VC Market Update for Entrepreneurs

December 2, 2008

Copyright 2008 Scale Venture Partners Confidential 1

 Agenda

 Investment Outlook – Impact of Recession

 Deployment of Dollars in 2009 – Where & How?
 Exit Environment
 Long Term Outlook
 Scale Venture Partners

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 Investment Outlook

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 Context for Current Economy

 2000: Tech Bubble: Silicon Valley Exported Its Irrational Exuberance

to Wall Street
– Near Term Results: NASDAQ Down 80%
– Long Term Impact: Less Venture Dollars, Each Company More Cash Efficient

 2008: Wall Street Sent Its Credit Squeeze to the World:

– Near Term Results: NASDAQ Down 40%
– Spiraling into Global Recession
– Long Term Impact: TBD

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 VC Market Environment More Rational Than 2000
2000
 $104 BN Raised
 264 IPO’s – Most Unprofitable
 7903 VC Investments
 Nasdaq Peak: 5048
 Nasdaq PE at Peak 64+
 Nasdaq Peak to Trough:
 Down 80%
Copyright 2008 Scale Venture Partners
2007
 $35 BN Raised
 86 IPO’s - Most Profitable
 3931 VC Investments
 Nasdaq Peak: 2859
 Nasdaq PE at Peak 22
 Nasdaq Peak to Current:
 Down 50%
Confidential 5
 Economic Contagion More Dangerous Today
2000
 S&P Peak to Trough – 50%
 Worst Sector - Technology
 No Real Systemic Risk
 9/11 External Threat Drove
Second Leg
 Result “Typical” Post War GDP
Decline: Sub 2%
A More Rational Venture Environment will Confront a More Virulent
Recession
Copyright 2008 Scale Venture Partners
2007
 S&P to Date Down 42%
 Worst Sector - Financials
 Clear Systemic Risk
 Subprime First Leg
 De-leveraging Second Leg
 Global Recession Third Leg
 Range of Outcomes from Tough
Recession to GD II
 1929-1933 GDP down 30%
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 Risks In Today’s Economy
 Venture-backed Company Execution
– Execution, Clinical, Product Risks
 Impact of Economy on Revenue Growth
– Hardest on “GDP Dependent” Businesses
 Financing Risk
– Much Harder Today to Raise Money
 Valuation Risk
– Will the Market Reward Companies with Appropriate Returns?
– Eventually Risk Will Resolve Itself
• Strong Fundamentals Get Rewarded
• Investors Ultimately Looking for Return

All Risks Except the First are Impacted by the Economy

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Business Exposure to Changes in GDP

Exposed: Consumer Products,

Brand Advertising, Elective
Surgery

Resistant: Open Source,

Virtualization, Low Cost Recurring
Revenue Models

Immune: Cure Cancer , Cost

Saving Non-Elective HC Services

Confidential 8
 Financing Risk

 See Sequoia Slides… http://tinyurl.com/3erkjz

 Better Since 2000 – Industry Burnt Once…
– Leaner Burn Rate Overall
– Bootstrapped Companies Use Venture to Scale Final Commercial Phase
– “Just-in-time” Expense Build Up For Growth
 Pockets of risk
– Reduced Pools of Equity Capital as VC’s Tend Existing Portfolio
– Series B Without Traction
– Syndicate Weakness
– Assume Fewer Strategic Investors/Partners
– Clean Tech Cap Ex Projects
– Limited Debt Sources

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 Deployment of Dollars in 2009
Where? How?

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Bulk of Dollars Into Expansion & Later Stage Deals
Investments By Stage – Q3 2008

Total Amount Invested ($B)

Object 2

$8

$7

$3.0 $2.8
$6 $3.1 $3.2 $3.3 Last Four Quarters
$2.5 $2.4 $3.2 $2.8
$2.1
$5 $2.8
$2.3 23%
$3.0
$4
39%
$3.1 $3.3
$3 $2.4 $3.1 $2.6 $2.7
$3.3 $3.0 $2.6 $3.1
$2.3 $2.6 38%
$2 $1.7

$1
$1.6 $1.8 $2.0 $1.7 $1.8 $1.7
$1.2 $1.1 $1.2 $1.4 $1.3 $1.5
$1.1
$0
Q3'05 Q4'05 Q1'06 Q2'06 Q3' 06 Q4 '06 Q1'07 Q2'07 Q3'07 Q4'07 Q1'08 Q2'08 Q3'08

