces, enough to support 4 more Google's in the next 10 years, perhaps. Lots of opportunity.


• Interestingly, 13% of US marriages in 2005 were from couples that met online! That's an amazing amount of growth. I met my fiancée online as well!


• Average life of an S&P 500 Company in 1938: 100 years. Today: Just 20 years.


• 50% of VC General Partners will be gone in the next 5 years. If you are a VC and are reading this, I hope you are working on your next gig as we speak. That's a lot of turnover.


• Lots of discussion about VC in China & India, and the need for startup companies to go global much sooner than they used to (for both outsourcing as well as to get access to humongous new markets). India has 300M product-consuming middle-class families, for example. Asia gets mobile phones and being continuously connected through their devices (PC at home is less important than mobile access everywhere).


• Conversation even strayed to cover VC vs PE/Buyout guys vs Hedge folks.

All in all, a very good use of a couple hours. Many thanks to PwC and the panel for their thoughts.

Tags: PwC, MoneyTree, PricewaterhouseCoopers, DLA Piper, NVCA, Thomson Financial, Venture Capital, VC, Brian Berliner, brianberliner