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1
VENTURE CAPITAL AN INDUSTRY IN
TRANSITION You dont go where the puck is, you
go to where it is going to be -Wayne
Gretzky Carl Eibl
2
Old (Dead) VC Model
IPO
Growth Capital Exit
Series C
Go-to-Market /Customer Risk
V A L U E
Series B
Product Development Risk
Series A
Technology Risk
Seed Capital
T I M E
3
New VC Reality
Tremendous Pressure On Capital Efficiency
V A L U E
M A Exit
Buyers Market
Series B
Growth Capital, Customers In-Hand
Series A
Technology, Product Development, Go-to-Market
Risk
T I M E
4
Rising Tides In Venture Capital

• Across All Sectors
• Globalization
• Transforming Materials
• Miniaturization
• Pervasive Computing Storage
• Pervasive Networks
• Internet-ization of Business Models
• Convergence of Information Technologies and Life
  Sciences
• Virtual Companies
• By Sector
• Insatiable Appetite for Digital Content
• Massive and Cheap Computing, Storage and Networks
  
• Specialized Energy Technology
• Personalized Medicine Beginning to Improve
  Patient Outcomes
• Biotech Enters Era of Predictive Biology Aided by
  Information Technologies
• Outsourcing of Innovation by Big Pharma to Small
  Biotech Companies

5
Disruptive Forces In IT

• Pervasive Computing the Embedded Netputer
• 5 networked computer-on-a-chip ushers in the
  next wave
• Everything is intelligent and networked
• Disrupts most CE business models
• Devices become intelligent network elements
• Pervasive Networking the New Internet
• Bubble to bust to long-term sustained growth
• Universal broadband and mobility
• Physical network agnostic
• At home, in the store, on the go
• The consumer is the green field opportunity
• Not burdened with IT legacy
• Huge disruption to media business models
• Free Storage
• 999 stationary terabyte (today) becomes the 99
  portable terabyte
• Tradeoff storage for processing and bandwidth

6
Opportunities In IT

• Embedded hardware to make dumb objects smart and
  networked
• Embedded software to make smart, networked
  objects function
• Mediation solutions which reduce and manage
  complexity
• New applications which leverage smart, mobile and
  networked devices and cheap storage to deliver
  value to the user
• Tools to enable major players to adapt to new
  business models
• Disruptive business models which displace
  existing businesses

7
The Big Picture in IT
Pervasive ComputingConnections Everywhere, All
The Time, By Everyone
Networks
Computers
Mobility
Devices
Personalized/ Global Communities
Bits Massive Cheap Storage
Easy, Rich Mediation
Software
Media/Content
8
Disruptive Forces In Healthcare

• Escalating costs of chronic diseases (75 of
  healthcare dollars)
• Neurological diseases, cancer, metabolic
  syndromes and aging
• Global pricing requires more cost effective drug
  development paradigms.
• 800M per drug requires 1B Blockbuster sales
  not sustainable model for Big Pharma
• Exponential increase in molecular level
  understanding disease changing delivery of
  healthcare
• Old definition of disease based on symptoms
  changing to molecular pathology classification
  and new biomarkers for disease monitoring
• Optimization of individual health status through
  diagnostics and personalized therapy will explode
  over the next decade

9
Opportunities in Life Sciences

• Lower the cost of debilitating diseases by
  developing innovative therapies
• Select near term opportunities in regenerative
  medicine
• Medical devices that can reduce hospital days and
  costs
• Fund strategies for lower-cost drug development
  in small companies
• Outsource and offshore RD (China India) with
  eyes wide open
• Create capital efficient virtual drug
  development companies with experienced management
  teams
• Create startups with late stage assets (proof
  of concept in humans or multiple animal species)
• Start with validated targets and utilize rapid
  in-vivo screening
• Fund opportunities in life-enhancing therapies,
  products and services
• Especially in discretionary medical spending
  categories
• Identify innovations at the intersection of
  converging technologies
• NBIC (Nanotechnology / Biotechnology /
  Information / Cognitive Science)
• New combination devices and sensors made possible
  by miniaturization and new materials

10
The Big Picture in Life Sciences
Convergence To Optimize Individual Healthcare
Computers
Biotech
Digital Records
Genes
Personalized Medicine
Sensors
Diagnostics
Nanotech
Networks
11
The Strategic Game is the Same
Build Category Leaders, But Now Capital
Efficiency And Time Are Compressed
Experienced/Embedded Investors

• Southern CA
• World-Class RD Centers
• Large Corporations (Life Science, Wireless,
  Media)
• Creative-Class Entrepreneurs
• Top-Tier VCs