Seed/Early Stage Expansion Later Stage

PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report

Based on Data from Thomson Reuters

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…But Early Stage Companies Being Funded
Q3 2005 – Q3 2008

Number of investments by stage

309 320
334
314 299
278 224
236
294
274 271
258
276
307 347
333 329 321
339 312
360 263
327 286
241 294

420 382
375 357 362 378 350
307 329 306
272 256 271

Q3'05 Q4'05 Q1'06 Q2'06 Q3' 06 Q4 '06 Q1'07 Q2'07 Q3'07 Q4'07 Q1'08 Q2'08 Q3'08
Seed/Early Stage Expansion Later Stage

PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report

Based on Data from Thomson Reuters

Confidential 12
Software, Biotech, Medical Devices Dominate
Investments By Industry – Q3 2008

IT Investments ($M)
$1,343

IT $2,835.7 Mil $403 $396 $323

$178
$120
$73

Software IT Services Semiconductors Telecom Networking & Electronics & Computers &
Equipment Instrumentation Peripherals

Life Sciences Investments ($M)

$1,350

$896

LS $2,301.9 Mil
$56

Biotechnology Medical Devices and Healthcare Services

Equipment

PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report

Based on data from Thomson Financial
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 Clean Tech Investment Remains Strong
Q3 2005 – Q3 2008

Internet-Specific Investments ($M)

300
$1,644
$1,401 $1,352 250
$1,182 $1,088 $1,226 $1,256 200
$1,002 $998 $1,061 $1,057
$763 $836 150
100
50
0
Q3'05 Q4'05 Q1'06 Q2 '06 Q3 '06 Q4 '06 Q1'07 Q2'07 Q3'07 Q4'07 Q1'08 Q2'08 Q3'08

$ Invested # of deals

Clean Tech Investments ($M) 70

$1,172
$1,036 60
$886 $887 50
$708 40
$578
$508 $470 30
$377
$289 $245 20
$112 $123 10
0
Q3'05 Q4'05 Q1'06 Q2 '06 Q3 '06 Q4 '06 Q1'07 Q2'07 Q3'07 Q4'07 Q1'08 Q2'08 Q3'08

$ Invested # of deals

PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report

Based on Data from Thomson Reuters
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 Less Investment – Better Risk/Reward Balance
 VC’s Will Have Less Money to Spend
– More Allocated to Reserves
 Stage? Sectors? It Will Go into Risk Reduced Deals
– Lower Exposure to GDP
– Lower Burn Rate
 Valuations - Who is Right?
– Public Values Adjust Quickly – Over React?
– Private Values Lag – Under React?
– Prices Still Appear High Today, Particularly with Little 2009 Visibility
 Returns
– Public Markets Have Ceded 2 Years of the Growth Cycle Back to Venture Investors
– Winnowing out Occurs in Private vs. Public Markets
– Result is Few, Bigger IPO’s with Better Metrics and Fewer Competitors

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 Exit Environment

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Venture Exit Counts - IPOs and M&A by Year

700
600 M&A
500 IPO
400
300
200
Number of Issues

100
0 '08
91 92 93 94 95 96 97 98 99 '00 '01 '02 '03 '04 '05 '06 '07 9
mo

M&A 17 76 74 100 98 118 172 221 248 327 388 341 299 351 371 387 361 220
IPO 156 181 220 166 202 270 136 77 260 264 41 22 29 93 57 57 86 6
Year

Source: Thomson Reuters & NVCA

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 IPO Exit Environment – Market Feedback

 86 IPO’s in 2007 – High Water Mark until 2010

– But 2010 is Expected to be Stronger than 2007
 To Resume, Will Need:
– Multiples to Expand
– Volatility to Decrease
– Earnings Visibility to Increase
– 1- 3 Quarters of Cash Flow Positive Operations
 M&A
– Will Face Pressure
– Accretive Transactions Still Getting Done
 Banker Quotes:
– “Harsh Winter Is Good As Leaves More Room for Winners to Survive”
– “Fortunes Will Be Made in Next 12 Months…by Buying Not Selling”

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 Long Term Outlook

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 Venture Backed Companies Lead the Economy

Tech & Healthcare Companies

 Amgen
 Tech Sector is 18% of S&P
 Apple
 Boston Scientific
 Healthcare is 14.3% of S&P
 Cisco
 Venture Backed Companies
Represent 18% of US GDP
 Genentech
 Job Growth 2-1/2x the Market
 Genzyme
 Google
 Intel
 Microsoft
 Oracle

