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shaking the moneytree 4: Q2/2000

a billion dollars in mixed signals

According to PricewaterhouseCoopers’ (PwC) latest MoneyTree™ survey, for the first time in a single quarter over $1 billion dollars in venture capital was invested in Greater Washington companies.  That’s a significant threshold which tells PwC’s Kevin Thompson that, “venture capital is growing, it's continuing to thrive, money is available and good deals are getting done.”  Recent public market volatility, however, is changing which netpreneurs are getting that money, how much and how they do the deals.  A panel of leading VCs explored the trends and implications behind the quarterly numbers at this Netpreneur.org/PwC co-sponsored event held August 31, 2000.

Copyright 2000, Morino Institute. All rights reserved. Edited for length and clarity.

Commentary:   John Burke, ABS Ventures
John May, New Vantage Partners

John Muleta, PSINet Ventures

Moderator:  Kevin Thompson, PricewaterhouseCoopers

fran witzel: welcome

Good morning, I'm Fran Witzel, Vice President of Morino Institute's Netpreneur.org.  We invite you to join our learning community made up of New Economy startups in Greater Washington and experts from around the world at events such as this one and on our Web site and email lists.

          It's our pleasure, this morning, to partner with PricewaterhouseCoopers (PwC) and welcome you to Shaking The MoneyTree 4, our review of venture capital investment activity in the second quarter in Greater Washington.

          As you will soon hear more about, VC investments in our region continue to rise.  In fact, we broke a major milestone this quarter.  While the amount of money invested in our region and some others went up, the Industry Standard’s issue of September 4 reported that seed and startup funding by VCs fell by one-fifth nationally and that the number of deals fell by 25% during the quarter.  At the same time, local VCs are raising money in record numbers, as reported in Washington Business Forward’s September issue.  Might the IPO fires be rekindled as we leave the traditional August doldrums in the public equity market?  Let's hope so.

          What does all of this mean for entrepreneurs and investors in our region?  Let's find out from PwC and our distinguished panel.  Introducing our speakers and moderating will be Kevin Thompson, an audit engagement partner with PwC.  Kevin has 12 years of public accounting experience serving a variety of public and private companies.  He specializes in serving high-technology companies and has significant SEC and merger and acquisition due diligence expertise, including numerous IPOs and secondary offerings, public and private debt offerings and private placements of equity. This is in addition to his extensive experience working in and directing projects in international locations.  Kevin also has significant experience with due diligence reviews and operational reviews, and his clients include Red Hat, Syquest.com, Open Site Technologies, Red Storm Entertainment and Paradigm Genetics, among many others.  He brings a tremendous amount of expertise and understanding of fast growth companies and the VC industry, so please help me in welcoming Kevin Thompson.

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kevin thompson: introductions & numbers

Thanks, Fran.  As Fran mentioned, I'm an audit partner in our technology practice here in Northern Virginia.  I'm relatively new to the area; I moved here about 90 days ago from Research Triangle Park, North Carolina.  That’s probably why, when you heard Red Hat, you thought, “That's not around here.”  I did Red Hat's initial public offering, their follow-on offering and will continue to be their audit partner.

          I'm getting to know this area.  I have met a good number of you, and I'm looking forward to meeting the rest of the you during my tenure here.  Basically, my role in our practice is to coordinate many of our activities for startup companies, including dealing with the VCs, so you're going to see me at a lot of events.

          A number of things happened in the second quarter, especially in the public markets.  B2C companies, which started to fall out of favor in late 1999, continued to fall out of favor in 2000.  B2B's entered the second quarter at pretty high levels, but had completely fallen out of favor by the end of the quarter and were struggling to raise money and keep their stock prices at even moderate levels.  Biotech entered the quarter very hot.  By the middle of the quarter they couldn't get anything done, and by the end of the quarter the biotech market started to come up again.  So, yes, there has been a lot of activity this quarter and a lot of volatility.  It is going to make for an interesting third and fourth quarter.  Everyone is trying to predict what's going to happen, but, unless they have a crystal ball that’s better than mine, I think it's anybody's guess at this point.

