Startup Outlook Report 2013

20

Public Policy Issues

Key Findings

4

Understanding Startups

10

Hiring Talent

1612

Business Environment

32

U.S. Versus U.K. Startups

Startup Outlook2013 Report

Executive Summary Key Findings2013 Survey Respondents

Understanding StartupsBusiness Environment Hiring Talent The Impact of Public Policies on StartupsIntellectual Property ProtectionTax ReformU.S. ManufacturingMedical Device TaxU.S. Versus U.K. Startups

Part 1: Overview

Part 2: Detailed Findings

147

101216202024252832

Startup Outlook Report 2013

1

Part 1: Overview

“The Federal Government needs to be as flexible and lean as a small startup. Learn to pivot and learn to endorse

new technology that will stay here in the US.”

President/CEO, Healthcare Startup

Executive Summary

When you look at world of high-growth technology startups, there’s a lot to be happy about.

Entrepreneurs continue to form companies at a truly remarkable pace. Disruptive

transformation is spreading into areas ripe for change: mobility, financial services

and education, to name just three. Nine in 10 startups are hiring. Most entrepreneurs

continue to believe we’re on an upward trajectory, that 2012 was better than 2011 and

that 2013 will be better than 2012. Innovation is at the top of corporate America’s

agenda, as evidenced by the broad, deep array of “traditional” corporations that have

established venture investing arms or innovation centers. Technology remains the

most trusted sector on the planet, according to the 2013 Edelman Trust Barometer.


“Excess federal regulation and fiscal uncertainty has a chilling effect on the business environment.”

CFO, Medical Device Startup

“Help find more ways to allow creative minds to explore and finance new ideas beyond the current VC networks.”

President/ CEO, Hardware Startup

“Please find ways to financially support innovation within smaller companies and startups. We are the engine of the economy and need

a bit of help to get going and keep going.”

COO, Software Startup

“We are bullish on our company’s growth, however feel the government policies will not help us at all. Further regulations and tax increases will

stifle all business, and hurt our customers, who may look for ways to eliminate or reduce our product content.”

CFO, Cleantech Startup

2Startup Outlook Report 2013

Executive Summary (con’t.)

Yet for all of our optimism about the technology sector,

this year’s Startup Outlook again shows that we’re

not doing what we need to do to help this important

part of our economy thrive. Nine in 10 startups plan

to hire new employees, but an equal number say it is

challenging to find workers with the skills they need.

Sixty percent of software executives think business

conditions in 2012 were better than 2011, but the number

who think business conditions were worse doubled

year-over-year, from six percent to 13 percent. And

the critically important healthcare sector remains

challenged, with a majority of healthcare executives

believing business conditions in 2012 were the same or

worse as 2011 and one in 10 seeing them as much worse.

Startups don’t want or need a lot of help. Entrepreneurs

are remarkably versatile and solutions-oriented. But

they do need a few things from government — like

an education system that teaches students about

science, technology, engineering and math (the

so-called “STEM” skills); an immigration system that

welcomes people who bring talent and energy to

our economy; an intellectual property system that

rewards invention, not litigation; and a tax system that

provides certainty, predictability, and an incentive to

invest in real companies, doing real things. And they

need government to avoid misguided policies — like the

new 2.3 percent tax on the topline revenues of medical

device companies, including device startups that aren’t

yet profitable.

We publish the Startup Outlook survey annually to help

give startups a voice. We hope that if people see firsthand

the opportunities and challenges entrepreneurs face, they

will recognize the immense potential startups offer to our

country. We hope they’ll also see how short-sighted or

seemingly benign policies can hurt the companies we need

to drive our economy in the coming decade.

In the end, we think good business decisions and good

public policy both come down to a few things. We need

to base decisions on facts. We need to embrace the right

kinds of risks. We need to invest in the underpinnings

of a strong economy, such as infrastructure and basic

research and development. And we need to focus on

creating a better future, not entrenching the status quo.

We hope this year’s Startup Outlook promotes this kind

of forward-looking, fact-based discussion and provides

new insights to policymakers and business leaders. We

look forward to participating in those discussions and

doing what we can to help innovative companies thrive.

