Thoughts on Tatum’s January 29th “Dallas Capital Markets Update”:

Randy Ray / Gardere Wynne: Besides the evolving focus on the MAC (Material Adverse Change) clause as a dealbreaker as dealflow declines, he covered the “newfound legitimacy” of SPACs (Special Purpose Acquisition Companies), with 66 SPAC IPOs in the US last year, five Texas SPACs raising over $1 billion, and over $11 billion in SPAC IPOs in the 2008 pipeline. SPACs are an interesting investment vehicle in that they allow public financing of private equity, based on the backing of a particular management team.

Paul Howell / Grant Thornton on the IPO Market: He forecasts a strong global IPO market for early 2008, with energy and tech the leading sectors, and a continued decline in global IPO market share for NYSE and NASDAQ. Last year, the Shanghai market was the world’s largest IPO market ($57B), number two was Hong Kong, with the NYSE edging out London for third place. NASDAQ ranked fifth in global IPOs at $20B. 85 IPOs were pulled, the largest figure since 2001.

Keith Winzenreid / J.P. Morgan (debt markets), and Mark Dufhilho / Houlihan Lokey (M&A) both focused on the contrast of first half of 2007 (low interest rates, historically low default rates, aggressive multiples, high dollar volume of M&A transactions) to second half 2007. The nugget from Mark is an analysis of 2^nd half 2007 deal volume by deal size. Deals over $500 million “evaporated”, but middle market deals continued to get done. He supported that thesis with evidence to support private equity ‘dry powder’ for deals, and continued hedge fund growth.

The 2008 net: continued capital availability for middle market deals but at lower multiples, declining global share for US IPO’s, continued growth of hybrid financing styles like SPACs to fill the US IPO gap.

-John Reed

I attended the Edward Tufte presentation in Austin last week (”The Leonardo da Vinci of Data” - New York Times), where many of my deep subliminal hatreds regarding how presentations are made were explained to me.

A cult of friends have Tufte’s first book, and will reference the Minard map of Napoleon’s retreat from Moscow occasionally, but if you have the opportunity to see him the next time he’s in your neighborhood it will be a day well spent.

Tufte begins by laying out the basic principles of presenting information. When he tightens them up later in the day, the contrast between how you like to receive information and how information is normally delivered in powerpoint becomes progressively more obvious.

Key elements of Tufte’s position on presentations:

• “Don’t use the dreaded “Slow Reveal”
  • Powerpoint should not be an exercise in cognitive denial
  • “People haven’t become stupid just because they are in your audience”
  • It’s a actually great thing if the audience looks at your material ahead of time
  • An 11X17 page provided as a handout can contain 50 to 250 times the information of a PowerPoint slide. It can show adjacencies, comparisons, causality, By using a high resolution data dump beforehand, a presenter can then orchestrate a directed conversation, versus the information denial system of powerpoint.
  • A wall chart can be even better, especially for projects – the viewer can absorb the whole thing at once, 24-30 inches away, and integrate an intense amount of data. It’s not chopped up in 50 slides, and shows sequential events and responsibilities adjacent in space, which is how people think and understand.
  • People like intense content. “There is no such thing as information overload, only bad design” - which is the reverse of the five bullet rule.
  • Essentially – and I liked this – powerpoint should only be used as a “Projector Operating System”.

• Try and show information “adjacent in space, Vs. stacked in PowerPoint”

• The iPhone does a lot of things right as a wireless UI:
  • It leverages a flat model to show information
    • Great resolution allowing dense data
    • Data doesn’t ‘disappear’ – it slides or flips, versus going up or down in a pile of menus, where you lose your place
    • And you can zoom in or out, controlling the density of your data in a given screen

• Graphics are no longer a “Special Occasion” – he introduces a concept he has coined as Sparklines, which concentrate graphics into spaces equivalent in size to words in a line of text.

