Peter Moran

1
Peter Moran Perspectives from the Venture
World Leaders for Manufacturing
Conference October, 23 2003
2
Thoughts from Venture World

• Gaining lift off
• Wild West to Exciting East
• LFMs in Start-ups

3
Thoughts from Venture World

• Gaining lift off
• What is Venture Capital
• Venture Trends
• Reaching Escape Velocity
• Wild West to Exciting East
• LFMs in Start-ups

4
Thoughts from Venture World

• Gaining lift off
• What is Venture Capital
• Venture Trends
• Reaching Escape Velocity
• Exciting East
• LFMs in Start-ups

5
Venture Capital as an Asset Class
Asset Class
Portfolio
Public stocks
Public bonds
Private Equity
Real Estate
Venture Capital
Buyout/Mezzanine
6
Venture Capital Is Depends upon where you
stand

• Investment
• Capital
• Leadership contacts
• Economic development
• Commercializer
• Innovation engine
• Job creator
• Research magnet

7
Importance of US VC Industry Big Picture

• Enables innovation (small companies do it
  better)
• Principal reason for sustained US productivity
  growth
• Job, wealth creation platform standards of
  living impacts
• Highest financial returns of any asset category
  over time caveat
• Major impetus for healthy capital markets
• Capital gains taxes- a massive contributor to
  federal, state government revenues
• Financial return opportunities attract foreign
  investment capital

8
Job Creation by Startups in the USA
Major Source of Job Creation from Hi-Tech
Start-ups 1990-1995
Share of Growth in number of Companies
Share of Net New Jobs
2220-499 Employees
2820-499 Employees
10gt500 Employees
24gt500 Employees
48lt 20 Employees
68lt20 Employees
Source Small Business Administration from
Bureau of Census
9
Impact of Venture Capital

• Venture funded firms
• 12.5 million employees
• Annual revenues
• of 1.1 trillion

Represent 9.7 of US payroll 11 of US GDP 6.7
of US co revenue
Source DRI-WEFA (analysis as of 8/2001)
10
Venture Impact, Cont.
Venture Investment 1970-1999 For 1 For 22K
Impact In 2000 9 in Revenue 1 job
Source DRI-WEFA (analysis as of 8/2001)
11
RD Spending - Top 15 Global IT Players
1991
2002
RD as of Market Cap
RD as of Market Cap
10
5
Acquisitions of innovative start-ups substitute
for RD of large companies
Source DCM Research
12
Venture by State
Venture Backed Jobs (000s)
Venture Backed Revenue (B)

• California 270
• Texas 158
• Pennsylvania 58
• Massachusetts 49
• New York 66
• Georgia 63
• Washington State 75
• New Jersey 38

• California 1,400
• Texas 676
• Pennsylvania 425
• Massachusetts 381
• New York 369
• Georgia 338
• Washington state 264
• New Jersey 260

Tennessee 382
Source DRI-WEFA 2001 study
13
Thoughts from Venture World

• Gaining lift off
• What is Venture Capital
• Venture Trends
• Reaching Escape Velocity
• Exciting East
• LFMs in Start-ups

14
Venture Capital Explosion
1 US GDP
Commitment to US Venture Capital
Million Invested
Source PricewaterhouseCoopers/Venture
Economics/National Venture Capital Association
MoneyTree
15
The Overhang
1,800
Acquired
900
TakenPublic
1,500
10,000
Shut Down
5,800 (100 BInvestedCapital)
CompaniesRemaining
CompaniesFunded
16
2003 Investment Continues to Fall
Deal Flow and Equity into Venture-Backed
Companies (Annual)
6,000
5,000
93.9
100
4502
4,000
75
3112
Amount Invested (B)
3,000
2520
49.2
Number of Deals
2198
50
2156
1901
35.4
2,000
20.3
25
866
17.8
1,000
13.1
9.9
7.5
0
0
1996
1997
1998
1999
2000
2001
2002
1H03
Amount Invested (B)
Number of Deals
Source VentureOne/Ernst Young
17
VC Funding Bottoms?
Amount Invested M
of Financing Rounds
1st Growth in 6 Quarters
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q1
Q2
Q3
Q4
Q1
Q2
2001
2002
2003
2001
2002
2003
Source VentureSource
18
Valuations at Mid-90s Levels
Median Premoney Valuation by Year
30
26.0
25
22.0
Median Premoney Valuation (M)
20
16.8
15.5
15
12.6
11.2
10.7
10.5
10.0
9.5
8.5
10
5
0
1993
1997
1998
1999
2000
2001
2002
1H03
1996
1995
1994
Source VentureOne
19
Equity Investment by Industry Sector

