London, United Kingdom, Wednesday, May 03, 2006 — A significant
increase in venture-backed exits is signaling a new phase in the
evolution of the global venture capital industry, according to a
report released by leading professional services provider Ernst &
Young.

Venture-backed company exits grew in value and number in 2005, as the
United States and Israel saw increasing M&A valuations, while Europe
experienced an increase in IPOs - a trend that is set to continue this
year and into 2007, according to Transition, the fourth annual Ernst &
Young Venture Capital Insight Report.

“Market demand continues for great companies, including venture-backed
companies, both in terms of initial public offerings and
acquisitions,” Gil Forer, Global Director of Ernst & Young’s Venture
Capital Advisory Group, said. “At the same time, the number of exit
options available to venture-backed companies - whether the exchange
or the funding vehicle - is increasing, making it more important than
ever to allow a company’s business imperatives to determine the choice
of exit.”

Global consumer markets, increased international competition,
investment opportunities in emerging markets, the higher cost of
building a company in the mature markets and advancements in
technology are all continuing to drive the globalization of both
venture funds and their portfolio companies. “Private, venture-backed
companies must increasingly act like multinationals earlier in their
life cycles, taking advantage of the new global ecosystem that matches
the increased demand for innovation with an international supply of
talent, technologies, business models and capital,” said Forer.

Collaboration among funds is also increasing as global investors seek
out local funds in the emerging innovation hotbeds for help in making
the right investments and penetrating large developing consumer
markets. As cross-sector innovation increases, so will collaboration
among funds to complement each other with the right skills and
expertise when investing in the cross-sector deals that will likely
characterize the next wave of disruptive technology or business
models.

This annual report on the state of the venture capital industry
indicates that while in the near term in the US there will probably be
continued reliance on both M&A and exploration of more innovative exit
opportunities, improving market conditions and investor demand for
venture-backed offerings are likely to result in increased
venture-backed IPO activity in both the US and Europe through 2006. In
the emerging markets, the increasing number of China-focused venture
capital funds being raised and invested suggests that there is a
robust population of venture-backed Chinese companies in the IPO
pipeline.

Other highlights of the report include:

– Venture capital investments worldwide reached the level of US$31.3
billion. The United States, Canada, Europe, and Israel represent 93%
of capital invested, while China and India account for the remainder.

– Venture capital firms in the United States have raised US$41
billion in new funds in the last two years. European firms closed on
EUR 3.7 billion in 2005, more than double the previous year’s figure.

– Venture-backed company exits grew in value and number in 2005,
setting the stage for continued investment in 2006:

– In the United States, 356 companies were acquired for an aggregate
amount paid of US$27.3 billion, an increase of 17% as the median
amount paid rose to US$23 million with more mature companies being
acquired and increased competition among buyers.

– In Europe, venture-backed IPO activity surged last year with 60
offerings that raised EUR 2.03 billion (US$2.40 billion), a 71%
increase in transactions and a 185% increase in capital raised.

– Private equity firms are increasingly buying-out venture-backed
companies, providing an exit to venture capital investors - a trend
that looks set to continue.

– Leading investment bankers and venture capital investors believe
that the challenge of meeting Sarbanes-Oxley requirements in the
United States and the increased bar to listing on NASDAQ are creating
new interest among venture-backed companies in listing on global
exchanges such as Hong Kong, Tokyo and AIM. AIM, in particular, has
become a growing destination for growth-company listings.

– The number of companies in the pool of private venture-backed
companies in the U.S., Europe and Israel continues to contract. The
contraction is concentrated in segments such as
information services, communications, consumer and business services
and retailers, as positions taken during the tech boom are being
traded for promising new opportunities in biopharmaceuticals, medical
devices, semiconductors, electronics, and Web 2.0 offerings.

– The rebalancing of the venture capital portfolio is ultimately a
positive sign for the future of the industry as it makes way for new
start-ups to attract investors’ attention. The
contraction in the number of companies also increases the chances of
the winners to achieve market leadership through strategic
acquisitions, ability to penetrate new markets and innovation of
customer need-based products and services.

– There is a potential exit backlog of 1,912 private venture-backed
companies in the U.S., Europe and Israel. These companies, with a
cumulative US$51 billion of venture capital
invested in them, have not received financing in several years and are
maturing from a venture capital perspective. Current rates of
venture-backed exits call into question the possibility of this many
companies finding a timely and successful liquidity event.

– The anticipated shakeout in the venture capital industry through a
healthy consolidation in the number of funds is underway. Between 2000
and 2006, the overall number of firms making investments in U.S.
companies declined by 49%. During the same period, the number of firms
investing in European companies dropped by 52%, while the count of
active investors in Israeli companies fell by 57%.

– 2005 was a milestone year for venture capital in China: Chinese
venture-backed companies launched a second wave of successful IPOs on
the NASDAQ; China-dedicated funds raised US$4 billion in committed
capital; foreign venture capitalists advanced the deployment of
various operating models in the country; and the government revised
regulations that had temporarily restricted the ability of foreign
venture capital investors to exit investments in Chinese companies,
clearing the way for continued foreign investment.

– Indian early-stage investment is in comeback mode, with the
formation of new India-dedicated venture capital funds and an
increasing focus among foreign venture capitalists on defining
their India strategies. A new emphasis on IP driven products among
Indian entrepreneurs and investors, along with announcements by Intel,
Cisco, and Microsoft of significant development plans in India,
suggest that the country is poised for a new wave of innovation.

– Overall, the Limited Partner (LP) community is looking ahead to a
stable investing environment and improved exit conditions. Key
observations related to the LP outlook
include:

– Succession management - the ability of venture capital firms to
groom new partners to be as successful as their predecessors - remains
a concern for LPs.

– First-time funds are finding little support in the current
fundraising cycle, even those formed by individuals with strong track
records, as LPs reduce the number of their manager relationships and
focus on brand-name firms.

– LPs are taking a cautious approach to direct exposure to China and
India, given the challenges and memory of losses in those markets.
Intellectual property protection is seen
as key differentiator between China and India, with India’s more
robust protections giving it the edge in IP-driven ventures.

– By industry, biopharmaceutical and software companies continued to
dominate venture capital investing in the U.S., Europe and Israel.

– New activity appeared in a range of emerging industries in Europe,
such as alternative energy, which saw investments increase 25% to EUR
50.3 million.

About Transition, the Ernst & Young Venture Capital Insights Report 2006

Transition, the fourth annual global Ernst & Young Venture Capital
Insights Report, provides insight into global venture capital
investments, the venture-backed exit landscape, the state of the pool
of privately-held venture-backed companies and venture capital
investors, the policy landscape, Internet 2.0, and the outlook of
global limited partners. Throughout the report, partners from some of
the top venture capital firms around the globe share their own
perspective on the lessons of the past year and what lies ahead.