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“You Can’t Stop the Waves, But You Can Learn to Surf!” Larry Kubal – Labrador Ventures May 31, 2007.

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Presentation on theme: "“You Can’t Stop the Waves, But You Can Learn to Surf!” Larry Kubal – Labrador Ventures May 31, 2007."— Presentation transcript:

1 “You Can’t Stop the Waves, But You Can Learn to Surf!” Larry Kubal – Labrador Ventures May 31, 2007

2 L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL2 “You Can’t Stop the Waves, But You Can Learn to Surf!” 34 minutes, 34 slides to answer two questions: Part 1: The Market Where are we in the VC wave cycle? Part 2: The Investment Opportunities Where are the opportunities today, created by cultural & technological waves that are transforming our world?

3 L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL3 PWC’s Cascading Technology Waves Source: PricewaterhouseCoopers

4 L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL4 Gartner’s Hype Cycle of Emerging Technologies Source: Gartner Group Technology Peak of Trough of Slope of Plateau of Trigger Inflated Disillusionment Enlightenment Productivity Expectations VISIBILITY TIME

5 L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL5 Kondratiev Waves – Components of the Economic Cycle Wave Form P R D E P: prosperity R: recession D: depression E: improvement Steam Engine Railroads Electrical Engineering Petrochemicals Information Cotton Steel Chemistry Automobiles Technology Source: Wikipedia, Labrador

6 L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL6 Mathematics of the Kondratiev Wave Николай Дмитриевич Кондратьев Nikolai Kondratiev ( )

7 L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL7 A More Conceptual Approach Realism Disappointment Hype Waves of change / growth Market values Time Source: Morgan Stanley Dean Witter & Co., Labrador Growth

8 L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL8 Liquidity Cycle in Venture Capital Company liquidity events VC / Angel investments in companies Company growth LP investment in VC  $7B in Q1’07, best in 5 years  Up rounds exceeded down rounds for 13 th consecutive quarter  Q1’07 IPOs raise $1.2B – double Q1’06  $30B commitments best in 5 years AngelShortcut

9 L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL9 Annual Progress Along the Curve Waves of change / growth Market values Source: Morgan Stanley Dean Witter & Co., Labrador Realism Disappointment Hype Time Growth

10 L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL10 Potential Divergence For Different VC Models Waves of change / growth Market values Source: Morgan Stanley Dean Witter & Co., Labrador Realism Disappointment Hype Time Growth ? 2007

11 “I’ve been telling our investors for three or four years, I don’t think this is a good asset class to commit money to right now.” -Paul Ferri Founding Partner Matrix Partners (1982) Private Equity Hall of Fame (2003) quoted in Private Equity Analyst, March 2004

12 “Technology finance has turned rational – so I’m outta here.” -Howard Anderson William Porter Distinguished Lecturer MIT Sloan School of Management (co-founder Battery Ventures) quoted in Technology Review, June 2005

13 “The traditional venture model seems to us to be broken.” -Steve Dow General Partner, Sevin Rosen Funds quoted in the New York Times, October 7, 2006

14 L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL14 Why Are Smart, Experienced People Saying This? “There is a pig in the python and the python is constipated.”  LOTS OF MONEY: lots of funds funding lots of deals – 10,000 over the last 4 years  “Capital overhang” has become a “company overhang”  VENTURE FRATRICIDE: excessive competition funded within market segments  EXIT MARKETS CONSTRAINED: getting liquidity at good return multiples is tough  EXTENDED HOLDING TIMES: from initial investment to a liquidity event – M&A and IPO are at historic highs ( > 5 years) Case for the venture model being broken:

15 "It's a great time for investing in early-stage companies that will mature in three to five years." -Larry Kubal Managing Partner, Labrador Ventures quoted in the Los Angeles Times, July 13, 2003

16 L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL16 So who is right? What accounts for the divergence of opinions? Most Important: What does the future hold?

17 L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL17 Fund Size: A Defining Difference $0 $50 $100 $150 $200 $250 $300 $350 $400 $450 $500 Labrador Ventures Matrix Partners Battery Ventures Sevin Rosen Fund Size ($ Millions) OPTIMISTICPESSIMISTIC

18 L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL18 Case Study to Support the Broken Model Thesis… $400M fund Target 20% IRR (3x return over 6 years) 20 company investment portfolio CHALLENGE: In today’s environment, assumptions > $150 million average for winners is very optimistic If ALL are winners (aggressive) = $300 million per company If 50% winners = $600 million per company If 20% of a company owned at liquidation, then portfolio needs to create $6 billion of value Must create $1.2 billion of exit value Must create $1.2 billion of exit value Thanks to Josh Kopelman, MD First Round Capital for the example.

19 L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL19 Small “fund” size Small “fund” size Low $ / partner Low $ / partner Earliest stage focus – small investment, very early at low valuations Earliest stage focus – small investment, very early at low valuations Experienced, consistent, disciplined investment team & strategy Experienced, consistent, disciplined investment team & strategy Capital efficiency a core value Capital efficiency a core value Manage company growth and cash to fundable milestones Manage company growth and cash to fundable milestones Well-networked with larger VCs that are potential follow-on funders Well-networked with larger VCs that are potential follow-on funders What Does This Mean For the Early Stage Investor Today? The venture business is experiencing a sea change … and the earliest stage VC or angel investor is well-positioned. Key Positioning Factors

20 L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL20 IRR(%) IRR increases with experience Fund # Supported by Data: Experience & Small Size are Success Indicators IRR(%) IRR increases with more partners & fewer dollars Source: Lerner & Schoer 2005 # Partners per $100M