of Investment
Source VentureOne/Ernst Young
20
MA Opportunities Stable in 2Q03
Transactions and Amount Paid in MAs
125
116
125
109
110
104
103
103
50
45.7
95
100
92
Amount Paid (B)
87
86
83
40
67
75
63
Number of Transactions
30
23.8
20.3
50
20
11.8
25
7.5
10
5.6
4.9
3.5
3.2
2.7
2.7
2.7
2.3
1.9
0
0
1Q00
3Q00
2Q00
4Q00
2Q01
1Q01
3Q01
1Q02
4Q01
2Q02
4Q02
3Q02
2Q03
1Q03
Amount Paid (B)
Number of Transactions
Source VentureOne
21
Not Much Profit in Current MAs
Median Amount Paid in MAs vs. Median Investedin
Private Rounds Prior to MA
21.0
20
15.4
100
14.7
15
80
11.3
Median Invested in Private Rounds (M)
10
60
10.4
MedianAmount Paid (M)
7.0
5.7
40
5
5.5
20
18.2
19.7
26
100
55.2
31.1
34.3
40
0
0
1997
1998
1999
2000
2001
2002
1H03
1996
Median Raised in Private Rounds (M)
Median Amount Paid (M)
Source VentureOne
22
IPO Liquidity Remains Rare
Deals and Amount Raised Through IPOs
71
70
60
Amount Raised (B)
7.6
10
6.7
Venture-Backed IPOs
40
43
3.5
5
18
20
8
1.5
9
5
4
4
4
6
2
1
.8
0
.5
.9
.4
.3
.3
.2
.2
.03
0.00
0
0
1Q00
3Q00
2Q00
4Q00
2Q01
1Q01
3Q01
1Q02
4Q01
2Q02
4Q02
3Q02
2Q03
1Q03
Amount Raised (B)
Venture-Backed IPOs
Source VentureOne
23
Nikkei at 19-Year Low
19
2003 11,025
24
Equity Returns Annual Returns, Percent
1 Year
5 Years
20 Years
-26.1
47.9
19.8
Early/Seed VC All Venture All Private
Equity NASDAQ SP 500
16.1
-27.4
24.2
13.8
-6.9
6.1
10.8
12.7
-3.1
-1.5
-3.0
11.6
As of 6/30/03Source Thomson Venture
Economics/NVCA
25
Thoughts from Venture World

• Gaining lift off
• What is Venture Capital
• Venture Trends
• Reaching Escape Velocity
• Exciting East
• LFMs in Start-ups

26
Beating the Net Startup Odds
Went Public/Acquired
1 in 833 business plans made it big
605
3-5,000
Received Venture Capital
1 in 173 receive VC funding
Received Other Financing
5-15,000
2 in 10 ideas become business plans
Business Plans Shopped
500,000
2.25 Million
Entrepreneurs with a big idea
Totals from 1994 through first-quarter
2000Source Estimates from The Standard based on
data from VentureOne, Garage.com, primary
research and venture capital firms
27
Early Stage Venture Investing Life Cycle

• Find great entrepreneur team
• Identify rapidly growing market
• Build product with unique, defensible technology
• Implementing barriers-to-entry, differentiation
• Complement, expand management team
• Establishing global sales, distribution
  capability
• Achieve profitable steady state business model
• Liquidity event (IPO or MA)

28
Sometimes We Dismiss Great Tech Opportunities

• The telephone has too many shortcomings to be
  seriously considered a means of communication
• Western Union Internal Memo, 1876
• The wireless music box has no imaginable
  commercial value. Who would pay for a message
  sent to nobody in particular?
• David Sarnoffs associates in response to his
  urging for investment in Radio in the 1920s
• Who the hell wants to hear actors talk?
• Harry M. Warner, Warner Bros, 1927
• There is no reason for any individuals to have a
  computer in their home.
• Ken Olsen, President, Chairman Founder of DEC,
  1977
• Heavier-than-air flying machines are impossible
• Lord Kelven, President, Royal Society 1895
• Airplanes are interesting toys but of no
  military value.
• Marshall Ferdinad Foch, Professor of Strategy,
  Ecole Superiure de Gueere