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 What Does History Tell Us?
 IBM During Great Depression
70 350

60 300

50 250

40 200
IBM Annual
Revenue ($M)
30 150
GDP ($B)
20 100

10 50

0 0

 Mid 1980’s and Late 1990’s Tech Bubbles

– When Venture Fundraising Declines, Returns Increase
– True in Mid 1980’s & History Repeated Itself in the Mid 1990’s
– Best Companies Were Built During Troughs: Microsoft, Cisco, Google
 Today
– Venture Funding on Secular Decline
– If History Repeats Itself, Good Time to Invest
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 Venture Capital Summary

 Venture Is Not Dead

 Innovation Expected to Lead US Economy Out of Recession
 However…Venture Is Not Immune to Current Economy
 Therefore…It Will Require More Time & Money Per Company to Exit
– Higher Failure Rates
– Winners Will Do Better - Healthier Companies with Fewer Competitors
– Fund Returns May Be at Strong Multiple
 Venture Contraction Will Continue…& Leave Survivors Healthier
– Short Term Dislocation
– Continuous Since 2000
– Benefit to Industry Overall

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 A Letter to Venture-Backed CEOs

“don't forget that 
surviving is not 
winning, and 
winning requires 
more than 
cutting.”

Copyright 2008 Scale Venture Partners Confidential 23

 Scale Venture Partners

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 About Scale Venture Partners

 Formed in 2000
 Invest in Technology & Healthcare
 Invest Throughout U.S. – 50% ex-Silicon Valley
 Since Fund Formed:
– 33 M&A Exits
– 11 IPO’s
– 4 Exits in 2008
 Proactive, Theme-based Investment Strategy
 Partners Have Worked Together > 10 Years
– Significant Operating Experience in Investment Sectors
 www.scalevp.com

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 Investing in the Middle of the
Risk-Reward Continuum

We Invest Early in a Company’s Evolution but

After experimentation Is Over …

The Benefits:  Reduced Risk

 Faster Time to Exit
 Significant Ownership
 Ability to Add Value

Early ScaleVP Late

Higher Risk / Higher Return Lower Risk / Lower Return

ScaleVP:  Proprietary Deal Sourcing
 Over 40% of Deals Series A
 17% Average Ownership
 1st/2nd Largest Investor

CopyrightData
Financial 2008asScale Venture Partners
of 9/30/08 Confidential 26
 Consistent Track Record of Quality
Exits Has Built Reputation and Network

Over $8.6B in Value Created in 33 Exits in 8 Years (11 IPOs)

2000 2002 2004 2006 2008

Financial Data as of 9/30/08 pro forma

Financial 2008
Copyright Data as of 9/30/08
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 ScaleVP Among Top Venture Firms for Exits
All Deals Post-Bubble
2003-2007

Value Value
# of Deals Created # of Deals Created
Rank Firm >$200M ($Ms) Rank Firm >$200M ($Ms)

1 KPCB 9 $185,067 14 DFJ 3 $3,770

2 Sequoia Capital 12 $184,597 15 Foundation 6 $3,751

3 TA 6 $12,424 16 Apax 6 $3,734

4 Accel 12 $11,547 17 Greylock 7 $3,670

5 Battery Ventures 9 $10,210 18 ScaleVP 8 $3,626

6 NEA 16 $8,853 19 Charles River 6 $3,567

Madison 20 Versant 10 $3,565
7 3 $7,776
Dearborn
21 Vertical Group 1 $3,562
8 Benchmark 12 $7,212
22 TCV 8 $3,534
9 Warburg 6 $6,512
23 Globespan 4 $3,533
10 Domain 16 $6,278
24 Sprout 6 $3,484
11 Venrock 9 $4,003
25 August Capital 4 $3,479
12 Menlo Ventures 8 $3,893

13 JP Morgan 5 $3,785

Source: Venture Source for US Venture Capital Exits 2003 to 2007. Includes all exits > $200M at time of IPO or M&A. Credit given to board member
investors only. Ranked by most recent market capitalization on 5/21/2008.

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 Scale Venture Partners

 Contact:
Scale Venture Partners
950 Tower Lane, Suite 700
Foster City, CA 94404
phone: (650) 378-6000
fax: (650) 378-6040
 Email:
Businessplan@scalevp.com
 Web:
www.scalevp.com

Copyright 2008 Scale Venture Partners Confidential 29