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"What is Different This Time Around" at SaaStr Annual 2016

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Venture Capital 2016 - Some Upfront Views 1 Mark Suster @msuster
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Venture Capital 2016 - Some Upfront Views

1

Mark Suster @msuster

There is Some Stuff We All Know

We all know the funding markets for venture-backed startups have been strong for 7 straight years

2

LP contributions to the VC industry are back to pre-recession levels and anecdotally 2016 seems likely to increase further

3

US VC fundraising activity

0

75

150

225

300

$0

$15

$30

$45

$60

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Capital raised ($B)# of funds closed

235

271

209218

192176

162

214235236233

$28$31

$18$20$19

$13$16

$25$30$31$30

233 236 235214

162176

192

218 209

271

235

Source: Dow Jones VentureSource; Upfront analysis.

With more money (and new non VC entrants) venture financings have obviously increased. 2015 was an enormous year (2x pre recession)

4

US VC financing activity

0

2,500

5,000

7,500

10,000

$0

$25

$50

$75

$100

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Capital invested ($B)# of rounds closed

8,097

9,3818,563

7,572

6,428

5,193

4,3164,5334,119

3,1452,574

$77

$68

$44$40$42

$30$26

$36$35$28

$23

2,5743,145

4,1194,533 4,316

5,193

6,428

7,572

8,5639,381

8,097

Source: PitchBook 2015 Annual U.S. Venture Industry Report; Upfront analysis.

And what's interesting is that if you look at the spread between dollars raised by VCs and dollars invested, you see the huge shift from a decade ago of non-VC capital

5 Source: Upfront analysis.

US VC fundraising vs financing (2006-07, $B)

0

35

70

105

140

175

Funds raised by VCs Funds invested by VCs

6361

1x

US VC fundraising vs financing (2014-15, $B)

0

35

70

105

140

175

Funds raised by VCs Funds invested by VCs

145

59

2.5x

Angel & Seed deals have grown fastest but dollars have scaled massively into a smaller number of later-stage deals (doubling in just 2 years)

6 Source: PitchBook 2015 Annual U.S. Venture Industry Report; Upfront analysis.

US VC # of rounds closed by stage US VC capital invested ($B) by stage

0

10

20

30

40

50

2010 2011 2012 2013 2014 20150

1,000

2,000

3,000

4,000

5,000

2010 2011 2012 2013 2014 2015

Early Stage

CAGR

21%

36%

16%

CAGR

1%

22%

3%

Angel/ Seed

Late Stage

Early Stage

Late Stage

Angel/Seed

And the dollars into late-stage deals has largely been driven by non-traditional VCs entering the market (up 50% in the last 3 years)

7 Source: CBInsights, VC-backed $20M+ rounds; non-VC defined as Asset Mgmt, Corporate/Corporate VC, Family Office, Hedge & Mutual Funds; Upfront analysis.

Non-VC participation in US $20 million-plus rounds

0%

15%

30%

45%

60%

2012 2013 2014 2015

55%47%47%

37%

CAGR ’12-’15

15%

M&A pace hasn’t matched the increases in funding pace so VC mark-ups have been good but cash distributions less so

8

US VC-backed M&A activity

300

375

450

525

600

$0

$38

$75

$113

$150

2011 2012 2013 2014 2015

Amount Paid ($B)Number of M&As

473

510

470462

542

$54

$81

$42$43$47

542

462 470

510

473

Source: Dow Jones VentureSource Venture Capital Report 4Q’15; Upfront analysis.

IPO exits are down 32% in volume and 38% in value

9

US VC-backed IPO activity

0

30

60

90

120

$0

$4

$8

$11

$15

2011 2012 2013 2014 2015

Raised ($B) through IPONumber of IPOs

66

107

73

5046

$6

$9

$8

$11

$5

4650

73

107

66

Source: Dow Jones VentureSource Venture Capital Report 4Q’15; Upfront analysis.

50

But there are other truths that people have only recently begun to speak about

10

11

Public Tech Markets are obviously off dramatically in the past three months beginning the question of what this means for private valuations

NASDAQ

LinkedIn

Apple

Twitter

(9%)

(18%)

(19%)

(41%)

Source: 3-month valuations November 02, 2015 to January 29, 2016; Upfront analysis.