Key Findings

Understanding Startups: A Few Facts

▶ Most startups don’t earn a profit. That’s true even

when they earn significant topline revenues,

and even in capital-efficient sectors (like software)

where the cost to start a company have declined

meaningfully in recent years.

▶ Twenty-two percent of startups have one or more

women on their founding team.

▶ Forty-six percent of startups have one or more

foreign born persons on their founding team.

Tech Economy Continues to Perform as the Economy Stabilizes

▶ Startups have performed well in 2012 with 58

percent of executives saying that they either met or

or exceeded revenue targets.

▶ This isn’t dampening entrepreneurs’ enthusiasm.

Executives are as likely as in previous years to say

that current business conditions compared to last

year are “better” and that conditions in the coming

year will continue to improve.

▶ Software executives are more likely than other

executives to say business conditions are better

than a year ago. But that optimism isn’t universally

shared, even within the software sector: year over

year, the number of software executives who say

business conditions are somewhat worse more

than doubled.

▶ Healthcare executives are the most downbeat —

less likely to say business conditions are better,

and more likely to say they are worse.

Startups Remain a Job-Creation Engine … But Can They Find the People They Need?

▶ Respondents are even more likely than in past

years to say they’re hiring, with nearly nine in 10

executives say they will hire new employees in 2013.

▶ Most executives are looking for workers with STEM

(Science, Technology, Engineering, and Math)

skills. Hardware executives are the most focused

on workers with STEM skills.

▶ But finding the right workers will be a real

challenge. Nine in 10 executives say it is hard to

find workers with the skills needed to grow their

businesses. Software and hardware executives face

the greatest challenges.

The Impact of Public Policies on Startups

In this year’s survey, we dig deeper into a handful

of issues that are front and center on the policy

landscape: intellectual property protection, federal tax

and fiscal policies, U.S. manufacturing, and the new

2.3 percent excise tax on medical device companies’

topline revenues.

Intellectual Property Protection

▶ About half of the surveyed executives see

IP as a “key strategic asset,” but litigation

is a real issue for startups. Nearly one in

four respondents faces lawsuits. Healthcare

startups are hardest hit, but software

companies are the most likely to be sued

by non-practicing entities, patent assertion

entities, or “patent trolls.”


5

▶ Overall, about half of all executives say they

think IP is an important asset and worth the

cost, but views vary dramatically by sector.

Two in three hardware, healthcare and

cleantech executives share this view, while

software executives are much more likely

to focus on non-legal means to create their

competitive advantage.

Tax Reform

▶ When asked which federal tax change would

best promote their company’s near-term

success, startups focus first on using the tax

code to provide incentives to invest in startups

(23 percent agree with this).

▶ Helping startups preserve scarce dollars

to invest in their growth (remember, most

startups aren’t profitable) comes in second,

with one in five (19 percent) believing a tax

credit to offset employment and other taxes

would be most beneficial.

▶ Fifteen percent of executives ask Congress to

“just get it done so we have certainty.”

▶ Healthcare, hardware and cleantech

executives highlight the importance of

R&D, through R&D tax credits and direct

government investments in R&D.

U.S. Manufacturing

▶ Just over one in three startups (35 percent)

either currently manufacture or plan to start

manufacturing in the next 18 months. And

a great deal of this activity will occur in the

United States. Eighty percent of respondents

say they will do at least some manufacturing

in the U.S. When deciding where to locate

manufacturing facilities, the number one

factor for startups is the availability of workers

with the necessary skills.

▶ Manufacturing has the potential to create

middle class jobs. Approximately two in three

of these jobs require some combination of high

school education, experience, and training,

but not a college diploma.

Medical Device Tax

▶ Eight in 10 executives at medical device

startups (82 percent) believe the 2.3 percent

revenue tax that went into effect at the

beginning of 2013 will affect their company’s

long-term growth.

▶ Device startups — the vast majority of which

are not yet profitable — have a variety of ways

they plan to cope with the tax. One in three

will try to pass most or all of the increased

cost to customers. Nearly as many (28

percent) will focus on expanding overseas

instead of in the U.S., while others will cut

hiring, R&D, and/or growth.


U.S. Versus U.K. Startups: Similarities and Differences

▶ For the first time, we included U.K. entrepreneurs

in this year’s Startup Outlook survey.