Disruptive/Enabling Technologies
Time/Race to Critical Mass
Market Creation/Transformation
12
SoCal Well Positioned as a

• A Rich Geography Fostering Innovation
• Southern California is a
• a global hotbed for
• Biotech
• Wireless
• Digital media and content
• Materials technologies
• has the countrys greatest concentration of
  academic and primary research centers with a
  focus on commercialization of primary research
• is home toLarge Corporate and Military RD
  Centers
• Embodies a Culture of Entrepreneurship and
  Company Building

13
San Diego 1995-2005

• LIFE SCIENCES 1995 2005
• Academic RD centers up from 4 to 7 18 in region
• For-profit RD centers up from 3 to 7 in San
  Diego 12 in region
• Over 500 companies built
• Over 30k LS employees
• 5B in VC money from 1998-2005 to San Diego
• NIH funding in 2005 gt 1.4B

• IT 1995 2005
• UCSD ranked 7th best public university by US News
  and World Report
• Corporate RD centers up from 2 to 12 Qualcomm
  SAIC now huge
• 10x increase in hi-tech companies
• Hi-tech jobs 160 per 1000 private sector jobs
  in SD vs. 46 per 1000 in U.S.
• 5B in VC money from 1998-2005 in San Diego
• Defense RD back in SoCal

14
LA and Orange County 1995-2005

• LIFE SCIENCES 1995 2005
• Academic RD centers have expanded since 95 UC
  Irvine, UCLA, UC Riverside, UCSB, Cal Tech, USC
• Private RD up sharply Cedars Sinai, City of
  Hope Nt. Med. Center, Huntington Medical Research
  Inst.
• 1.8 B in VC money 1998-2005
• Health/Bio employs over 250k in LA/OC
• Concentration of huge medical equipment/device
  companies Beckman, Edwards, Medtronic

• IT 1995 2005
• IT companies are 10x in number since 1995 with
  several mega companies Broadcom, Conexant,
  Gateway etc.
• Worlds 2 largest fabless semiconductor
  companies Broadcom and Qualcomm
• Worlds largest media companies Disney, Yahoo,
  Sony, CA, Paramount, Universal and JamDat
• 4B in VC money 1998-2005
• IT employs over 300k in LA/OC

15
2005 VC Exit Events 392 IPO / MA Transactions
81 located in 11 areas
Washington 3
New York 7
WA
ME
MT
ND
Massachusetts 16
VT
MN
OR
NH
MA
ID
WI
NY
SD
Pennsylvania 3
WY
RI
MI
CT
Northern CA 26
PA
NJ
IA
New Jersey 3
NE
NV
OH
DE
IL
IN
UT
MD
Maryland 3
CO
WV
VA
KS
CA
MO
KY
NC
Virginia 3
TN
Southern CA 10
AZ
OK
AR
SC
NM
GA
MS
AL
TX
LA
FL
Georgia 3
All states with no color account for lt3 of exit
events
Texas 4
Southern CA represents points from Fresno south
Source Ernst Young/VentureOne (Feb. 2006)
16
SoCal Exit Growth

• Over the past 4 years, the percentage of
  national exit deals coming from Southern
  California has increased from 7 in 2002 to 10
  in 2005, the only region in the country other
  than Boston to show significant growth.
• VC Exits
• SoCal NoCal Boston NY Texas
• 2002 7 31 12 9 5
• 2003 10 34 10 6
  6
• 2004 12 28 13 10 6
• 2005 10 26 16 10 4

Source Ernst Young/VentureOne (Feb 2006)
17
2005 Southern California Deals
2.1 Billion Invested
203 Deals
Software 15
Biopharmaceuticals 23
Biopharmaceuticals 16
Software 25
Communications 8
Semis 15
Communications 11
Cons/Bus Services 8
Semis 11
Other 7
Electronics 3
Cons/Bus Services 7
Healthcare Services 3
Other 10
Info Services 4
Electronics 2
Med Devices 13
Info Services 3
Med Devices 12
Healthcare Services 4
Source Ernst Young / Dow Jones VentureOne
18
Profile of New Entrepreneur Rise of the
Creative Class

• In IT The gear and software are commoditizing.
• The value is in the application, the content and
  the community.
• The value is in the disruptive business model and
  not in the technology.
• In Life Science The convergence of biology and
  information technology will change healthcare.
• The value is in the intersection.
• The value is in the globalization.
• The value is in personalization.
• Creative Class Rise above the topology.
  Integrate rather than specialize. Invent.