Private market valuations had risen beyond what some believe are sustainable (up 3x in 2 years). Q4 saw massive correction (we asked VCs if they thought it was an anomaly or a trend).

12

US VC-backed financing median pre-money valuation ($M)

$0

$20

$40

$60

$80

1Q'13 2Q'13 3Q'13 4Q'13 1Q'14 2Q'14 3Q'14 4Q'14 1Q'15 2Q'15 3Q'15 4Q'15

$28

$68

$53

$60$58

$37

$51

$22$21$19

$24

$17

Source: Dow Jones VentureSource Venture Capital Report 4Q’15; Upfront analysis.

More than 90% of respondents in the Upfront VC Survey expected valuations to go down in 2016 with a full 1/3rd of investors expecting significant price corrections

13

Do you expect valuations to go up, down or remain about the same as previous quarters?

0%

25%

50%

75%

100%

Q4'15 1H'16 Proj

30%5%

61%

61%

8%

28%

6% IncreaseAbout the same

Marginally downSignificantly down

Source: Upfront Survey Jan 2016, 156 VCs for Q4’15, 158 VCs for 1H’16; Upfront analysis.

This is coupled with a very visible recalibration of valuations of the pre-IPO mutual fund cohort at places like Fidelity

14

Fidelity’s holdings: % valuation change since purchase

Blue Bottle

MongoDB Series F

Taboola.com Series E

Turn Inc.

Zenefits Series C

Dataminr Series D

Dropbox Series C

Snapchat Series F

0% 25% 50% 75% 100%

Source: Fortune; Blue Bottle, Dropbox, Snapchat and Benefits data as 11/30/2015, rest as of 9/30/2015; Upfront analysis.

0% -25% -50% -75% -100%

-61%

-54%

-45%

-44%

-35%

-29%

-15%

-47%

15

This has swung sentiment for many experienced VC firms firmly toward controlling burn over rapid growth

This was clearly borne out in the Upfront VC Survey where 62% of firms are advising companies to cut costs / burn as markets tighten

16

4%

35%

62%

Source: Upfront Survey Jan 2016, 156 VCs.

Which statement best describes the spending behavior at most of the companies in which you are on the board or observe?

Generally cutting costs expecting markets to tighten

Don’t see much change from a year ago

Generally not too worried about burn rates

17

“Winter is Coming” message

received by portfolio

companies

18

“Winter is Coming” message

received by portfolio

companies

And with fewer VC exits many partners are more overloaded with boards and financings and feel less pressure to do new deals quickly. FOMO is on the decline.

19

Average number of board / observer seats

0

2

4

6

8

10

Years of investment experience

0-3 years 3-6 years 6-10 years 10-15 years 15+ years

8

7

5

4

3

Source: Upfront Investor Survey, sample size of 76 early to late stage VCs, excluding angel/seed and corporate VCs; Upfront analysis.

There is a clear feeling that fund raising cycles are taking longer and 77% felt this pace is likely to slow down even further in 2016

20

Do you expect deals to take longer in the process than previous funding quarters, the same or shorter?

0%

25%

50%

75%

100%

Q4'15 1H'16 Proj

77%45%

22%

51%

1%4% Shorter than normal

About the same as normalGetting longer

Source: Upfront Survey Jan 2016, 159 VCs for Q4’15 and 158 VCs for 1H’16.

50% of respondents indicate they may slow down their pace, 35% thought it would be the same pace as 2015 and only 16% expect 2016 to be robust

21

1%4%

43%

35%

16%

Source: Upfront Survey Jan 2016, 158 VCs.

How would you generally describe your investment mindset heading into 2016?

“Seeing tons of great deal flow and expect this to be a solid year”

“Unless a deal is amazing I’m likely to slow my pace a bit”

“I don’t feel compelled to do deals”

“2016 about the same pace as my last several years”

“I’d rather fund when the dust settles

With the sentiment of the markets it’s no surprise that a full 82% of VCs expressed caution or concern going into 2016

22

2%

30%

50%

9%

9%

Source: Upfront Survey Jan 2016, 155 VCs.