• Lastly, he gave four keys to consuming presentations-
  • ‘Figure out their story”
  • “Figure out their credibility”
  • “Domain Specificity” – keeps presenters from making a leap, creating a shaky tangent relevant to your area of interest
  • Figure out “what should I be seeing – Vs. what I am being shown”

Of course I’m violating all his principles by blogging on this topic without any graphics. Part of his presentation includes four really rich hardbound books, which are referenced throughout his talk. If you make presentations, take a look at his site and consider attending the Tufte seminar on “Presenting Data and Information” when it is in your area.

-John Reed

Consolidation: Fewer deals were closed in Q3 for roughly the same $7.1-$7.2 billion invested vs. Q2, for an average of $8,000,000 per deal in Q3 vs. $7,200,000 in Q2.

Sector Analysis: Software and Life Sciences raised slightly less than in Q2, Internet and Media/Entertainment slightly more. However, the “Clean Tech” sector saw record investment levels, with $844 million going towards 62 Q3 deals, an 80% increase in dollar level investment over Q2.

The complete text of the PricewaterhouseCoopers - NVCA release follows.

WASHINGTON, D.C., October 22, 2007 – Venture capitalists invested $7.1 billion in 887 deals in the third quarter of 2007 according to the MoneyTree™ Report from PricewaterhouseCoopers and the National Venture Capital Association based on data provided by Thomson Financial. Quarterly investment activity was down slightly from the second quarter of 2007 when $7.2 billion was invested in 1,000 deals, suggesting ongoing stability within the venture capital arena. The quarter saw notable increases in both the CleanTech and Internet specific sectors as well as ongoing strength in first rounds of venture capital financing.

“While Software and Biotechnology upheld their historical placements as the top funded industries, venture capitalists seemed to diversify across various industries this quarter,” said Tracy Lefteroff, global managing partner of the venture capital practice, PricewaterhouseCoopers. “In some cases, investment trends reflected top issues facing the nation. Clean Tech, for example, demonstrated its viability as an emerging sector by producing three of the top five deals this quarter, with one deal reaching the $100 million plateau, marking it as one of the largest deals ever for the sector. Overall there was strong deal activity this quarter keeping us on pace for the largest investment year since 2001.”

“The stability of the overall venture capital investment levels, coupled with an increased focus on the most innovative new industry sectors such as alternative energy suggests that the venture capital industry is continuing to support our country’s most promising start-up companies in a rational and deliberate manner,” said Mark Heesen, president of the National Venture Capital Association. “We were particularly pleased to see the sustainability of first time financings levels. Many new companies are seeking and winning venture capital investment which equates to growth for the US economy as a whole.”

Industry Analysis

The Software sector narrowly edged out Biotechnology as the number one industry sector for the quarter with $1.11 billion going into187 deals. This investment level was down from the previous quarter when Software hit a six year high with $1.5 billion going into 253 deals.

The Life Sciences sector (Biotechnology and Medical Devices combined) had another strong quarter with $1.9 billion going into 175 deals compared to the previous quarter when $2.2 billion went into 233 deals. Both Biotech and Medical Device investing slowed in Q3 with fewer deals completed and dollars invested. Biotechnology had $1.1 billion going into 99 deals; Medical Devices had $825 million going into 76 deals in the quarter.

The Clean Tech sector, which crosses traditional MoneyTree sectors and comprises alternative energy, pollution and recycling, power supplies and conservation, saw record investment levels with $844 million going into 62 deals in the third quarter. This represented 80 percent increase in the dollar level and 35 percent increase in the number of deals in the Clean Tech sector in the second quarter of the year.

Internet-specific companies garnered $1.1 billion into 195 deals in the third quarter, a 17 percent increase in dollars over the second quarter when $903 million went into 160 deals. Four of the last five quarters have seen Internet-specific investment of more than $1 billion. ‘Internet-Specific’ is a discrete classification assigned to a company with a business model that is fundamentally dependent on the Internet, regardless of the company’s primary industry category.