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          One of the things that impacted the venture capital market, and people are trying to decide how it will continue to impact the venture capital market, is the "correction" in the public markets, for lack of a better word.  How is that going to impact VC dollars, both the dollars being invested in funds and the dollars funds are investing in companies?  How is it going to impact company valuations?  We are going to try to cover a lot of that today, focusing especially on our market in the Greater Washington region.

          Some of the trends that we saw on a national basis in the second quarter of 2000 include:

-  eCommerce investments were down significantly in dollars and percentage of total capital invested.  My expectation is that the trend will continue in the third quarter.

-  Internet infrastructure companies, however, were very hot.  That tells you that there is still belief that the Internet is here to stay, that there is value in the Internet and that companies can make money on the Internet.

-  Information technology software companies continue to remain strong.  They are still a good investment and a lot of VC dollars are still going into those companies.

- Telecom also continues to be in favor.

          Now for the outlook for the rest of 2000.  As I mentioned, you're going to have to have a crystal ball that's better than mine to really know what's going to happen, but some of the things we expect and that we've seen in the press are:

-   Public markets will remain difficult for the rest of this year.  Good deals will get done in the IPO market, but they're going to have to be strong deals in companies that are further along in development and that can show that they will be profitable in a relatively short period of time after going public.

-   Because the IPO markets began to close down, another trend we saw in the second quarter is a lot of private technology companies starting to do very large private equity deals rather than an IPO.  We expect to see that trend continue because, right now, you can get almost as much money through a large private round as through an IPO.

-    It is expected that venture capital investment is going to remain strong.  There is plenty of money in the venture capital funds.  The questions are, if the public markets remain difficult, what's going to happen to valuations?  What's going to happen to very early stage deals?  Obviously, these questions will be answered over the next six months, and, hopefully, our panelists will shed some light on them.

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          I want to introduce our panelists, now.  First is John Burke, a principal at ABS Ventures which he joined in 1999.  Prior to that, he was a founder, Chairman and CEO of BMI Software, a privately held software company specializing in international shipping logistics and marketing systems.  He sold the company in 1997.  John invests in B2B eCommerce, Internet enabling infrastructure, Internet security and telecommunications, especially in the areas of wireless and telecom software and services.  Some of his recent investments include Foveon, which is in my home area of Research Triangle Park; NetEx, based in Herndon, Virginia; and Zilliant in Austin, Texas

          Our second panelist is John May¾all the panelists are named John, so, when we get to the Q&A, just say, "John, I've got a question," and someone will answer.  John May is a managing partner of New Vantage Partners and has extensive experience as a venture fund manager and advisor.  In addition to co-founding New Vantage in 1997, he has been a partner and consultant to five venture funds and has been in the forefront of the angel investing movement in the region since 1996.  He founded or co-founded several manager-led angel investor clubs, including the Dinner Club, the eMedia Club and the Washington Dinner Club.  He is also the managing partner of Calvert Social Venture Partners, a Washington, DC-based venture capital fund that specializes in providing capital and assistance to emerging growth companies that also provide a social and environmental dividend.

          Our final panelist is John Muleta, president of PSINet Ventures and a senior vice president of PSINet.  He joined PSINet in February of 1998, and is currently responsible for PSINet Ventures, for buying and building PSINet's IP infrastructure around the world and for overseeing the company's sales and marketing operations activities in India, the Middle East and Africa.  You can tell that he wears a number of hats.

          In today's program we're going to talk about the results of PwC’s MoneyTree™ survey for the second quarter of 2000, then we are going to address some questions to our panel and have them respond.  To the extent we have time, we'll then open it up to questions from the audience.

          Each quarter, MoneyTree surveys over 900 venture capitalists in the US.  This is its sixth year, so we've been doing it a long time and it is a recognized standard in the industry quoted by a number of publications.  MoneyTree tracks quarterly venture capital investments in US companies based on region, industry, stage and a number of additional criteria.  It has been expanded to include traditional venture capital funds and corporate venture capital funds.  I'm not going to take a lot of time reciting numbers that are available at the MoneyTree site.  Instead, I’d like to point out some of the things that relate to trends or highlights, then quickly get to our panelists.

 (continued)

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