VENTURE INVESTING

1
VENTURE INVESTING
Jorge del Calvo
2

• General
• Venture capitalists reversed a three-year
  downward trend by investing 20.9 billion into
  2,876 deals in 2004, according to the MoneyTree
  Survey by PricewaterhouseCoopers, Thomson Venture
  Economics and the National Venture Capital
  Association.
• The annual investment level fell every year
  beginning in 2001, culminating in a six-year low
  of 18.9 billion in 2003.
• The increase in VC investing in 2004 was largely
  attributable to late stage investments jumping to
  7.2 billion in 2004 compared to 4.9 billion in
  2003.

3

• General (Continued)
• After a dip to 4.6 billion in the third quarter
  of 2004, investing in the fourth quarter
  rebounded to 5.3 billion the approximate
  quarterly average of the last two years.
• The fourth quarter marked the 11th consecutive
  quarter of venture investing in the 4-6 billion
  range.
• Its a good time to be an entrepreneur. New ideas
  with realistic business models will be seriously
  considered. New companies with customer
  commitments can get cash to progress. And,
  operating companies can access plenty of capital
  to accelerate growth. The watchwords for
  entrepreneurs are potential, prudence and
  patience.

4
Life Sciences (Biotechnology and Medical
Devices Combined)

• The Life Sciences sector (Biotechnology and
  Medical Devices industries, together) continued
  to dominate the field.
• The 5.6 billion in the Life Sciences Sector in
  2004 was the second-largest amount for the sector
  in the 10 year history of the MoneyTree. Only the
  6.8 billion recorded at the height of the boom
  in 2000 was greater.
• Life Sciences accounted for 27 of all venture
  capital in 2004. Thats the second year in a row
  at 27. This, too, is an all-time high for the 10
  years of MoneyTree.

5
Life Sciences (Continued)

• There are at least a dozen VC-backed
  Biotechnology companies in registration right
  now. More than any other industry segment.
• And, when it comes to Life Sciences companies
  getting funding for the first time, the 2004
  number of 154 is more than last year. In fact, in
  the last 4 years, over 600 Life Sciences
  companies in various stages of development
  have gotten their first venture capital, so
  theres plenty of follow-on funding to come.

6
Software

• Its a perennial leader, but tough to pin down
  because of its cross-industry nature from
  security software, to medical software, database,
  wireless, manufacturing and home software, for
  example.
• In 2004, 5.1 billion went into 862 Software
  deals. The dollars are a 3-year high and the
  deals are close to it.
• Taking a longer view, Software companies have a
  tendency to get acquired before they go public.
  Still, there are at least 10 VC-backed Software
  companies in registration right now. Second only
  to Biotech.

7
Software (Continued)

• And, when it comes to getting venture capital for
  the first time, Software is the leading industry
  going-away. The 217 that got Series A in 2004 is
  no record for the category, but its close to
  three times more than the next closest Biotech.
  Over the last 4 years, nearly 1,000 Software
  companies got first-round financing.
• Software has been and will continue to be a
  driving force in business and in venture capital.
  Software is pretty much the solution to every
  business problem or so weve been conditioned
  to believe.

8
Telecommunications

• The company receiving the most venture capital in
  2004 was Vonage, a VoIP telecom company. They got
  145 million in 2 tranches paid out in different
  quarters.
• While encouraging, one big deal doesnt mean a
  comeback for a whole industry, at least not yet.
  Total funding in Telecom stands at an 8-year low.
  And, first-time fundings continue to languish. In
  calendar year 2001, 135 Telecom companies got
  their first venture capital. In the three years
  since, a combined total of 141 Telecom companies
  got first-time financing.

9
Internet-Related Companies

• This isnt actually an industry. Its a
  cross-category analysis we do that tags companies
  with business models primarily dependant on the
  Internet. 5 of the 10 largest financings for the
  year were classified as Internet-related
• Vonage meets the classification criteria, 145
  million
• eHarmony -- a Media Entertainment industry
  company that got 110 million
• OptionsXpress a Financial Services industry
  company that got 88 million
• TechTarget an on-line publisher at 85 million

10
Internet-Related Companies (Continued)

• FastClick an on-line advertising services
  company at 75 million
• But, even 5 big deals dont necessarily signal
  the resurgence of pure play Internet companies.
  Internet-related investing amounted to around 7
  billion in 2004, or a third of all venture
  dollars. Perhaps not surprisingly, thats the
  lowest percentage since the information
  superhighway began to ramp up in 1996.
• Two were founded in 1999, two in 2000 and one in
  2001. And now, theyre serious, later stage
  companies, getting serious money.