Media and Entertainment had a positive quarter with $509 million going into 96 deals, an increase in both deals and dollars from the second quarter when $464 million went into 77 deals. Other industry sectors which saw increases in both dollars and deals include Financial Services, Healthcare Services, and IT Services. Both Telecommunications and Semiconductors saw more dollars but fewer deals in the third quarter.

First-Time Financings

The dollar value of first time deals (companies receiving venture capital for the first time) remained at higher levels with $ 1.7 billion going into 273 first time deals. This is almost even with the second quarter when $1.7 billion went into 347 first time deals.

Companies in Industrial/Energy, Medical Devices, Biotechnology, Software and Media/Entertainment received the highest level of first-time dollars. Financial Services also saw more first time bets this quarter the in the second quarter. Telecommunications saw more first time dollars.

The average first time deal in the third quarter was $6.3 million compared to $5.0 million one quarter ago. Seed/Early stage companies received the bulk of first-time investments garnering 45 percent of the dollars and 69 percent of the deals.

Stage of Development

Seed and Early stage investing dollars in the third quarter fell 15 percent to $1.4 billion into 305 deals. This level compares to an extremely strong second quarter when venture capitalists invested $1.7 billion into 395 deals. Seed/Early stage deals accounted for 34 percent of total deal volume in the third quarter compared to 40 percent in the second quarter of the year. The average Seed deal in the third quarter was $2.4 million, up from $2.0 million in the second quarter; the average Early stage deal was $5.6 million, also up from $5.0 in the second quarter.

Expansion stage dollars increased by 16 percent in the third quarter to $2.7 billion from $2.3 billion in the second quarter. The number of deals however, declined slightly from 302 deals in the second quarter to 294 deals in the third quarter. Overall, Expansion stage deals accounted for 33 percent of venture deals in the quarter. The average Expansion stage deal was $9.2 million, up significantly from $7.8 million in the second quarter

Later stage deals fell slightly dollar value with $3.0 billion going into 288 deals and accounting for 33 percent of total volume. In the second quarter of this year $3.2 billion went into 303 deals. The average Later stage deal in the third quarter was $10.3 million which was also slightly lower than the second quarter when the average Later stage deal size was $10.6 million.

International Investing

In the third quarter of 2007, U.S.-based venture capitalists invested $206 million into 31 deals in China representing a 52 percent decline in dollar volume from the second quarter when $429 million was invested in 38 deals. Also in the quarter, U.S. venture capitalists invested $248 million in 22 deals in India, a more than doubling of second quarter investments of $119 million into 18 companies. These figures are reported separately and are not included in the aggregate totals above.

Note to the Editor

Information included in this release or related venture capital investment data should be cited in the following way: “The MoneyTree™ Report by PricewaterhouseCoopers and the National Venture Capital Association based on data from Thomson Financial”, or “PwC/NVCA MoneyTree™ Report based on data from Thomson Financial.” After the first reference, subsequent references may refer to PwC/NVCA MoneyTree Report, PwC/NVCA or MoneyTree Report. Charts and tables displaying the data are sourced to “PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report, Data: Thomson Financial”. After the first reference, subsequent references may refer to PwC/NVCA MoneyTree Report, PwC/NVCA, MoneyTree Report or MoneyTree.

About the PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report

The MoneyTree™ Report measures cash-for-equity investments by the professional venture capital community in private emerging companies in the U.S. It is based on data provided by Thomson Financial. The survey includes the investment activity of professional venture capital firms with or without a US office, SBICs, venture arms of corporations, institutions, investment banks and similar entities whose primary activity is financial investing. Where there are other participants such as angels, corporations, and governments in a qualified and verified financing round the entire amount of the round is included. Qualifying transactions include cash investments by these entities either directly or by participation in various forms of private placement. All recipient companies are private, and may have been newly-created or spun-out of existing companies.