▶ Like their U.S. counterparts, U.K. entrepreneurs

are performing strongly and are optimistic

about future conditions and growth. In fact, U.K.

entrepreneurs express greater confidence than

their U.S. peers.

▶ Two-thirds of U.K. startups reported revenues in

2012 – roughly the same as in the U.S. with 64

percent of revenue-generating startups.

▶ However, U.K. revenue generating startups were

much more likely to be profitable in 2012 — 46

percent, compared to 27 percent of U.S. startups.

▶ Like their U.S. counterparts, nine in 10 U.K.

startups are hiring and are primarily looking

for workers with STEM (Science, Technology,

Engineering, and Math) skills.

▶ As in the United States, finding the right workers

will be difficult.

▶ Directionally, U.K. executives’ views on intellectual

property mirror their U.S. peers, although they

are less likely to classify IP as a “key strategic

asset,” and more likely to describe it as primarily a

defensive tool. U.K. entrepreneurs are less likely to

face IP disputes and more likely to focus on non-

legal means rather than on IP rights to create a

competitive advantage.

▶ Nine in 10 (90 percent) of entrepreneurs in this

study say the U.K. fundraising environment is

challenging. Over half say government initiatives

that would help the startup sector are greater

access to government grants and funds designed

specifically for startups and tax reform.

▶ Twenty-six percent of startups in the U.K. survey

have women on founding team, similar to the

22 percent for startups in the U.S. survey.

▶ Thirty-seven percent of startups in the U.K.

survey have foreign born members on founding

team, compared to 46 percent for startups in the

U.S. survey.

7

2013 Survey Respondents

Startup Outlook 2013 is Silicon Valley Bank’s fourth

annual survey of the views of executives at startup

companies across the United States. We’ve defined

“startups” as high-growth technology and healthcare

companies with less than $100 million in revenues

and fewer than 500 employees.

We retained an independent, third-party market research

firm, Koski Research, to conduct an online survey on our

behalf as in prior years The survey was conducted from

December 4 through December 20, 2012.

We received responses from 758 executives of U.S.

based, high growth technology and healthcare

startups — approximately three times as many

responses as in the 2012 survey. Eighty-seven

percent were C-level executives, with 81 percent

either CEOs or CFOs. The responses by sector were

as follows:

▶ Software: 433 responses

▶ Healthcare: 220 responses

▶ Hardware: 50 responses

▶ Cleantech: 63 response

As in previous years, we received the largest number of

responses from software company executives. In order

to provide more meaningful insights into this segment,

in this year’s survey we distinguished between two

types of software companies: consumer internet

companies and enterprise software companies. Of

the 433 software executives who responded to the

survey, 158 (36 percent) were from consumer internet

companies and 274 (64 percent) were from enterprise

software companies. Due to the small sample size for

hardware and cleantech companies, survey responses

from these executives are directional and are not

compared statistically to other groups.

Survey Respondents by Industry Segment

Software Life Science Hardware Cleantech

2010

2011

2012

2013

44%

32%

14%

6%

55%

22%

17%

7%

49%

27%

12%

7%

57%

29%

7%8%

0

0.1

0.2

0.3

0.4

0.5

0.6

“We cannot produce more than China but we can innovate more than the rest of the world.”

President/CEO, Software Startup


2013 Survey Respondents (con’t.)

In terms of geography, we received responses from

executives in 37 states across the country plus the

District of Columbia. Northern California remains the

most active region for startups and accounted for 39

percent of all responses, followed by Massachusetts with

11 percent. Southern California, New York, Washington,

Texas, Georgia, Colorado, New Jersey, Utah, Florida,

Oregon, Pennsylvania, Arizona, Minnesota, Illinois,

Delaware, North Carolina, Nevada, Maryland, Missouri,

the District of Columbia, Louisiana, Connecticut,

Indiana, Maine, Michigan and Virginia all accounted for

two or more percent.

As in prior years, our focus is on high growth startups,

measured both in terms of revenues and number of

employees. We saw a notable increase this year in the

number of respondents with fewer than 10 employees.

This was driven by consumer internet startups, 56

percent of which had fewer than 10 employees.