29
VC Mindset

• Venture capitalists make lemmings look like
  rugged individualists.
• Mark F. Radcliffe, Gray Cary Ware Freidenrich

30
VC Mindset
31
Thoughts from Venture World

• Gaining lift off
• What is Venture Capital
• Venture Trends
• Reaching Escape Velocity
• Exciting East
• LFMs in Start-ups

32
A New Alarm Bell
U.S. Manufacturing Jobs Millions
2.7 million jobs lost in 3 years, includes
400,000 In High-Tech
And Its Not Just Manufacturing Jobs!
33
Emergence of Exciting East
34
U.S. is Not Center of Universe
Think Outside The Box
35
International PC Workstation Market
2002
2007
12
16
All Others Western Europe Asia (includes
Japan) USA
27
25
27
34
34
25
Total 156B
Total 166B
Source IDC
Confidential and Proprietary
36
International Network Equipment
Spending Growth Rates
25
USA
21
Asia Pacific(ex-Japan)
19
20
18
15
11
9
9
9
10
5
3
2
0
-2
-5
2003
2004
2005
2006
2007
Source IDC
37
China Telecom Spending
China Telecom Capex as of US
46
37
28
20
2000
2001
2002
2003
US Capex China Capex
136 27
119 33
68 25
54 25
Source CSFB, MIT
38
China Communications Opportunity
Facts

• Fastest growing telecom infrastructure CapEx
• 14 wireline penetration
• Fastest growing largest wireless market
• 190M subscribers
• 150M white collar workers
• Rapid growth to 300M

39
Technology Companies with Significant Asian
Revenue
Companies With Primary Listing in U.S.(US MM)
Market Value as of Apr. 23, 2002
Market Value as of Sept. 18,2003
Company
Change
2,332 32 73 39 245 470 212 17 50 23 68
UTStarcom Neatease.com Sina.com Sohu.com Chinadotc
om AsiaInfo ASAT Holdings Rediff Gigamedia Pacific
Internet Kareo Thrunet
3730 2020 1950 1460 1010 375 284
155 110 107 N/A
60 6213 2571 3644 312 -20 34
811 120 365 N/A
40
Cost To Build a Semi Company
US/Silicon Valley
China
Science/ Engineering Grads
480,000
465,000
Avg. Wage Semiconductor Designer
120k/yr
11-14k/yr
Total investment to build semi co. to cash flow
positive
35-45M
15-22M
41
New Company Formation Necessary Conditions
USA
PRC
1980 2000
1995
2000

• Large home markets
• Great technology companies
• World-class universities
• New ideas / new industries
• Intellectual property rights
• Effective patent laws
• Entrepreneurs
• Icons
• Low capital gains tax
• Venture capital funding
• MA market for new technology companies
• Easy access to big IPO market

Yes Yes Yes Coming No Yes Yes Coming Yes Yes No
No
Yes No Yes No No Yes Yes No No Starting No No
Morgan Stanley Dean Witter Co.
42
Summary of Common Investment Hypotheses for China
Market Size
Only 300-400 million addressable market
Chinese Partners and customers are increasing
acceptance of foreign brands and goods
Technology Localization
Several key technologies are being deployed first
in China
Technology Innovation
Political Risks
Have succumbed to partnering route to market in
select cases
Some of the unstable structures are working.
Genuine commitment.
Legal / Fin. Structures
43
Silicon Valley VC Concerns Over Investing in China

• Critical shortages of experienced management
• Technology uniqueness defensibility
• Legal protectability of intellectual property
• Venture friendly legal system, regulatory
  infrastructure
• Unnecessary company formation complexity
• Corporate governance, compliance, transparency
• Inadequate international stock exchanges, listing
  requirements, currency constraints (exit
  constraints)
• Political, country risk
• Shareholder rights issues (e.g. CNC)
• Ever changing, conflicting government mandates
  and their impact on startups