The survey excludes debt, buyouts, recapitalizations, secondary purchases, IPOs, investments in public companies such as PIPES (private investments in public entities), investments for which the proceeds are primarily intended for acquisition such as roll-ups, change of ownership, and other forms of private equity that do not involve cash such as services-in-kind and venture leasing.

Investee companies must be domiciled in one of the 50 US states or DC even if substantial portions of their activities are outside the United States.

Data is primarily obtained from a quarterly survey of venture capital practitioners conducted by Thomson Financial. Information is augmented by other research techniques including other public and private sources. All data is subject to verification with the venture capital firms and/or the investee companies. Only professional independent venture capital firms, institutional venture capital groups, and recognized corporate venture capital groups are included in venture capital industry rankings.

MoneyTree Report results are available online at www.pwcmoneytree.com and www.nvca.org.

The National Venture Capital Association (NVCA) represents approximately 480 venture capital and private equity firms. NVCA’s mission is to foster greater understanding of the importance of venture capital to the U.S. economy, and support entrepreneurial activity and innovation. According to a 2007 Global Insight study, venture-backed companies accounted for 10.4 million jobs and $2.3 trillion in revenue in the U.S. in 2006. The NVCA represents the public policy interests of the venture capital community, strives to maintain high professional standards, provides reliable industry data, sponsors professional development, and facilitates interaction among its members. For more information about the NVCA, please visit www.nvca.org.

The PricewaterhouseCoopers Private Equity & Venture Capital Practice is part of the Global Technology Industry Group, www.pwcglobaltech.com. The group is comprised of industry professionals who deliver a broad spectrum of services to meet the needs of fast-growth technology start-ups and agile, global giants in key industry segments: networking & computers, software & Internet, semiconductors, life sciences and private equity & venture capital. PricewaterhouseCoopers is a recognized leader in each industry segment with services for technology clients in all stages of growth.

PricewaterhouseCoopers provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 146,000 people in 150 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice.

“PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

About Thomson Financial
Thomson Financial, with 2006 revenues of US$2 billion, is a provider of information and technology solutions to the worldwide financial community. Through the widest range of products and services in the industry, Thomson Financial helps clients in more than 70 countries make better decisions, be more productive and achieve superior results. Thomson Financial is part of The Thomson Corporation, a global leader in providing essential electronic workflow solutions to business and professional customers.

The FT’s Lex column:

“A dose of penicillin or a shot of adrenaline? Investors interpreted the Fed’s surprise 50 basis point cut in its discount rate as the latter – US equities surged on Friday morning, with financial stocks leading the charge. RBS Greenwich Capital points out that discount window borrowing has been minimal during the turmoil. On that basis, the cut is all about utilising other techniques to try to make money flow.

Hence, the Fed is reiterating its watchfulness and emphasising that it accepts a wider range of assets, including home mortgages, as collateral in the discount window compared with open-market operations. That reduces the chance of an immediate emergency Fed funds cut. Indeed, until there is more clarity on the extent of the structured credit problem, it is not clear how much help such a cut would provide.

Ben Bernanke, Fed chairman, has not capitulated – note that the discount rate spread was not erased entirely. He has, however, given ground and, in spite of Friday’s slight downward move, Fed funds futures still imply investors expect one or more cuts by the end of the year.”

Bianco Research, on The Wall Street Journal’s ‘Real Time Economics’ blog:

“[The Fed] cut a symbolic rate that no one uses and the stock market is predicted to have its biggest up-day in history. This underscores how psychological this selloff has been. Sometimes it is better to make statements than to actually do anything.”

Fintag:

“Welcome to serious market volatility - this is a panic measure by the Fed and will lead to the main rate being cut with serious ramifications re inflation, oil prices and the USD. Markets don’t like shocks and once the uplifts occur, the markets will go down severely. Hold onto your hats …”

Dealbreaker:

“This will be good news until about lunch time when the world outside of Wall Street realizes that a cut at the discount window means nothing to the millions of folks looking for rate cuts on their mortgages. This is lipstick on a pig, and is merely delaying the inevitable.”

