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3
The mood of LPs over the past 5 years has gotten consistently more optimistic about venture capital off of a low period from 2009-2012.
Source: Upfront Ventures survey of LPs (N=82 and N=73, respectively), Jan 2017, Jan 2016
2016 2017
4%4%
28%22%
58%67%
11%7%
Right allocation
Too much
Aggressively grow
Trying to grow
Q. How would you describe your fund’s current allocation to VC?
4
We have seen a steady recognition over the past 5 years by LPs that there is a need to find new managers to drive alpha in addition to established firms.
2016 2017
3%2%
43%39%
36%40%
16%19%3% Too many
Looking to add
Aggressively add
Cutting back, may add 1-2
Happy with roster
Q. How would you describe your fund’s current outlook on VC managers?
Source: Upfront Ventures survey of LPs (N=82 and N=73, respectively), Jan 2017, Jan 2016
5
Perhaps the biggest shift we’ve seen is the increasing focus on LPs in co-investments and in fact some LPs now specialize in this.
2016 2017
1%1%
29%17%
18%
20%
38%45%
13%16%
Q. How would you describe your fund’s position on direct investments?
Only reason we fund VCs
Some, opportunistic
Starting to do more
Never
Very important
Source: Upfront Ventures survey of LPs (N=82 and N=73, respectively), Jan 2017, Jan 2016
6
LPs believe that a large correlating factor driving our industry is large pools of capital chasing higher yields due to low interest rates affecting other asset classes.
Low interest rate environment
Late-stage VC funds raising larger funds
Many new VC funds
Increases in corporate VC arms
Mutual funds and hedge funds
Increases in Sovereign Wealth Funds
Increases in Chinese money
Increases in LPs making direct investments 21%
23%
28%
41%
41%
59%
66%
77%
Note: Survey asked respondents to rate each item on a scale of 1-5. Above chart indicates percent of respondents that rated 4 (relevant) or 5 (most relevant). Source: Upfront Ventures survey of LPs (N=82), Jan 2017
Q. In 2016 many investors warned “Winter is Coming” referring to a slowdown in venture markets. That slowdown happened but was very short lived. Which of the following are relevant in influencing why “Winter was Mild”?
7
LPs expect to continue to fund the venture industry at a relatively stable pace over the next 3 years, which should mean consistent capital available for entrepreneurs.
Source: Upfront Ventures survey of LPs (N=82 and N=73, respectively), Jan 2017, Jan 2016
2016 2017
12%8%
79%82%
9%10%
Q. How would you describe your likely investment pace in venture over the next 3 years?
Increase pace
Keep pace
Slow down pace
9
LPs have noticed the “valuation creep” in venture-backed companies and have some concerns about burn rates and financial discipline.
Source: Upfront Ventures survey of LPs (N=82 and N=73, respectively), Jan 2017, Jan 2016
2016 2017
26%26%
71%68%
3%6%
Q. How would you describe your fund’s outlook on your existing (VC) managers activities?
Very happy
Deeply concerned
A bit concerned by pace, valuation creep and burn rates
10
VCs have been shortening the cycles in which they raising money from LPs, which also has LPs a bit concerned.
Source: Upfront Ventures survey of LPs (N=82 and N=73, respectively), Jan 2017, Jan 2016
2016 2017
24%24%
11%15%
66%61%
Q. How would you describe your fund’s outlook on your existing (VC) managers funding (and fundraising) pace?
More quickly; it concerns us
Normal cadence
More quickly; we’re fine with it
12
Compared with a year ago there are far fewer bears amongst LPs - likely driven by a sense that the industry has gotten through its short-lived tough patch.
2016 2017
6%1%
76%70%
17%29%
1%
Q. How would you describe your current views on venture capital overall?
Bearish
Haven’t changed
Too much capital
More bullish
Source: Upfront Ventures survey of LPs (N=82 and N=73, respectively), Jan 2017, Jan 2016
13
And most LPs we’ve spoken with over the past 5 years have now acknowledge that the seed stage of the venture market is here to stay.
Source: Upfront Ventures survey of LPs (N=82 and N=73, respectively), Jan 2017, Jan 2016
2016 2017
7%11%
75%66%
18%23%
Q. How would you describe your fund’s outlook on the seed market?
Fund, but discerning
Invest heavily
Over-done
14
Traditional A/B round venture capital is still the most favored part of the venture industry but LPs acknowledge they need a healthy mix of seed, A/B & growth.
Source: Upfront Ventures survey of LPs (N=82 and N=73, respectively), Jan 2017, Jan 2016
2016 2017
30%32%
57%51%
14%16%
Q. How would you describe your fund’s outlook on traditional Series A/B venture capital?
Best fit
Being squeezed
Want a healthy mix
15
LP dollars still go disproportionally to large funds that end up doing later stage investing but this is also the stage of the market they are most concerned about.