44
Political Risk - Summary
Source The Economist
45
Case Study SMIC Semiconductor Fab

• Founded 1999
• Raised 1.5 Billion
• Investors Walden International, Temasek,
  Vertex, New Enterprise Associates (NEA), Oak
  Investment Partners, Goldman Sachs, DCM
• Production started 2002
• Will pass Charter Semiconductor as worldwide 4
  foundry in Q4 2003
• On track for 1 Billion revenue in 2004

46
Domestic IC Supply Lags Far Behind Demand
Shortage1,087K 8 wafers per month approx.
the capacity of 30 8 fabs or 12 12 fabs
1,600
1,400
02-06 Wafer Demand CAGR 24.5
1,200
Shortage528K 8 wafersper month
Supply
1,000
Demand
of 8" Wafers per Month ('000)
800
600
400
200
0
2000
2001
2002
2003
2004
Domestic IC supply shortage is expected to be
doubled by 2006
Source Dataquest (2002), CSFB Estimates
47
Record Fab Ramp Up
SMICIncorporated
Construction of Fab 1 begins
Fab 1 begins production
2000
2001
2002
April
May
June
Sept.
15 Months
Reach Critical Scale in Just 3 Years
of Years to Reach Capacity of 45,000
Wafers/Month
of Years to Reach US 300M Revenues
1980-1987
1987-1992
2000-2003
1980-1993
1987-1993
2000-2003
13
7
5
6
3
3
SMIC
TSMC
UMC
SMIC
TSMC
UMC
Source JPMorgan estimates, company reports Note
SMICs wafers are 8, TSMCs wafers were 6,
UMCs wafers were 4
48
Good Reading
49
Thoughts from Venture World

• Gaining lift off
• What is Venture Capital
• Venture Trends
• Reaching Escape Velocity
• Exciting East
• LFMs in Start-ups

50
Know Your Goals

• Fortune
• Fame
• Family
• Fervor
• Friends

51
Fortune
52
Know Your Audience

• What VCs Look For
• People
• Big outcome potential
• Sustainable, competitive advantages
• Ability to attract future financing

Remember Fear Greed
53
Greed
54
Entrepreneur Fundraising Issues

• What are VCs expectations?
• Can you meet them?
• Raising - a sales situation!!
• Valuation negotiation strategy
• Succinct, compelling, realistic bizplan
• Management team, advisor pedigrees
• Due diligence your target VCs

55
LFM Careers in Start-Ups

• Manufacturing Matters
• Domain expertise Optiant, ECnet, I2
• Functional Expertise Procket, Layer 7
• Marketing, Sales Engineering often Matter More
• Expertise Experience Matter Most

56
Fortune . . .
57
DCM Overview
DCM Overview

• Founded in 1996 to invest in early-stage
  communications Internet infrastructure,
  application software/service, and end-user
  content/service opportunities.
• Experienced partners from Accel, Apple, Arrow
  Electronics, Bain, Cisco, Hewlett-Packard, IBM,
  Intuit, KPMG, New Era of Networks (NEON),
  McKinsey, Silicon Graphics, and Sun Microsystems.

• Early-stage communications, software, and
  services investments
• Experienced team from Accel, Apple, Arrow
  Electronics, Bain, Cisco, F5, Goldman Sachs, HP,
  IBJ, IBM, Intuit, KPMG, NEON, McKinsey, Silicon
  Graphics, Sun Microsystems, and USWest.

VINTAGE Committed NUMBER OF YEAR FUND
Capital INVESTMENTS 1996/7 DCM
I 51M 18 1999 DCM II 155M 20 2000 DCM
III 471M 28
Confidential
58
DCM Partners Track Record

• Public
• Private/Acquired

59
DCM Investment Profile

• 75 early-stage companies, 25 strategic
  late-stage
• Majority of early stage deals are seed stage
• Typically lead or co-lead investor
• Taking a Board of Directors seat in 80 or more
  of the deals
• Total investment in any one deal generally up to
  15M
• Typical initial investment 3-6M reserves of
  125-150 for early stage deals
• Seed round investments as low as 0.5M
• Active EIR programs feed into seed stage deals

60
Peter Moran Leaders for Manufacturing
Conference October, 23 2003