Paul Kedrosky’s Infectious Greed:

“While I appreciate the symbolism of the Fed early today cutting its discount rate to the best borrowers…damn you Ben Bernanke for making me wake early for no reason: the truth is, it isn’t particularly practical. According to the most recent data, borrowing at the window has been a reasonable approximation of nada in recent weeks, something like $11m in the week ended Wednesday. Markets, of course, will see this as a further step toward an ease, which locks in something the Fed futures had already forecast as a lead-pipe cinch: A September rate cut.”

Caroline Baum on Bloomberg.com:

“You don’t need to buy [Ben] Bernanke’s analysis of the 1930s, published 25 years ago, to find clues to his conduct of monetary policy today.

Whether the Fed was primarily responsible for the severe and sustained economic contraction of the 1930s, as asserted by economists Milton Friedman and Anna Schwartz, or just bears partial responsibility, is still a subject of lively debate among economic historians almost 80 years after the fact.

It is perhaps fitting that Bernanke used the occasion of Milton Friedman’s 90th birthday to assume institutional responsibility for the Great Depression. He said: “I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.’’

He meant it. He won’t.”

Consolidation – Fewer firms are raising more money. The top 10 funds raised 70% of the Q2 total
Stage Creep – Proportionately more money is going to later stage opportunities.

In Q2 2007, 68 VC Funds raised $7.2 billion dollars, which following the themes above represented fewer funds, raising more absolute dollars, than in Q1.

The full release: from NVCA: “Venture Capital Fundraising Activity Healthy and Prudent in Second Quarter of 2007″

The funding markets are shifting, with Private Equity more interested in software/tech than in recent years (see Red Herring Private Equity / Software article ), and able to do the riskier deals that would have gone to VC’s in the past.

This is interesting on a number of levels.

From a life cycle perspective, VC’s have traditionally worked the front end, working with companies climbing the development/growth/shakeout mountain, where VC portfolio companies can benefit from VC partner expertise in building technology, deploying capital, and securing market access through dealmaking. All classic early-stage skillsets.

Private Equity has meanwhile been more about financial engineering, making mature or early-decline stage investments where the drivers of value are process improvements and cost reduction. As private equity gets more aggressive, doing smaller, earlier deals and becoming more active in technology, it creates an fresh auction environment for those deals that makes it hard for the VC’s to compete, forcing VC’s to look at earlier stage deals that promise a longer, less attractive time horizon to an exit.

It also forces private equity investors to do things they have not traditionally been good at, which include implementing messy, uncertain, early-stage value creation strategies.

In effect, this process is a rebranding of VC, pushing it as an investment class towards earlier deals, and a repositioning of PE, allowing it to be effective and to invest in earlier stage deals.

Which leads to the question - as long as capital is available and the market knows where to secure it, does it matter what name you call it?

Every metropolitan  community hopes to build its tech infrastructure.  Although the news is not as bad as it originally sounded, the Sematech headquarters decision re-raises the topic of how to get the tech development flywheel moving.  Hence  ”How to be Silicon Valley”, which carries the interesting thesis that it just takes rich people and nerds.  But the right kind of each…

-JR

    A quick review of Q1 IPO results for VC-backed investments: 

Accuray                                                           Sunnyvale, CA

Aruba Networks                                              Sunnyvale, CA

BigBand Networks, Inc.                                   Redwood City, CA

Glu Mobile                                                       San Mateo, CA

GSI Technology                                               Santa Clara, CA

Mellanox Technologies Inc.                               Santa Clara, CA

Oculus:                                                             Petaluma, CA

Optimer Pharmaceuticals Corp.                        San Diego, CA

SenoRx                                                            Aliso Viejo, CA

Xtent:                                                               Menlo Park, CA

Switch & Data Facilities Co.                             Tampa, FL

Sourcefire                                                         Columbia, MD

Molecular Insight Pharmaceuticals                     Cambridge, MA

Salary.com                                                       Waltham, MA

Synta Pharmceuticals                                        Lexington, MA

More complete data from PE Hub includes the VC backers of each IPO.  