11
Regional Results

• Silicon Valley accounted for 34 of the dollars
  invested in 2004 and 29 of the deals
• New England came in a distant second with 15 of
  dollars and 13 of deals
• Software Companies received 29 of the dollars
  invested in 2004 into S.V. companies, and Life
  Sciences investments made up 21 of the dollars.
• Semiconductor companies were third in line,
  accounting for 13 of investments into S.V.-based
  start-ups

12
Foreign Investment - Israel

• Overseas Investment in Israel Exceeded 4.8BN
  during Jan. Oct. 2004.
• Total overseas financial investment was 3.6BN
  during the same period, 47 MORE THAN THE TOTAL
  FOR 2003.
• Total overseas investment in overseas IPOs of
  Israeli companies was 2.8BN, 3 times as much as
  throughout 2003 (Globes, Dec. 2004).
• 113 high tech companies raised 438MN during
  Q32004, which is the highest sum since Q42001 and
  30 higher than Q22004 (338MN by 91 companies)
  and 55 higher than Q32003 (283MN by 103
  companies).

13
Foreign Investment Israel (Continued)

• The total for the first three quarters of 2004.
  (1.BN) is 43 higher than the same period during
  2003 (Globes, Oct. 26).

14
IPO/MA LIQUIDITY
15
2004 The Beginning of A New Liquidity
Cycle?Venture Backed IPOs Rebound In 2004
Source VentureOne
16
Top US VC Backed IPOs In 2004
Company Name
City
ST
Segment
Raised M
Google
Mountain View
CA
Information Services
1,202
Eyetech Pharmaceuticals
New York
NY
Biopharmaceuticals
136
Atheros Communications
Sunnyvale
CA
Semiconductors
126
InPhonic
Washington
DC
Communications/Networking
124
Salesforce.com
San Francisco
CA
Business Services
110
PortalPlayer
Santa Clara
CA
Semiconductors
106
Theravance
South San Francisco
CA
Biopharmaceuticals
98
Corgentech
South San Francisco
CA
Biopharmaceuticals
96
Shopping.com
Brisbane
CA
Consumer/Business Services
91
Cytokinetics
South San Francisco
CA
Biopharmaceuticals
90
Source VentureOne
17
Top Southern California IPOs
Company Name
City
ST
Segment
Raised M
IntraLase
Irvine
CA
Medical Devices
82
NuVasive
San Diego
CA
Medical Devices
72
Digirad
Poway
CA
Medical Devices
66
JAMDAT Mobile
Los Angeles
CA
Software
61
Santarus
San Diego
CA
Biopharmaceuticals
54
Anadys Pharmaceuticals
San Diego
CA
Biopharmaceuticals
44
WebSideStory
San Diego
CA
Consumer/Business Services
43
CallWave
Santa Barbara
CA
Communications/Networking
40
Senomyx
La Jolla
CA
Biopharmaceuticals
36
Metabasis Therapeutics
San Diego
CA
Biopharmaceuticals
35
Source VentureOne
18
2004 The Beginning of A New Liquidity
Cycle?Venture Backed MA Values On The Rise
Source VentureOne
19
MA Median Value vs. Median VC InvestedMAs
Are Returning More To Investors
( M)
100
Source VentureOne
20
2004 IPOs and MA By SegmentBiopharma Dominates
IPOs, Software Leads MA
IPOs
MAs
Biopharma
Products Services
Products/Services
8
Software
17
17
Healthcare Svs 1
6
Medical Devices 4
Medical IS 3
Software
Biopharma
Communications
36
38
Information Svs
13
5
Electronics 3
Comms 3
Med IS 2
Medical Devices
Information Services
Semi conductors
18
9
6
Source VentureOne
21
SOFTWARE MARKET
22
Software Market Observations

• Software stocks have pulled back after early Fall
  rally, though valuations remain near all-time
  highs relative to growth
• Longer-term industry fundamentals remain
  challenging with lower projected growth,
  sustained IT customer discipline and heightened
  competitive pressures
• Oracle/PeopleSoft, Symantec/Veritas and other
  merger activities highlight maturing of the
  software market and need for scale/product
  breadth
• OnDemand and subscription/term-based models
  gaining momentum
• Flexible computing paradigms (grid/utility, SOA,
  web services), as well as open source, also
  gaining momentum
• MA dialogues increasing

23
Software Stocks Have Generally Underperformed the
Broader Indices
1/1/2004 to Current Stock Price Performance,
5
2
(4)
Source FactSet
24
Small Cap Software Stocks Have Been Weakest
1/1/2004 to Current Stock Price Performance,
15
13
0
(5)
(16)
Source FactSet

