State of the Markets The Innovation Economy Responds to Recalibration Mid-Year 2016 Report

Written by SVB Analytics:

Steve Allan, CFA Head of Analytics

Sean Lawson Manager

Steven Kakowski Associate

Steven Pipp Associate

John Ortelle Manager

State of the Markets

State of the Markets 2

1 Market Dynamics: Investment and Exit Trends

2 Key Themes: Responses to Market Recalibration

State of the Markets 3

Market Dynamics

Capital Still Cheap; Volatility Still Low

State of the Markets 4

With interest rates remaining near record lows, investors continue to scour the markets for returns. Markets saw a sustained period of low volatility for nearly three years, from 2012 to Q3 2015

U.S. Treasury 5-Year Constant Maturity: June 2008 – June 2016

Source: S&P Capital IQ

0

10

20

30

40

50

60

70

80

90

Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 Jun 14 Jun 15 Jun 16

^VIX (Implied Volatility): June 2008 – June 2016

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 Jun 14 Jun 15 Jun 16

Macro Forces Weigh on U.S. Market

State of the Markets 5

Nasdaq Composite Index: June 2008 – June 2016

After years of impressive growth, the post-financial crisis bull market decelerates amid global macroeconomic headwinds and geopolitical uncertainty

0

1000

2000

3000

4000

5000

6000

Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 Jun 14 Jun 15 Jun 16

Since January 2014

U.S. Dollar Hits 10-Year Highs

Oil Price Hits 10-Year Lows

China Yuan & Market Shocks

Source: S&P Capital IQ

Year 2000 Peak

U.K. / E.U. Brexit

3 4

7

2

7

3 3

6

13 11

13 12

15

25 27

12 13

10 8

4

12 11 10

1 7

3

9

1 7 3

0

5

10

15

20

25

30Private IPOs

IPOs

2015: Year of the Private IPO

State of the Markets 6

Late-stage companies have opted to raise private capital rather than IPO, as 2015 saw four times as many private IPOs (rounds >$100M) as IPOs. Both Private IPOs and IPOs have notably decreased in the first half of 2016.

Source: CB Insights, S&P Capital IQ

IPO and PIPO Transactions for U.S. Technology Firms: Q1 2012 – Q2 2016

0

January 2014 June 2016

45 Number of Unicorns 148 $4B Uber’s Valuation $68B

The difference it’s made…

Crossovers Curtail Private Funding

State of the Markets 7

Some of the largest fund managers who took a primary role in funding large, late-stage private rounds have been less active in 1H 2016

Source: CBInsights

Global Investments in Venture Rounds – Crossover Investors

Tota

l Rou

nds

Average Round Size $35M $46M

$139M $153M

$117M

$0M

$20M

$40M

$60M

$80M

$100M

$120M

$140M

$160M

$180M

0

10

20

30

40

50

60

2012 2013 2014 2015 H1'16

Tiger Global Management Goldman Sachs Wellington Management

Fidelity Investments Coatue Management T. Rowe Price

Blackrock Average Round Size ($MM)Average Round Size ($M)

The Advent of the Unicorn

State of the Markets 8

The number of private companies with $1B+ valuations has tripled since 2014, with more than half of all unicorn value concentrated in the top 12 “decacorns”. The pace of newly minted unicorns, however, has declined

Source: Wall Street Journal

Private Companies with Reported $1B+ Valuations: Q1’14 – Q2‘16

Unicorn Market Value Concentration: June 2016

0

20

40

60

80

100

120

140

160

Less than $2B $2-5B $5-10B$10-15B $15-20B Greater than $20B

Uber $68B

Xiaomi $46B

Airbnb $26B

Didi Chuxing $25B

Palantir $20B

Meituan-Dianping $18B Snapchat

$16B

WeWork $16B

Flipkart $15B

SpaceX $12B

Pinterest $11B

Dropbox $10B

All Others $277B

Tech Companies Stay Private Longer

State of the Markets 9

Years from Founding to IPO (Median): 1999 – 2015

With access to funding from traditional and non-traditional sources, tech companies are choosing to delay the scrutiny and transparency of public markets, and the median age of current U.S. unicorns suggests this trend will continue

