PreMoney SF 2017: State of the Venture Capital Industry by Mark Suster

1. State of the Venture Capital Industry 1 PreMoney - Dec 5th 2017 Mark Suster, @msuster Upfront Ventures

2. Some things most people know 2

3. In 2013-2015, the VC market overheated, driving irrational behavior Valuations up 3x 3 Capital invested up 2x $6.2B to $16.7B A) Median pre-money valuation for VC-backed tech startups rose from $17M in 1Q’13 to $68M in 3Q’15, where 4Q’15 dropped to $28M, Dow Jones VentureSource Venture Capital Report 4Q’15 B) Total dollars raised by startups from 1Q’13-3Q’15 grew from $6.2B to $16.7B, where 4Q’15 dropped to $12.3B, PWC National MoneyTree Report 3Q’16 $17M to $68M

4. 4 …and we ushered in the age of  “the unicorn”* Illustration by Goran Factory for Fortune * Credit to Aileen Lee! :)

5. 5 High prices, often with structure Art by Freepik VC: “You name the price, I name the terms.”

6. 6 We’re starting to see some correction in the over-valued companies

7. 7 Many predicted that winter was coming. What happened to winter?

8. 8 Twice as many VCs did cut investment pace in 2016.  Winter was real Made fewer investments Made more investments 16% 31% Q. What was your deal activity like in 2016 vs. 2015? Excluding follow ons. Excluded 53% of respondents that answered “about the same pace” Source: Upfront Ventures survey of VCs (N=114), Jan 2017

9. 9 And 76% of VCs reported valuations declined in 2016 Valuations decreased Valuations increased 8% 76% Q. Would you say valuations in 2016 were higher, lower or remained about the same vs. 2015? Excluded 16% of respondents that answered “about the same.” Source: Upfront Ventures survey of VCs (N=114), Jan 2017

10. 10 2016 was the year our industry took cost-cutting seriously and most say this work is behind them 25% 12% 63% Q. Which statement best describes the spending behavior at most of the more mature companies in which you are on the board or observe (i.e. not super early stage)? Source: Upfront Ventures survey of VCs (N=114), Jan 2017 Cut costs in 2016 Planning to cut costs in 2017 No change Just 12% cutting in 2017

11. 11 Winter DID come. But it sure was mild! Blame Global Warming. Seriously.

12. 12 “Global” warming—part 1: China, Japan, Asia more broadly “Global” warming — Inﬂux of foreign capital into US startups 1

13. 13 2009 2010 2011 2012 2013 2014 2015 2016 $29B $10B$9B $12B $7B $4B$4B $1B Note: Includes all FDI in all states and industries excluding real estate Source: Rhodium Group China Investment Monitor Chinese Foreign Direct Investment (FDI) has poured into the US. Tech sector has clearly beneﬁtted

14. 14 The US has FANG, China has BAT: Baidu, Alibaba & Tencent. All very aggressive in US investments.

15. 15 Baidu launched two major funds in 2016 — increasing investment pace to match its peers Baidu Venture Early-stage fund AI, AR / VR, next-gen tech Baidu Capital Late-stage tech fund $50-100M checks $200M $3B

16. 16 led $800M Series C in (Feb 2016) This is like 20 seed funds in just one deal!

17. 17 But there are a huge number of other Chinese funds now moving into venture that you’ve never heard of with a mandate to bring innovation back to China Government-backed funds Cross-Border Funds Private Corporations

18. 18 invested $690M in (Mar & Oct 2016)

19. 19 Of course it’s not just China: SoftBank / Saudi Arabia’s PIF  / Mubadala $100B tech fund (Oct 2016) &

20. 20 As oil prices have collapsed, the Arab states have been eager to diversify their assets $165M Kuwait 201520142013 2016 $3.5B Saudi Arabia

21. 21 Temasek (Singapore’s soverign wealth fund) opened a US venture ofﬁce & allocated more capital to US deals $350M AUM

22. 22 invested $800M in (Jan 2017)

23. 23 93% of VCs have seen an increase in interest from an international LP base* Q. In the last fund you raised, did you see increased interest from international sources of capital to invest as LPs in your fund? *Excluded those that answered “Didn’t reach out, so don’t know” Source: Upfront Ventures survey of VCs (N=114), Jan 2017 93% 7% More international LPs No increase

24. 24 Designed by Freepik Global warming — Rise of the corporate VC 2

25. 25 Increasing number of corporates have active venture investing arms 2012 2013 2014 2015 2016 61 131 US Active CVC Investors By Quarter Source: CBInsights

26. 26 Of course there are the usual suspects… Source: CBInsights 80-90 deals/year 70-90 50-70 30-50 20-30

27. 27 invested $200M in (Oct 2016) Active corporates continue to write large checks…

28. 28 invested $500M in (Jan 2016) But large checks are coming from many sources now

29. 29 ramps up venture fund to $530M (Nov 2016)

30. 30 When Sesame Street became a venture investor, you know the market has moved