• Note
• Companies with 5Bn revenue run-rate include
  Microsoft, Oracle and SAP
• Companies with 1Bn - 5Bn revenue include
  Computer Associates, PeopleSoft, Intuit, Veritas,
  Symantec, Siebel, Compuware, Adobe, Novell, BEA
  and VeriSign
• Companies with 500MM - 1Bn revenue run-rate
  include McAfee, Sybase, Parametric, Hyperion and
  Mercury
• Companies with 300MM - 500MM revenue run-rate
  include Kronos, i2, Macromedia, Dendrite,
  FileNet, Lawson, Progress, Quest, TIBCO and Aspen
• 75MM - 300MM category includes a representative
  set of 50 software companies with annual revenue
  of 75MM - 300MM

25
The Big are Getting Bigger (and Better)
2000
Source FactSet
26
Scale Matters
Source FactSet

• Note
• Companies with 5Bn revenue run-rate include
  Microsoft, Oracle and SAP
• Companies with 1Bn - 5Bn revenue include
  Computer Associates, PeopleSoft, Intuit, Veritas,
  Symantec, Siebel, Compuware, Adobe, Novell, BEA
  and VeriSign
• Companies with 500MM - 1Bn revenue run-rate
  include McAfee, Sybase, Parametric, Hyperion and
  Mercury
• Companies with 300MM - 500MM revenue run-rate
  include Kronos, i2, Macromedia, Dendrite,
  FileNet, Lawson, Progress, Quest, TIBCO and Aspen
• 75MM - 300MM category includes a representative
  set of 50 software companies with annual revenue
  of 75MM - 300MM

27
Growth Expectations Have Moderated
2005E/2004E Revenue Growth
Long-Term EPS Growth
Source FactSet

• Note
• Companies with 5Bn revenue run-rate include
  Microsoft, Oracle and SAP
• Companies with 1Bn - 5Bn revenue include
  Computer Associates, PeopleSoft, Intuit, Veritas,
  Symantec, Siebel, Compuware, Adobe, Novell and
  BEA
• Companies with 500MM - 1Bn revenue run-rate
  include Sybase, Parametric, Hyperion and Mercury
• Companies with 300MM - 500MM revenue run-rate
  include Kronos, i2, Macromedia, Dendrite,
  FileNet, Lawson, Progress, Quest, TIBCO and Aspen
• 75MM - 300MM category includes a representative
  set of 50 software companies with annual revenue
  of 75MM - 300MM

28
Valuations at All-Time Highs Relative to Growth
Historical Valuation Summary Next Twelve Month PE
(x) Projected Growth
NM
1/4/2005 PEG 1.76x
1/1/1995 PEG 0.81x
Source FactSet
29
Software IPO Market Open for Business

• Investors flush with cash
• Recent MA
• Microsofts 30 billion dividend
• Overall growth-oriented investment opportunities
  limited
• 2004 IPOs returned solid performance
• But
• Bar is higher
• Being public not what it used to be

30
Software IPO Activity Has Rebounded, But Still
Well Below Historical Levels
Total vs. Technology IPOs (30MM)
Other Tech
of Software IPOs 67 30 27 88 55 5 5 3
9
Software IPOs ( of Total Amount) 29 28 26 22
12 4 12 9 16
Source Equidesk
31
Software IPO Class of 2004 Has Delivered

• Notes
• Proceeds raised includes overallotment option
• As of 1/21/05

32
Benchmarking 2004 Software IPOs

• Note
• Proceeds raised include overallotment option

33
Software Business Model Observations

• Term-based and subscription models gaining
  traction
• Benefits for issuers, investors and customers
• Growth expectations have moderated
• More disciplined investment need for lower
  breakeven
• Lower ASP, fast time to ROI solutions seeing
  faster growth
• Rise of the SMB IT buyer

34
Case Study IPO vs. MA
Value to Current Shareholders (1) MM
CY2004E Net Income (2)
15
15
15
CY2004E P/E Multiple
32.0x
35.0x
38.0x
Fully Distributed Equity Value
473
517
561
Equity Value at IPO Pricing (15 Discount)
411
449
488
IPO Size
125
125
125
IPO Net Proceeds (7.0 Gross Spread)
116
116
116
Post IPO Fully Diluted Trading Value
589
633
677
IPO Dilution (4)
27
26
24
Future Value at Time of IPO to Current
Shareholders
428
470
512
Time Until IPO (Years)
0.5
0.5
0.5
Post-IPO Time to Liquidity (Months)
6
6
6
Discount Rate
25.0
30.0
35.0
Present Value to Current Shareholders (1)
342
362
379