0

2

4

6

8

10

12

14

16

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021

Median tech company age at IPO

Source: Dr. Jay Ritter, University of Florida

U.S. Unicorns

2000 Dotcom Crash

2008 Financial Crisis

90th

10th

Median 25th

75th

Unicorn Values Fall Precipitously after IPO

State of the Markets 10

More than two-thirds of unicorns have seen their values plummet after going public. Twilio, which had its IPO in June 2016, is one of the few exceptions

Source: S&P Capital IQ

Publicly Traded Tech Unicorn Returns

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

71% of Unicorns trade below their IPO closing price

Median Return: -28%

Last Private IPO June 2016

0%

-20%

-40%

-60%

-80%

IPO Date: 2014 2015 2016

Public Values Point to Unicorn Mispricing

State of the Markets 11 Source: Wall Street Journal, S&P Capital IQ

Total Returns Compared to Tech Unicorns’ Last Private Round

-400%

-300%

-200%

-100%

0%

100%

200%

300%

400%

500%

600%

At the end of 1H 2016, the majority of publicly traded unicorns traded below their final private valuation, reinforcing the ongoing shift in investor focus towards profitability

Last Private IPO June 2016

0%

-20%

-40%

-60%

-80%

IPO Date: 2014 2015 2016

GoPro

Pure Storage

Hortonworks

Rocket Internet

Box Lending Club

Sunrun

Square

Hanhua Financial

Size Limits Exit Options

State of the Markets 12 Source: CBInsights, Wall Street Journal

With a limited number of buyers for $1B+ companies, an IPO may be the only choice for those seeking an exit

Tech Unicorn Exits All Tech Exits

59% IPO

3% IPO 8 17

4

2014 – 2015 2014 – 1H 2016

IPO M&A

2014 – 1H 2016

New Unicorn Entrants Eclipse Exits

State of the Markets 13

Net Change in Unicorns by Year: 2014 – June 2016

The pace of new companies reaching $1B+ valuations still exceeds the pace of exits,1 creating a backlog of private companies with a combined market value of more than $550B

Total Market Values

All Unicorns $560B

1Exits include IPOs, M&A and revaluations below $1B. 2Sum of market caps for unicorns at the close of their respective first day of trading Source: Wall Street Journal; S&P Capital IQ

Year End Unicorns

2013

Exits New Year End Unicorns

2015

Year End Unicorns

2014

Exits New Exits New June End Unicorns

2016

45 -15

+49 79 -11

+76 144 -5

+8 148

0

20

40

60

80

100

120

140

160

Apple $523B

Google $479B Facebook $326B

Unicorns at IPO2

$87B

Exit Conditions Remain Uncertain

State of the Markets 14 Source: S&P Capital IQ; Yahoo! Finance

Tech IPO Count: H1 2012 – H1 2016

Companies look for a sustained period of low volatility before going public. The elevated volatility over the last year helps to explain the paucity of tech IPOs

H1 2012 H2 2012 H1 2013 H1 2013 H1 2014 H2 2014 H1 2015 H2 2015 H1 2016

20

15

10

5

0

0

10

20

30

40

50

Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16

^VIX: Jan 2012 – June 2016

But Recent IPOs Provide a Glimmer of Hope

$0

$10

$20

$30

$40

6/306/23IPOPrice Range

State of the Markets 15 Source: Yahoo! Finance, Wall Street Journal

Twilio exceeded expectations at its June 23 IPO, and a week later it traded at 3x its last private valuation from a year prior. Acacia has also performed strongly since its May 13 IPO

Twilio, Inc. Stock Price per Share (Daily)

First Day of Trading:

+92% IPO Close to 6/30:

+27%

Acacia Communications Stock Price per Share (Daily)

IPO

$0

$10

$20

$30

$40

$50

6/276/206/136/65/275/205/13PriceRange

First Day of Trading:

+35% IPO Close to 6/30:

+29%

State of the Markets 16

1H 2016 Key Themes

Investor Sentiment Shapes IPO Market

State of the Markets 17

During bull markets, tech companies focus on growth at the expense of profitability at IPO. However, investor sentiment has shifted away from growth, which is requiring IPO candidates to show strong unit economics and a clear path to profitability

Source: Dr. Jay Ritter, University of Florida

Percentage of Companies Profitable at IPO: 1995 – 2015

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Tech IPOs Non-Tech IPOs

?

