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Return on Investment:
The Economic Impact of
Venture Capital
Prepared for the Minneapolis
Foundation
April 29, 2004
The Venture Capitalist
Dilemma Grid
Pre Investment
Control
No Control
Post Investment
Pre Investment / Control
Pre Investment
Control
No Control
Post Investment
Post Investment / Control
Pre Investment
Control
No Control
Post Investment
Pre Investment / No Control
Pre Investment
Control
No Control
Post Investment
Post Investment / No Control
Pre Investment
Control
No Control
Post Investment
Model VC Portfolio
Cash Flow History
5,000,000
Contributions
4,000,000
3,000,000
 $6 million commitment
 $18.2 million in
distributed capital
 30% IRR
Distributions
Investment Period
2,000,000
1,000,000
0
-1,000,000
Harvesting Period
-2,000,000
-3,000,000
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2
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4
5
6
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9
10
Agenda
 Sherpa Partners
 Venture Capital as an Economic Engine
 Venture Capital Industry
 Regional Venture Capital
 Minnesota Highlights
 FAQs about Venture Capital
“…Americans created the phrase ‘to
make money.’ No other language or
nation had ever used these words
before... Americans were the first to
understand that wealth has to be
created.”
Ayn Rand (1905-1982)
Russian-American philosopher
The Term Sherpa
“Sherpa” refers to both an ethnic
group and a job description as
porter, climb or trek leader found in
the mountains of Eastern Tibet.
Sherpa Partners, LLC
Venture capital firm focused on
early-stage companies primarily
located in the Upper Midwest
Sherpa Partners
Together Since 1998
Co-Managers Mac Lewis,
Steve Pederson and Rick
Brimacomb have a proven
track record as
entrepreneurs, operating
managers, value-added
investors, and directors.
Collectively, they have about
50 years of operating
experience and 30 years of
investment experience.
Equity Financing Food Chain
(Founder to Angel to Institutional Investors)
Late Stage
Late Majority Customers
Expansion Stage
Early Majority Customers
Early Stage – (Sherpa)
Early Adopter Customers
Seed Stage
Innovation Customers
Angels
Friends & Family
Public Market
Institutional - VCs
Venture Capital as an
Economic Engine
Venture Capital Impact
on the US Economy
 Venture funded firms account for:
 12.5 million jobs
 Annual revenues of $1.1 Trillion
 Impact on economy
 6.7% of US company revenue
 9.7% of US payroll
 11.0% of US GDP
Source: National Venture Capital Association and DRI-WEFA
Job Creation
1 job per $3,000 invested
in venture capital
Source: National Venture Capital Association
Venture Capital Creating
Jobs in Minnesota
 356,000 new jobs in Minnesota at
companies with $27.5B in Revenue
 Sherpa’s seven companies created
258 jobs in Minnesota and
surrounding states.
Source: National Venture Capital Association and DRI-WEFA
Where is the Employment
Growth?
 Obsolete jobs will be
“outsourced.”
 U.S. economy will
continue to gain in the
service sector.
 Venture Capitalists and
Entrepreneurs start
companies to create
new jobs.
120,000
100,000
80,000
60,000
40,000
20,000
Jobs in
thousands
0
1960 1967 1974 1981 1988 1995 2002
Manufacturing
Services
Source: Economic Report of the President, 2004
Venture Capital Industry
Local Underwriters Jump on IPO
Comeback
Star Tribune 4/26/04
“…both initial and secondary offerings
have soared from a year ago.”
“…share prices increase an avg. of 16.4%
in the first week… That’s good, but it’s
well below the 82%, 1-week gain…
enjoyed in 2000.”
Venture Capital Slows to a Trickle
Star Tribune 4/27/04
“…slowest quarter in terms of deals
since 1995…”
“…the largest quarterly dollar amount
in two years.”
VC According to the Star Tribune
Venture Capital Slows to a Trickle
Star Tribune 4/27/04
VC Awaits an IV
Star Tribune 1/27/04
Coming Up Short in Biotech – VC Investment
in MN Keeps Falling
Star Tribune 10/28/2003
Venture Capital Investments
($ in 000s)
~ ~
$50,000
$45,000
$40,000
$35,000
$54.5 B
$18.2 B
$105.9 B
$30,000
$25,000
$20,000
$15,000
$10,000
$0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
$5,000
Source: Thomson Venture Economics
Venture Capital Investments
($ in 000s)
$50,000
$45,000
$18.2 B
$40,000
$35,000
$30,000
Fantasy
$25,000
$20,000
$15,000
$10,000
Steady Growth
$0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
$5,000
Source: Thomson Venture Economics
Uninvested Venture Capital
“Dry powder” near all-time highs
80
$86B According to McKinsey & Co. 3/04
70
60
Billions
50
40
$55B
30
20
10
0
88 989 990 991 992 993 994 995 996 997 998 999 000 001 002 003 004
9
1
1
1
1
1
1
1
1
1
1
1
1
2
2
2
2
2
Source: SVB Estimates & Venture Economics
Regional Venture Capital
Midwest Venture Capital Industry
Dollar Amount of Invested Capital
$450
Illinois
Minnesota
Michigan
Ohio
Wisconsin
$400
$350
$300
$250
$200
$150
$100
$50
$0
2002 Total = $1.0 B
2003 Total = $0.9 B
Midwest Venture Capital Industry
Number of Deals – Deal Flow
70
Illinois
Minnesota
Michigan
Ohio
Wisconsin
60
50
40
30
20
10
0
2002 Total = 212
2003 Total = 163
Minnesota Highlights
Chances Are…
That you know someone who works
for a venture backed company!
Odds are better than one in ten!
 MN employs 2,700,000 residents.
 Of that, 12.9% or 356,000 were created by
venture backed companies.
Source: PWC Money Tree, Minnesota Workforce Center
Hometown Start-Up
Success Stories