• Notes
• Assumes merger transaction date of 12/31/03 vs.
  an IPO date of 6/30/04
• Includes 1.2MM after-tax interest income earned
  on assumed IPO proceeds of 116MM. Assumes
  interest rate of 1.5 earned on cash and tax rate
  of 34
• Assumes 0 discount to earnings from Street case
• IPO dilution and estimated 4.0 dilution required
  for recruitment of additional management members

35
MA Activity is Robust

• The vast majority of exits continue to be through
  MA, not IPOs

• Overall and software-specific MA activity is
  strong and steady

of MA Transactions
Overall MA Deals
Software MA Deals
Sources Mergerstat, Capital IQ, VentureSource,
Inveraray Partners analysis
36
Software MA Recap for 2004

• The most active areas for 2004 by type of
  software ( of deals)
• Enterprise Software (31)
• IT Tools Mgmt. (24)
• Financial Software (12)
• Security (10)
• Supply Chain/Logistics (9)
• Retail/Point of Sale Software (5)
• Medical/Healthcare Software (5)
• Education Software (2)
• Communications (2)

• 2004 software valuations were roughly 2-3X
  trailing revenue

Sources Thomson, Mergerstat, Capital IQ,
VentureReporter, Inveraray Partners analysis
Sample based on 131 software MA transactions in
2004 LTM Last 12 Months
37
2005 Key MA Themes
Hot Areas/Active Buyers in 2005
Key Indicators are Positive

• Software sales forecast to grow 6-9 in 2005
• VoIP/Communications Broadening of product
  offering, roadmap acceleration
• Cisco, Juniper
• Security Broadening of the brand, consolidation
  of product lines
• Symantec-Veritas, McAfee
• Enterprise Software/Infrastructure Adding
  end-to-end capability
• IBM, Oracle, BMC
• Portals Strong currency and trying to
  differentiate their businesses
• Yahoo, Google, CNet, Ask Jeeves, Microsoft
• Mobile Telephony Need features, games to
  continue growth
• Motorola, Qualcomm, Nokia
• Sarbanes-Oxley Compliance Automation to lower
  cost of compliance

• Overall IT outlook is positive, NASDAQ steady
• IPOs trending up
• 45 tech IPOs in 2004 vs. 15 in 2003, 12 in 2002
• Middle market MA trends propelled by
  mega-mergers
• Oracle-PeopleSoft, Symantec-Veritas signal that
  consolidation is underway and will be felt
  throughout the industry

Sources Merrill Lynch CIO Survey, Americas
Growth Capital, IDC, Gartner, Forrester,
Inveraray Partners analysis
38
SEMICONDUCTOR MARKET
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Semiconductor Environment Update
Key Observations
Semiconductor Industry Growth Forecast

• SIA projects semiconductor industry revenue to
  reach 214 billion in 2004, up 29 from 2003
• 2004 semiconductor revenue expected to exceed the
  industrys previous peak of 204 billion for the
  first time since it was set in 2000
• SIA projects the semiconductor cycle to peak in
  2005, remain flat through 2006 and return to
  growth in 2007 with 11.7 expansion
• While growth is occurring in all end markets,
  2004 and 2005 growth will be predominantly driven
  by strength in
• Computing, Consumer, Wireless and Industrial
• Carrier capex expected to increase between 5
  percent and 10 percent in 2004, the first
  increase since 2000
• Factory utilization increased to 93 percent of
  total capacity in 1Q04, with leading-edge
  capacity (.16 micron and below) at 99 percent of
  total capacity

Semiconductor Cycles Industry Growth After Peak
6
5
3
3
45
US Venture-Backed MA Environment
US Venture-Backed Company MA Activity by Quarter
MA of venture-backed companies remains active
and valuations are trending upwards off 2002 lows
of Deals
125
113
117
104
106
104
97
95
88
114
89
88
75
80
96
81
96
95
90
Source VentureOne
46
MA Continues to Represent the Majority of
Liquidity Events
MA has represented 78 of liquidity events since
1997 and 93 of liquidity events since 2001
Source VentureOne
47
Private Semiconductor Fundraising Environment
Venture financing has climbed rapidly over the
past year
Semiconductor Private Investment Activity by
Quarter
Equity financings include cash investments by
professional venture capital firms, corporations,
other private equity firms, and individuals into
companies that have received at least one round
of venture funding
Source VentureOne
48
Semiconductor MA Environment
Semiconductor MA is increasing off the lows of
2H02 and 1H03
Semiconductor MA Activity by Quarter
Avg Deal Size (M)
68
95
23
24
233
257
182
186
219
302
348
262
319
133
69
239
110
75
15
31
11
44
62
107
63
105
84
Source SVB Alliant
49
Overview of Public Buyers in the Semiconductor
Market
Source Mergerstat, Capital IQ as of 9/30/04 (1)
Excludes Intel Corp.