Companies Seek Employee Liquidity Workarounds

State of the Markets 18

Even with access to additional capital, mature companies may need to seek non-traditional sources of liquidity to satisfy near-term employee needs and retain talent

Source: Wall Street Journal, BuzzFeed News, MIT Technology Review, Bloomberg Technology

Alternative Investment Structures Emerge

State of the Markets 19 Source: Wall Street Journal, Sovereign Wealth Fund Institute, SEC Filings, Company Websites

Early Stage

Growth Stage

Late Stage

Spotify Convertible Debt

Nutanix Pre-IPO Debt

$250MM

Menlo Ventures Special Opportunities Fund LP

$350MM

Flagship Ventures Opportunities Fund I LP

DCVC Opportunity Fund II LP

$125MM

Industry Ventures Special Opportunities Fund II-B LP

$200MM

CircleUp Marketplace Index

$250MM

Zeel $4.5MM

8tracks $33MM

Reg A+

Rule 506(b)

Keen $15.7MM

Bitpay $30.5MM

Investor Marketplaces

Structured Deals

Debt Markets

New Investors

While the IPO window remains uncertain, companies at all stages are finding innovative solutions to raise capital in order to finance the next stage of their growth. Those private companies large enough to access debt markets are continuing to do so.

Tech Deals Percent of Sovereign-Wealth Fund Investments

0%

5%

10%

15%

2006 2011 2016

Opportunity Funds

Airbnb $1B Debt

Uber $1.15B Debt Morgan Stanley,

Barclays PLC, et al. J.P. Morgan Chase & Co.,

Citigroup, Inc. et al.

Premium Between Generations Disappears

State of the Markets 20 Source: SVB Analytics, S&P Capital IQ Enterprise Software split by IPO Date at Salesforce IPO (6/22/2004): Before = “Legacy”; After = “Cloud” Other Internet split by IPO Date at Mobile Era (1/1/2007): Before = “Legacy”; After = “Mobile”

The public markets are no longer placing a premium on growth at all costs and instead favor proven business models, leading to recent multiple compression

NTM Revenue Multiples – Enterprise Software: Q2’09 – Q2’16

NTM Revenue Multiples – Other Internet: Q2’09 – Q2’16

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

Q2'09 Q2'10 Q2'11 Q2'12 Q2'13 Q2'14 Q2'15 Q2'160.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

Q2'09 Q2'10 Q2'11 Q2'12 Q2'13 Q2'14 Q2'15 Q2'16

Cloud Legacy Mobile Legacy

Compressed Multiples Spur SaaS Acquisitions

State of the Markets 21

Cloud Software M&A Deals Announced: Q2’16

On the heels of the recent market downswing, Q2 2016 saw a wave of M&A interest from both strategic and financial buyers for high-growth cloud software companies

Source: S&P Capital IQ

3.4x

6.1x

5.1x

3.6x 3.0x

5.6x

3.2x

8.3x 7.7x

6.7x

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

7.0x

8.0x

9.0x

10.0x

$0.0

$1.0

$2.0

$3.0

$4.0

$5.0

$6.0

$7.0

$8.0

$9.0

$10.0$26.0B

Impl

ied

Ente

rpri

se V

alue

($B

USD

) N

TM Revenue M

ultiple

Financial Buyers Median Rev Multiple: 4.4x

Strategic Buyers Median Rev Multiple: 6.2x

SciQuest Cvent Marketo Qlik Opower Textura inContact Demandware Blue Coat LinkedIn

Accel-KKR Vista Equity Vista Equity Thoma Bravo Oracle Oracle Nice Salesforce Symantec Microsoft

Private Valuations Reveal Divergence

State of the Markets 22

Investors are focusing on the most promising companies, curtailing early-stage bets while doubling down on later rounds. In Q2 2016, the number of rounds continued to decline, yet total capital invested grew by $10B vs. Q1 2016.