21 L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL21 Early / Seed VC Returning to Historic Pre-eminence Early / seed VC Later stage VC NASDAQ S & P (3.0) years 10 years 5 years 3 years 1 year Returns to investors as of 12/31/2006 Source: Thompson Financial, NVCA

22 L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL22 Valuation Inflation Has Not Impacted the Early Stage Source: PriceWaterHouseCoopers, NVCA Pre-money valuations – early stage companies

23 L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL23 Early / Seed VC Driven by Recognized Value Creation Series A to Series B Series B to Series C Series C to Series D 120%60%34% Financing round Average % price increase Source: Fenwick & West’s Q1 ’07 San Francisco Bay Area Venture Capital Survey

24 L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL24 Summary of the Health of the VC Market For whom is the traditional venture model especially challenging today? $400+ million funds that focus on capital intensive businesses or Series B and later$400+ million funds that focus on capital intensive businesses or Series B and later For whom is the model still intact and vital? Smaller funds that invest earlier and do not depend on exceptional exit marketsSmaller funds that invest earlier and do not depend on exceptional exit markets How long will exit challenges persist? We believe the state of the exit markets is an anomaly and will self correct in the normal cyclicality of our businessWe believe the state of the exit markets is an anomaly and will self correct in the normal cyclicality of our business

25 Part 2: Investment Opportunities Where are the investment opportunities today, created by cultural & technological waves that are transforming our world? Part 2: Investment Opportunities Where are the investment opportunities today, created by cultural & technological waves that are transforming our world?

26 L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL26 Four Waves Are Changing Our Lives and Creating Investment Opportunities  Globalization  Digitization  Millennialization  Geo-political destabilization

27 L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL27 Globalization: Increasing Interdependence Among Nations Outsourcing originally driven by lower manual labor costs has transitioned to knowledge workers Nearly 100% of Citibank’s IT programming requirements are outsourced to IndiaNearly 100% of Citibank’s IT programming requirements are outsourced to India 50% of US Treasury debt obligations are held by foreign entities China accounts for 20% of the world population. Its people have transitioned into 21 st century consumers representing the largest single market in the world Morgan Stanley forecasts China as the #1 consumer of TMT (technology, media and telecommunications) products and services in 2010Morgan Stanley forecasts China as the #1 consumer of TMT (technology, media and telecommunications) products and services in 2010

28 L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL28 Digitization: Content Creation, Distribution and Consumption Are Increasingly Frictionless News, movies, music and communication transition to digital: newspapers, DVDs, CDs and phone calls become bits in the ether As old media transitions to new digital media, advertising dollars follow Beyond consumers, digitization encompasses enterprise business information, legal documents and medical records Behavioral, psycho-social waves of change are underway -- as ease to create, distribute and consume digital content grows.

29 L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL29 Millennialization: Millennials Rather Than Boomers Now Define the Online Consumer Experience Millennials (born ) -- the internet generation immersed in digital technology and content “The first generation to have a home PC, a cell phone while still in school, a Nintendo, and an iPod for Xmas. The Internet is their medium.” –Duncan Davidson “The first generation to have a home PC, a cell phone while still in school, a Nintendo, and an iPod for Xmas. The Internet is their medium.” –Duncan Davidson Multi-tasking, multi-cultural – in charge of their online experience – “long tailers.” Demand personalized, customized, self-expressive, creative, engaged, communicative, anytime/anywhere, connected web experiences. Global: 75 million US, 200 million China From Facebook to YouTube, the Millennials are defining the evolution of the consumer online experience that the rest of us adapt to.

30 L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL30 Geo-Political Destabilization: Power Shift From Massive Military to Small Groups High instability in the Middle East: Afghanistan, Iran, Iraq, Israel, Lebanon, Syria Higher energy costs Growing sensitivity to terrorism Funds have been created to address “Homeland Security.” In the last year KPCB has launched initiatives in both Greentech and Pandemic / BioDefense. Higher energy costs Attention & dollars to Solar Solar Fuel cells Fuel cells Batteries Batteries Demand for security Surveillance Surveillance Identification Identification Tracking Tracking Detection Detection

31 L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL31 Growth of WiFi hotspots # of hot spots clients(M) Global data subscribers - cellular Subscribers(M) Global broadband subscribers Subscribers(M) Technology Platform/Infrastructure Waves Also Define Areas of Investment Opportunity Source: Morgan Stanley research estimates

32 L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL32 Examples of Investments Riding the Intersections of Cultural and Platform Waves Customized streaming internet radio connecting listeners with the music they love – anytime, anywhere. Cultural – Digitization, Millennialization Platform – Cellular, WiFi Allows users to indulge, discover and personalize their passion for video entertainment – online or on TV. Cultural – Digitization, Millennialization Platform – Broadband, Cellular, WiFi Mobile photo and video messaging -- transforming the camera phone into a tool for mobile video and photo communication. Cultural – Digitization, Millennialization Platform – Cellular

33 L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL33 Four Takeaway Thoughts 1.The venture business is cyclical. We are currently in the growth phase of the wave with the four elements of the venture liquidity cycle generally in balance and improving. 2.The venture capital industry itself is in transition. For some funds, the model is structurally challenged – at least temporarily. Despite their best efforts, returns for their investors will be sub-standard. 3.Experienced investors at the earliest stage, investing relatively small amounts at low valuations, are well-positioned in the current environment. 4.Fundamental cultural and technology transitions are underway. These waves of change are transforming our world. Startups that ride the intersections of multiple waves represent extraordinary investment opportunities.

34 L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL34 “You Can’t Stop the Waves, But You Can Learn to Surf!” Larry Kubal May 31, 2007


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