31. 31 Unlike VCs, in 2016 twice as many Corporates made more investments than cut back. They ﬁlled in the gap Made fewer investments Made more investments 34% 18% Q. What was your deal activity like in 2016 vs. 2015? Excluding follow ons. Source: Upfront Ventures + CBInsights survey of CVCs (N=40), Jan 2017

32. 32 Global warming — Exits supported by M&A from non-traditional buyers 3

33. 33 acquired for $5.8B acquired for $3.3B acquired for $1.2B for $3.5Bacquired for $1.4Bacquired New, traditionally non-tech buyers entered the M&A market, seeking innovation and technology … Source: Dow Jones VentureSource acquired for $1.4B acquired for $1.0B is acquiring for $3.7B

34. 34 Source: Aberdeen Assets Middle-market PE also entered, seeking growth acquired

35. 35 There is certainly a backlog of scaling companies looking for liquidity Source: CB Insights

36. 36 Global warming — VCs have signiﬁcant dry powder 4

37. LPs have ﬁnally restocked coffers with distributions (plus many new LPs getting into the game) 37 2012 2013 2014 2015 1H'2016 8 28 32 2223 6 15 17 13 15 Contributions ($B) Distributions ($B) Source: Cambridge Associates Only 1H 2016

38. 38 2009 2010 2011 2012 2013 2014 2015 2016 # of funds closed Capital raised ($B) 42 3535 21 2423 20 12 253255 268 204 190 141 153 122122 153 141 190 204 268 255 253 Source: Pitchbook/NVCA Venture Monitor 4Q’16 More LP money = more funds, more dollars = warmer winter

39. 39 2016 saw many megafunds raised. Many back in market in 2018 $1B$1B$1.1B$1.2B$1.2B$1.2B$1.3B $1.6B $2B $2.5B $3.2B 11 firms raised $1B+ 12 firms raised $500M+ Source: DowJones Venture Source 1Q’16, 2Q’16, 3Q’16; Pitchbook data; represented aggregate sums over funds raised that invest in US tech ecosystem by each VC

40. 40 …and 300+ more! Source: CBInsights Microfunds are now a well- established market, with many scaling fund sizes

41. 41 Low interest rate environment encourages more capital to chase venture capital yields (cited by 77% of LPs as large driver of VC industry increases) 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 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? Source: Upfront Ventures survey of LPs (N=78), Jan 2017; Federal Reserve Federal Funds Rate, 2007 to 20165.25% .25% .75%

42. 42 Repatriation of offshore capital may fuel more M&A and investments $49B $52B $62B $113B $230B Note: Cash figures include cash, cash equivalents and liquid marketable securities held offshore Source: Moody’s Investor Service, as of end of 2016 Top 5 Companies by Offshore Cash Top 5 alone have $500+ billion in offshore cash

43. So where are we heading? 43

44. 44 Foreign capital Corporate investors Increased LP distributions New VC funds, bigger funds Repatriation of capital Likely robust M&A and IPO markets Good prognosis for venture and  tech market funding 2018 ↑ + ↑ + ↑ + ↑ + ↑ + ↑ =

45. 45 Unsurprisingly VCs are very bullish about the markets in 2017 Optimistic & bullish Innovations, but uncertainty Concerned 11% 28% 61% Q. Which of the following statements best describes your personal mood heading into 2017? Source: Upfront Ventures survey of VCs (N=114), Jan 2017

46. 46 The current category VCs are most interested in funding is AI / Machine Learning 85% rates it more interesting than other areas AI / ML AR / VR IoT Blockchain Bots-based commerce 58% rates it the most important area in next 5-10 years Q. How do you feel about the following investment areas? Source: Upfront Ventures survey of VCs (N=114), Jan 2017

47. 47 Of the major emerging venture categories, VCs are most skeptical about bots-based commerce and blockchain 53% thinks it’s too hyped Bots-based commerce Blockchain AR / VR IoT AI / ML 13% is deeply skeptical Q. How do you feel about the following investment areas? Source: Upfront Ventures survey of VCs (N=114), Jan 2017

48. 48 IC … Whoa! Largely driven by crypto-gains / diversification / tax avoidance 234 $3.7B ICOs in 2017 Total raised in 2017 Project Total Raised Filecoin $257M Tezos $232M EOS Stage 1 $185M Paragon $183M Bancor $153M Top Five ICOs of 2017 Source: https://www.coinschedule.com/stats.php $16m Average

49. ICO Warnings 49 • Over-capitalization • Lack of governance • (Too) early liquidity • Scams / Long-Term Trust • Governmental regulations

50. 50 What does this all mean?

51. Global is likely here to stay Warming is the forecast for funding the next 2 years Returns are ultimately what matter.  Over-funding creates new & different challenges.  I suspect we’ll debate over-funding in 2018-2022 I predict ICO backlash 51

52. Thank you! 52 Mark Suster, @msuster

PreMoney SF 2017: State of the Venture Capital Industry by Mark Suster

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