The best IPO quarter since 2000 overall, and a reasonable showing for VC backed IPO’s,  but it is difficult to tell what kind of momentum is being carried into Q2.  There are just two deals on the calendar for this week.  And it’s not just the recent issues in the technology markets causing the near term uncertainty…

From Red Herring March 30^th –

“This brings us to the present. The second-quarter IPO market is barely getting out the door.  Bankers have just one deal on the calendar. No, make it two, if you wish to include last week’s “blank check” carryover. There’s a reason.  For the first time in years, two major religious holidays have converged in the spring to give Wall Street an extended break. They bookend the week. Passover begins at sundown on Monday. The markets are closed for Good Friday.  For all intents and purposes, the IPO production line is open for one day. Whatever deal that goes public will have to be priced Wednesday evening and trade in Thursday’s market.”

It will be interesting to see how the quarter develops.

 

-John Reed  

 

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One topic of these columns has been the contrast of good Texas investment opportunities with limited capital availability.  This relates to the Texas growth companies at different stages that I’ve visited this year. As types of opportunities, they are categorized for discussion here as:   

• Geographic Arbitrage:  taking advantage of the centrality of Texas to enter markets in the Americas
• Era Arbitrage:  bubble-era companies with management that survived the nuclear winter, rolled out a second-or-third generation product, and are now ramping under radar
• Sector Arbitrage:  companies levering technology developed over time and at great expense for an adjacent market

These classifications are a bit loose.  However, if you have any interest in finding out more about these companies and their teams just send a note to me:  SouthwestVenture at gmail.com, and I will pass your information to the founders.

Geographic Arbitrage:  Interesting tech companies here are post-revenue to cash flow positive in smaller geographic markets.  The play is to leverage the upside of bringing a fully-baked product to the larger US market with an “Americas” team that has enjoyed recent successes in bringing technology to US and international markets.  The world is still not really flat – to quote Tom Peters, “Nothing Happens Unless You’re There”, and he means in person.  This style of deal has lower risk than a startup and most of the upside.  (Three companies)

Era Arbitrage:  (the ‘Survivor’ company):  Reasonable people differ as to whether there could be any upside to bubble-era companies that Missed the Window in 2000.  Jaded venture partners assume that the team was not right, the technology insufficient to the task. 

In many cases they are right, especially where management has built an unscalable services business that makes payroll, but little else, in order to survive.  But in other cases they are very wrong.  ‘Survivor’ companies have the three success factors in spades: (Two companies)

1. Team:  Management that came together in the bubble may indeed be guilty of bad timing.  Those that stayed together, forcing scarce resources into creation of a product suited for today’s market, have shown crazy persistence and creativity combined.
2. Technology:  Technology brought to market in 2000 would now be obsolete without continued investment.  It may also have been brought to the market in sectors way too immature to commercialize.  However, technology that has seen continued reinvestment, and that has been adapted to fit today’s new opportunities, is in position for rapid market wins.
3. Model:  The Survivor companies’ great risk comes from having shifted their model from scalable (licensing) to predictable (services) in order to keep the team together during the bust.  Those that kept their focus on a scalable model in a growth sector are in a strong position today.

Sector Arbitrage:  Several Texas companies have leveraged bubble-era investments by licensing for new uses.  Some advantages of this strategy: (Two Companies)

1. Investment Efficiency - with the right licensing structure, these companies can  leverage other’s investment capital and development time, and focus on productization.
2. Reduced Technology Risk - This strategy allows marketing of technology already developed and tested with other investor’s risk capital
3. Speed to Market - Competition will have to follow longer, traditional development path
4. Focus - Funding can be tightly focused on sales, marketing, and product

It’s a great time to be an investor in this market.

-John Reed  

 

 

 

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