MN’s Large
Fortune 500 Companies
3M - $65 B
Medtronic - $62 B
Target Corporation - $40 B
UnitedHealth Group - $40 B
General Mills - $18 B
Best Buy - $17 B
Supervalu - $4 B





MN’s Large
Technology Companies
Veritas Software Corp $11.8 B
Retek Inc. - $415 M
Computer Network
Technology - $200 M
Rimage Corp - $150 M
Analysts International
Corp - $70 M
*All of these MN companies are public and trade on either the NYSE or the
NASDAQ. Their respective market capitalization are as of April, 2004.
Medtronic Then
 Founded in 1949 by Earl
Bakken and Palmer
Hermundslie in Earl’s
garage.
 Started repairing hospital
equipment before turning
into an innovative medical
device manufacturer.
Medtronic Now
 Employer of +30,000
worldwide and generates
+$7 billion in annual
revenue.
 Consistently voted one of
the nation’s best
employers.
 Cornerstone of Medical
Device Community.
Control Data Then
 Founded in 1957 by
William Norris, Seymour
Cray and 11 others from
Sperry Rand Univac
 Started selling drum
memory products before
selling first computer in
1959 – first computer built
primarily with transistors.
Control Data Now





1957 Control Data
1972 Cray Research
1996 Silicon Graphics
2000 Cray
2002 Unlimited Scale

Sherpa invests $500k
 2003 Cassatt


$30M from Warburg Pincus
Bill Coleman becomes CEO
(Co-founder of BEA Systems:
BEAS - NASDAQ NM)
MN
th
8
in High-Tech States
Source: Milken Institute, 2004
MN
th
8
in High-Tech States
Source: Milken Institute, 2004
Reasons MN is a
World-Class Competitor
10.
9.
8.
7.
6.
Proven Performance - Ranked ninth in major corporate expansions
in 2001 and made the top five list for development capacity and
business vitality.
High-Tech Industries - One of the top 10 states for creating hightech jobs.
Robust and Diverse Economy - Minnesota's economy grew 43.3
percent in the 1990s, while the nation's economy grew just 34.7
percent.
Skilled and Educated Workforce - Nearly 91 percent of
Minnesotans have a high school diploma (third in the nation) and 31
percent have earned bachelor's degrees (seventh).
Education Breeds Investment Ideas - Ranking fourth in the number
of companies spun off from its discoveries, the University of
Minnesota not only provides skilled workers, but also contributes to
Source: Department of Trade and
the state's economy.
Economic Development
Reasons MN is a
World-Class Competitor
5.
4.
3.
2.
1.
Reliability and Affordability – Affordable utilities, and commercial
are competitive with those of other major cities .
Transportation Links – MSP International Airport, a portal to the
world, offers non-stop flights to 130 U.S. cities, 23 to Canada, Latin
America, Europe, and Asia.
Technology – Ranked 8th in High-Tech States in the 2004 Milken
Institute study.
Venture Capital - A 2001 study by the National Venture Capital
Association ranked Minnesota 11th in jobs created by companies
originally backed by venture capital, and the second fastest-growing
state for venture capital investment between 1996 and 2001.
Quality of Life - Minnesota's cultural attractions, outdoor recreation
and scenic landscape appeal to both residents and visitors. And for
many years, Minnesota has topped Morgan Quitno's "Most Livable
Source: Department of Trade and
State" rankings.
Economic Development
Deal Flow - National vs. Local
2003 Deal Flow Compared to 2002
 When Venture Capital
deal flow fell on a
national level,
Minnesota’s deal flow
increased!
5%
+3.6%
0%
-5%
-10%
-11.2%
-15%
% Change in Deal Flow
US VC Market
Minnesota VC Market
Source: PWC Money Tree
Venture Impact in Minnesota
 In 2002 and 2003, Minnesota
Venture Capitalists invested $540
million in 114 deals.
 Average investment per deal = $4.7
million.
Source: PWC Money Tree, Minnesota Workforce Center
Liquidity through IPOs
 Since 1993, Minnesota
Venture Backed
Companies have raised
$1.5 billion in IPO
financing.
 The aggregated market
capitalization of these
companies (count 40)
is $8.0 billion.
$450
Capital Raised by
Venture Backed MN IPOs
$400
$350
Average = $176.2 million
$300
$250
$200
$150
$100
$50
$0
1993 1994 1995 1996 1997 1998 1999 2000 2003
$ Raised by IPO
$ Average
Source: Venture Economics/NVCA
FAQs about Venture Capital
Is Minnesota Fly-Over Land?
 Workforce

Stable, educated and high-tech
 Higher Education

Research dollars and MBA programs
 Large Companies

Fortune 500
How do I Attract Venture Capital?
www.sherpapartners.com
How do I Invest in Venture Capital?
www.sherpapartners.com
Sherpa Partners, LLC
5050 Lincoln Drive - Suite 490
Minneapolis, MN 55436
Rick Brimacomb
www.sherpapartners.com
Direct: 952-942-1074
Main: 952.942.1070