Source: Pitchbook

Median Pre-Money Valuations Series Seed through Series B: 2012 – Q2’16

Median Pre-Money Valuations Series C through Series D+: 2012 – Q2’16

$4 $5 $5 $6 $5 $6

$8 $9 $12

$14 $14 $16

$21

$26

$33

$41

$36

$46

$0M

$5M

$10M

$15M

$20M

$25M

$30M

$35M

$40M

$45M

$50M

2012 2013 2014 2015 Q1'16 Q2'16

Seed Series A Series B

$50 $56 $60 $74

$100 $114

$92 $99

$135

$180

$205

$248

$0M

$50M

$100M

$150M

$200M

$250M

$300M

2012 2013 2014 2015 Q1'16 Q2'16

Series C Series D+

0

2,000

4,000

6,000

8,000

10,000

12,000

2013 2014 2015 H1 2016 2016 Run-Rate

Seed Series A + B Series C+

VC Deals Decline While Capital Deployed Is Flat

State of the Markets 23

Venture deal activity has receded in 2016, particularly for seed and early-stage deals. However, capital deployed has remained constant through 1H 2016, as fewer companies raise larger deals and investors grow more selective.

Source: Pitchbook

U.S. VC Deal Activity by Series: 2013 – H1’16 U.S. VC Capital Deployed by Series: 2013 – H1’ 16

-27%

-20%

-9%

$0.0

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0

$70.0

$80.0

$90.0

2013 2014 2015 H1 2016 2016 Run-Rate

Seed Series A + B Series C+

-14%

+3%

+3%

Early Stage Late Stage Seed Early Stage Late Stage Seed

State of the Markets 24

Appendix

Report Authors

25

Steven Pipp Associate, SVB Analytics spipp@svb.com

Steve Allan, CFA Head of SVB Analytics sallan@svb.com

Sean Lawson Manager, SVB Analytics selawson@svb.com

John Ortelle Manager, SVB Analytics jortelle@svb.com

Steven Kakowski Associate, SVB Analytics skakowski@svb.com

State of the Markets

Special Thanks Vincent Timoney Director Silicon Valley Bank Rob Tompkins Managing Director Silicon Valley Bank Dan Zaelit Director Silicon Valley Bank Natalie Dillon Associate Silicon Valley Bank Daren Motsuoka Associate Silicon Valley Bank

About Silicon Valley Bank For more than 30 years, Silicon Valley Bank has helped innovative companies and their investors move bold ideas forward, fast. SVB provides targeted financial services and expertise through its offices in innovation centers around the world. With commercial, international and private banking services, SVB helps address the unique needs of innovators.

State of the Markets 26

This material, including without limitation to the statistical information herein, is provided for informational purposes only. The material is based in part on information from third-party sources that we believe to be reliable, but which have not been independently verified by us and for this reason we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decision. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation, offer or recommendation to acquire or dispose of any investment or to engage in any other transaction. SVB Analytics is a member of SVB Financial Group and a non-bank affiliate of Silicon Valley Bank. Products and services offered by SVB Analytics are not FDIC insured and are not deposits or other obligations of Silicon Valley Bank. SVB Analytics does not provide investment, tax, or legal advice. Please consult your investment, tax, or legal advisors for such guidance. ©2016 SVB Financial Group. All rights reserved. Silicon Valley Bank is a member of FDIC and Federal Reserve System. SVB>, SVB Financial Group, and Silicon Valley Bank are registered trademarks.

About SVB Analytics SVB Analytics, a non-bank affiliate of Silicon Valley Bank, serves the strategic business needs of entrepreneurs, corporates and investors in the global innovation economy. For more than a decade, SVB Analytics has helped global business leaders make informed decisions by providing market intelligence, research, and consulting services. Powered by proprietary data, SVB Analytics has a unique view into the technology and life science sectors.