Hugely bullish

I’m very concerned

Things are bad & getting worse

Generally cautious

Generally optimistic

Which of the following statements best describes your mood heading into 2016

And how does the growth in funding, valuations and anxiety play in the minds of LPs who fund the VC

industry ultimately?

23

The good news is that only 7% of LPs believe they will cut back on venture programs with 26% of funds looking to increase exposure

24

4%

22%

67%

7%

Source: Upfront Survey Jan 2016, 73 LPs.

How would you describe your fund’s current allocation to VC?

About the right allocation

Aggressively growing venture Too much allocated to venture

Trying to grow our venture program

But LPs expressed caution, too. Nearly 75% of LPs have concerns about investment pace, valuation levels and burn rates of underlying companies.

25

6%

68%

26%

Source: Upfront Survey Jan 2016, 72 LPs.

How would you describe your fund’s outlook on your existing (VC) managers activities?

Very happy with investment activities of our existing managers

Deeply concerned about the market behavior

A bit concerned by pace, valuation creep and burn rates

61% of LPs believe that VCs are coming back to market to raise money at too quick of a pace - a reflection of anxieties of the over-funding of portfolios

26

61% 15%

24%

Source: Upfront Survey Jan 2016, 72 LPs.

How would you describe your fund’s outlook in your existing (VC) managers funding (and fund raising) pace?

Managers come back at a normal cadence and it hasn’t changed much

Managers have been coming back more quickly than in the past and we’re fine with this

Managers have been coming back more quickly than in the past and it concerns us

But a full 82% of LPs are likely to maintain their existing investment pace

27

10%

82%

8%

Source: Upfront Survey Jan 2016, 73 LPs.

How would you describe your likely investment pace in venture over the next 3 years?

We’re likely to increase our investment pace

We’re likely to keep the same investment pace

We’re likely to slow down our investment pace

While the market for Seed Funds grew enormously in the past 7 years, many LPs still express some concerns about capacity and market crowding

28

23%

66%

11%

Source: Upfront Survey Jan 2016, 70 LPs.

What is your fund’s outlook on the seed market?

Seed delivers the highest potential returns and we’ll continue to invest heavilyThere are too many seed funds and we’re worried they

won’t have enough capacity

We fund seed VCs but we’re very discerning on which ones we’ll fund

Also it’s not too surprising that LPs are most cautious about growth stage funds - in particular concerns about late-stage valuations

29

68%

32%

Source: Upfront Survey Jan 2016, 71 LPs.

What is your fund’s outlook on later stage venture capital / growth equity?

We like growth stage but want a healthy balance of seed, A/B and growth

We’re worried that the growth stage is the most over-valued part of the market

What to make of all of the uncertainty and potential change in the VC markets?

30

31

Expect loss ratios to go up. But ultimately the creative destruction of these storms can be good. New startup cohorts will sprout where

others get cleared out.

32

A slowing pace should be healthy for startups and for VC returns. We believe the

next 3 years will value patience over speed at all

costs.

33

And despite market concerns in the short-term, as an asset class we see so many industries ripe for innovation and disruption

Aerial & Space-techVR & ARTransportation Computational Biology Food & Agriculture

Venture Capital 2016Thank You.

34

Mark Suster @msuster

159 VCs surveyed

35

Fund type

0

20

40

60

Angel Seed VC (Early) VC (Mid) VC (Late) PE Corp (blank)

1196

19

4760

7

Source: Upfront Survey Jan 2016.

Fund size ($ million)

0

20

40

60

$1-20 $20-100 $300-999 $100-300 $1000+ Evergreen Personal

779

283347

19

Survey respondent geography

0

40

80

Norcal SoCal NE US Other US ROW (blank)

1782431

79

Position

0

47

93

140

Partner / MD Analyst to Principal Sole proprietor/personal investor

79

134

How long has your firm existed (years)

0

35

70

0-3 3-10 10-20 20+

2236

61

31

Personal investment experience (years)

0

40

80

0-3 3-6 6-10 10-15 15+

4123

4330

13

73 LPs surveyed, part 1

36

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 Survey Jan 2016.

73 LPs surveyed, part 2

37

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 Survey Jan 2016.


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