Cook 'n the Books

VC Funding History - Silicon Valley Money Flow

The VC market is getting healthy again.  VentureWire reported today that $6 Billion of new funds were raised by VC's in Q2 2005 (that's outside investors (Limited Partners) giving money to VC firms so they can invest in startups at some later time).  For perspective, $2.5B of this was raised by only 3 firms (Menlo, August Capital, and NorthBridge).  This $6B quarterly number puts CY 2005 on pace for VC's raising nearly $25 Billion of capital that they can invest in their respective startup portfolio's.

I don't believe the media does a good job of giving perspective to VC data.  So let's give it a shot by comparing how much was raised vs how much the VC's have invested historically in their startup portfolio's.

Reviewing PWC's Money Tree Data we find the following VC funding history (VC's investing in startups) for the last 10 years.  In 1995, there was $7 Billion invested.  1996 = $11B;  1997 = $15B;  1998 = $21B;  1999 = $54B (beg of the bubble);  2000 = $105B (bubble);  2001 = $41B (post-bubble);  2002 = $21B;  2003 = $19B;  2004 = $21B; 2005 ~ $25B (estimate).  I couldn't get the graph to work out for the X/Y Scale but all you need to know in the picture below is the gridlines are every $20B (Y scale) while each dot represents a year (1995-2005).

In terms of #'s of Companies funded over the last 10 years, the data looks like this.
1995 = 1800
1996 = 2500
1997 = 3100
1998 = 3600
1999 = 5400
2000 = 7800
2001 = 4500
2002 = 3000
2003 = 2900
2004 = 2900
2005 = 3100 (estimate)

Other interesting consistent historical insights from this data:

1. 30% of all U.S. VC Backed Companies are funded in Silicon Valley.  This grows to 45% if you include all of the West Coast (Southern Cal, Seattle Area, etc)
2. Other than the bubble period, 200-250 companies get funded every quarter in Silicon Valley.  We are on pace for 900-1000 companies funded in CY 2005.  My gut says this is a function of # of VC's and # of partners and time/focus.
3. The average investment (dollars / # of companies) per VC funding is a rather tight range of $8.5M-$9.0M per company funded. Again, an average. This compares to pre-bubble funding amounts of $5-$6 million vs the peak bubble days of $16-$17 million per funding.  I'm looking for this number to increase over the coming quarters as exits today are more visible and getting bigger faster is once again in vogue.

The data suggests that we are on track for the "old normal" of 1998 (borrowing from and apologies to Roger McNamee's new normal analogy).  I remember commenting to a few colleagues last fall (Oct 2004) that it felt to me like the VC industry had really started investing again for the first time in 3 years.  Today, it feels like the pace continues to pick up and if the data keeps rolling in like this, the VC market will continue their powerful economic engine of Silicon Valley.  VC's fund companies, companies hire people, people buy things from companies, companies buy other companies, companies go public..and so on.

My gut tells me we are going to have a very fun next few years again....stay tuned...

Finally, VentureWire's story as a reference:

venture market summary

       

By VentureWire Staff Reporters

U.S. venture capital firms raised $6.07 billion in new funds in the second quarter, the largest amount raised in a single quarter since late 2001, according to industry tracker VentureOne. The amount starkly contrasts the $2.3 billion brought in during the second quarter of 2004, and it represents an 80.5% increase from the $3.36 billion raised in the first quarter of 2005.

........The latest second quarter figures are heightened by several large venture firms that closed large-sized funds during the second quarter. Menlo Ventures, closed its tenth fund with $1.2 billion in April, and both August Capital and North Bridge Venture Partners' new funds topped $500 million.

NanoTubes: A Big Breakthrough to Watch

Link: U. T. Dallas-led research team produces strong, transparent carbon nanotube sheets.

Some excerpts from what could be a huge breakthrough on actually how to produce NanoTubes.....

"Rarely is a processing advance so elegantly simple that rapid commercialization seems possible, and rarely does such an advance so quickly enable diverse application demonstrations,"

The nanotube sheets are produced at up to 7 meters per minute by the coordinated rotation of a trillion nanotubes per minute for every centimeter of sheet width. By comparison, the production rate for commercial wool spinning is 20 meters per minute.

The nanotube sheets can be made so thin that a square kilometer of solar sail would weigh only 30 kilograms.

There are several thousand ideas for the use of nanotube technology from artificial organs to supercapacitors, batteries, fuel cells and thermal-energy-harvesting cells exploiting giant-surface-area nanotube sheet electrodes; light sources, displays, and X-ray sources that use the nanotube sheets as high-intensity sources of field-emitted electrons; and heat pipes for electronic equipment that exploit the high thermal conductivity of nanotubes.

But my favorite is  this one.  An extremely intriguing idea ... a Space Elevator!

http://en.wikipedia.org/wiki/Space_elevator

Stay tuned for more on NanoTubes and NanoTechnology....

Sidenote:  My gut tells me that Nanotechnology is very possibly today's "lightbulb invention" by Edison circa 1870.  Think of all the applications and technologies that resulted from that invention to present day which includes transistor technology.  Its important to remember that a transistor was simply another "combination technology" combining the technologies of a "transmitter" (sound waves) and a "resistor" (conductive electricity).  Transistors replaced Vacuum Tubes and performed the same functions by greatly reducing power and space requirements.  With Nanontubes, we are therefore on the verge of going even smaller, lighter, and even greater power reductions and thus being able to produce the incremental technology leap needed for the next century of applications.