Source: Upfront Ventures survey of LPs (N=82 and N=73, respectively), Jan 2017, Jan 2016
2016 2017
1%
38%32%
60%68%
Q. How would you describe your fund’s outlook on later stage venture capital / growth equity?
Want a healthy mix
Over-valued
Bullish
17
Prior to the inauguration LPs didn’t seem overly concerned about the economic & political environment.
LPs 10%32%32%24%1%
Very bullish Optimistic Neutral Somewhat concerned Very concerned
Q. Overall, looking at the current economic & political environment globally I would say I am
Source: Upfront Ventures survey of LPs (N=82), Jan 2017
18
But on point issues LPs did express concern about areas that may affect underlying investment opportunities.
China relations Surveillance / Immigration Offshore development
1%6%7%
25%9%
31%
48%16%
15%
60%30%43%
68%
3%14%16%8%
Very concernedWorriedNo impactGoodVery positive
Q. Do you believe a Trump Presidency could have an impact on the following areas?
/ manufacturing cyber security
Source: Upfront Ventures survey of LPs (N=82), Jan 2017
19
LPs seem concerned about Trump’s impact on social issues with 1/3rd “concerned or deeply worried”
LPs 15%19%35%30%1%
Right direction No impact Discourage from entering tech Concerned Deeply worried
Q. How will a Trump presidency impact startup companies and tech company employment & social policies including ethnic diversity, immigration, religious tolerance, gender equality and transgender rights?
Source: Upfront Ventures survey of LPs (N=82), Jan 2017
20
The majority of LPs we surveyed were clearly anti-Trump.
Q. How do you personally feel about a Trump presidency?
Source: Upfront Ventures survey of LPs (N=82), Jan 2017
LPs 11%40%20%29%
Right leader Fine, too much drama Dislike, but irrelevant Anti-Trump Deeply offended
21
However, most LPs didn’t think the Trump presidency will have a major impact venture capital.
LPs 15%69%12%4%
Very beneficial No impact Uncertainty but limited impact Concerned
Q. Considering all these issues (offshore development, H1-B, M&A, surveillance, China relations / manufacturing, etc.), how will a Trump presidency impact venture capital?
Source: Upfront Ventures survey of LPs (N=82), Jan 2017
Appendix Annual Upfront LP Survey Participants
82 respondents in January 2017 73 respondents in January 2016
22
2017 LP respondent demographics (I)
23
Fund type
0
10
20
30
9
25
12
34
20
Fund size
0
10
20
$0-250M $250-750M $750M-1.5B $1.5-5B $5-10B $10B+ N/A
5
18
7
13
7
1516
Which of the following best describes your focus on VC?
0
20
40
Only VC Mostly VC Very diverse Not much VC
3
302524
Foundation or Endowment
Fund of Funds
Family Office
Discretionary Advisor
Insurance Company
Other
Survey respondent geography
0
15
30
SF/Bay Area Greater LA NY Boston Other US ROW
7
28
2
13
4
25
Source: Upfront Ventures survey of LPs (N=82), Jan 2017
2017 LP respondent demographics (II)
24
Position
0
20
40
60
Partner / MD Analyst to Principal
21
60How long has your firm been investing in VC (years)
0
20
40
0-3 3-10 10-20 20+
2
33
26
15
4
How long has your firm existed (years)
0
20
40
0-3 3-10 10-20 20+
44
27
8
1
Personal investment experience (years)
0
20
40
0-3 3-6 6-10 10-15 15+
3028
14
72
Haven’t invested much in VC
Source: Upfront Ventures survey of LPs (N=82), Jan 2017
2016 LP respondent demographics (I)
25
Fund type
0
10
20
30
9
445
23
28
Fund size
0
10
20
$0-250M $250-750M $750M-1.5B $1.5-5B $5-10B $10B+ Blank
4
16
7
18
3
11
14
Which of the following best describes your focus on VC?
0
25
50
Only VC Mostly VC Very diverse Not much VC
2
42
10
19
Foundation or Endowment
Fund of Funds
Family Office
Discretionary Advisor
Insurance Company
Other
Survey respondent geography
0
15
30
NorCal SoCal NE US Other US ROW Blank
24
28
11
6
22
Source: Upfront Ventures survey of LPs (N=73), Jan 2016
2016 LP respondent demographics (II)
26
Position
0
20
40
60
Partner / MD Analyst to Principal Blank
1
18
54
How long has your firm been investing in VC (years)
0
20
40
0-3 3-10 10-20 20+
1
23
30
16
3
How long has your firm existed (years)
0
20
40
0-3 3-10 10-20 20+
38
1614
5
Personal investment experience (years)
0
20
40
0-3 3-6 6-10 10-15 15+
2723
15
44
Haven’t invested much in VC
Source: Upfront Ventures survey of LPs (N=73), Jan 2016