 

Google 1 Year Later

What a difference a year makes!  Today (Aug 18th) Google filed to sell an additional 14 million shares in a secondary offering.  At the current price $280-$290 per share, that will add a few billion of cash to their current $3B warchest leaving them with $5-$7 billion of cash and growing.   While others in the media are reporting this offering will add $4B of cash (14M shares * $280 per share), I predict this will not be the case.   Usually, in these situations, the insiders  (Larry, Sergei, Kleiner Perkins, Sequoia, etc.) take the opportunity to unload/diversify a large amount of their holdings and thus the cash raised does not flow through to the company's bank account.

But the real story here is what a difference a year makes!  This secondary offering (exactly 1 year later) is the effective equivalent of a 33 million share offering at $168 per share.   When Google initially filed last year at their $135 range, they were scoffed out of the market by literally everyone (I was certainly on that bandwagon) and subsequently forced to drop their offering  (number of shares sold and their IPO price) all the way down to $85 per share (37% price reduction).

After several false starts and auction process communications bungling, they eventually limped out the door and sold 19 million shares at $85 per share on Aug 19, 2004 for $1.6 Billion of cash.    Since then, however, their exeuction and stock price have gone virtually straight up. 

Kudos to Google for making hay while the sun is shining.

Link: Google files to sell 14.2 million shares.

Link:  My Blog Series Covering Last Year's IPO

Full Disclosure:  I still own the original 7 shares I was allocated at $85 per share last year that I bought to simply be "part of the auction process. I laugh everytime I think of owning 7 shares of anything...but I'm no longer laughing at the +200% return on those shares.

How To Be a Leader

Fred Wilson (a VC) nailed it below.  His advice on how you absolutely need to find people (preferably your team) to be completely honest with and rely on is how great teams and companies are made.  The resulting loyalty created and the amazing abilities of all team members to go above and beyond is the secret sauce of a great culture.

Link: A VC: VC Cliche of the Week.

A CEO/founder must surround themselves with people who they like, trust, and can lower their guard with.  The best leaders have a "kitchen cabinet" of people they can be completely honest with and who they rely on for advice, counsel, and support. It is tricky to provide that back to the same people who are providing it to you, but you must try to make it happen.

And the Race is On....in China

Yahoo is reportedly bidding up to $1 billion for a 35% stake in Alibaba.com - China's leading e-commerce site. The $3B valuation rationalization must be based on "what other people are willing to pay". If historical trends are consistent, we are likely to see a very busy six-nine months of acquisition / investing activity in all things Internet in China....The Race is On!....

Link: Yahoo! Negotiates Stake In China E-Commerce Site - Forbes.com.

It's 1995 in China.

Chinese Search Engine - Nasdaq IPO - Soars 353% in First Day of Trading

It's 1995 in China.  They just had their Netscape.  The internet wealth creation engine just woke up in China.  The world goes to where the money is and the money is clearly in China.  Baidu is China's Google with Netscape's excitement.  Stocks simply don't IPO at 27 and close at 120 in today's market...but one just did.  This is a seminal event.  An event the historians can pin the following economic value creation on.  It will be written that way a few years from now.   That's what you get when you have 45% market share in a search website vs Google's 30% market share...it's the only country in the world that is besting Google.  Time to take notice.   The telltale signs will be all other Chinese based internet stocks having unnatural valuation increases.  Then comes all other Chinese companies purporting to have some sort of internet presence / product.  Then comes the internet portions of these businesss being worth more than the brick and mortar pieces.  We've seen it all before.  The bubble will expand..this time faster..and even after the eventual consolidation, China will be put on the map as an internet powerhouse and the technology world will have changed virtually overnight from a US centric world to a worldwide economic engine..and everyone (including the US) will win.

The stock trades under the ticker BIDU and though it's initial US Nasdaq prospectus price range was $19 a share, they priced it at $27, it opened at $66, and it closed at $120 today with a market value of essentially $4 Billion.  Wow!  not bad for one day's investment.  Not bad for a compan with $5M of revenue last quarter on a run rate of $30M of revenue for CY 2005 (that's only +130x Revenue).

Now all we need is the voiceover and the T.V. commercial.....B AAAA  D UUUUUU (must be screamed like Yahoo)

Hacking Nature - Hacking the Brain!

Link: Discovery Channel :: News :: Brain in a Dish Flies Plane.

The brain can learn, just as a human brain learns, he said. When the system is first engaged, the neurons don't know how to control the airplane; they don't have any experience.

I heard this on the radio this morning and I was stunned.  Goes to show you how far our current technology has to go.  The idea that single brain cells (neurons) immediately start connecting to eachother in a Petri Dish and then start instinctively start working together really makes you wonder.

To think these cells start learning how to fly a flight simulator level and straight with only 25,000 neurons is incredible.  Even more incredible is the knowledge that a common housefly only has about 200 neurons and look what it can do!  Try catching a housefly.  The fact that it's neurons react so quickly to outside stimuli makes you wonder where all this is going.

My first reaction to hearing all this are that brain cell neurons must by nature optimize for efficiency and for risk avoidance (flying the plane level and straight;  not getting hit) without really knowing what it's doing.  It's a react-first understand-learn-apapt system vs. our current technology of understand-first and program-react-perform system.   

Being the parent of a 4 yr old and 1 yr old, I see these neural network "systems" in action everyday....continuously learning and adapting to their environment.

I wonder what artificial neural networks will be controlling 10 yrs from now?  50 yrs from now?