On the revenue front, we saw an increase in the number

of companies that are not yet earning revenues —

from 29 percent in 2012 to 36 percent in 2013. The

year-over-year increase in the number of pre-revenue

companies was driven by software companies. Sixteen

percent of software respondents in the 2012 survey

said they were not yet earning revenues. That number

rose to 28 percent in the 2013 survey. By sector, we

saw the largest number of pre-revenue companies

in the healthcare and cleantech sectors (55 and 42

percent, respectively).

Percentage of Respondents by Region

48%

9%

7%

20%

3%4%4%

2%

1%

California

Southwest

Southeast

Northwest

Northeast

Mid Atlantic

Midwest

Mountain West

Outside of U.S.

750 startup executives from across the US responded to the Silicon Valley Bank survey

States who responded States who did not respond


9

Annual Trailing Revenues (By Industry)

Consu

mer

Intern

et

Enter

prise

Software

Health

care

Hardware

Cleante

ch0%

10%20%30%40%50%60%70%80%90%

100%$50M or more

$25M to less than $50M




Less than $1M

Pre-revenue

34%

55%

30%42%

24%

32%

11%5%

12%

4%2% 1% 0% 2% 0%

7%2%

12%6%

13%

9%

14%

6%

11%

6%

8%

8%

15%

10%

12%

19%

27%

16%

22%

18%

Annual Trailing Revenues

25%

20% 19%

10%

14%

8%5%

29%

14%

18%

13%16%

7%

3%

36%

24%

14%

8%11%

6%

1%0%

5%

10%

15%

20%

25%

30%

35%

40%

2011

2012

2013

Pre-rev

enue

Less

than

$1M

$1M

to <

$5M

$5M

to <$

10M

$10M

to <

$25M

$25M

to <

$50M

$50M

or m

ore

Number of Employees (By Industry)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

ConsumerInternet

EnterpriseSoftware

Healthcare Hardware Cleantech

250+

100-249

50-99

25-49

10-24

Fewer than 10

56%

17%

9%

10%

7%1% 4%

0% 0% 2%

10%

4%10% 8%

14%

15%

20%17%

16%

16%

16% 24%

19%

25%

26%13%

37%40%

28%37%

Number of Employees

2010

2011

2012

2013

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Fewerthan 10

10 to 24 25 to 49 50 to 99 100 to 249 250 ormore

34%33%

20%20%20%

34%

42%

27%

20%17%

17%15%

16%16%14%

8%11%

7% 7%

2%2%

12%

6%

1%

“Please provide funding to small companies through the market in small bets rather than trying to pick a few winners. The market

will choose the winners better than the government ever could.”

President/CEO, Cleantech Startup


Understanding Startups

High-growth startups have an outsized long-term

impact on the U.S. economy, generating revenues equal

to an estimated 21 percent of U.S. GDP and creating

roughly 11 percent of all U.S. private sector jobs.

(Venture Impact: The Economic Importance of Venture

Capital-Backed Companies to the U.S. Economy, 6th Ed.

(2011)).

In order to reach this size and scale, however, these

companies need to make significant investments for

an extended period of time. To better understand the

relationship between size and profitability, we asked

revenue-generating respondents in this year’s survey

whether they expected to be profitable in 2012. As the

following charts illustrate, whether one looks by sector

or revenue level, most startups don’t earn a profit —

even when they earn significant to topline revenues,

and even in capital-efficient sectors (like software)

where the cost to start a company has declined

meaningfully in recent years.

This year we added two survey questions to determine

who is creating startups. The data indicate that women

remain under-represented among startup founders

(with only about one in four startups having one or

more women on their founding team), while people

born outside the United States are an important overall

part of the startup ecosystem (with about half of all

startups having one or more foreign-born person on

their founding team).

Part 2: Detailed Findings

“Immediate reforms to visa policy for skilled workers are necessary to ward off a brain drain AND to help stimulate the economy through …

startups that are driven by … tax-paying people that may have been born elsewhere in the world.”

President/CEO, Cleantech Startup


Founding Team Composition(By Place of Birth per Industry)

Consu

mer

Intern

et

Enter

prise

Software

Hardware

Cleante

ch

Health

care

0%10%20%30%40%50%60%70%80%90%

100%

Both Represented onFounding Team

Only Persons BornOutside U.S. on FoundingTeam

Only Persons Born in U.S.on Founding Team

60%

19%

21%28% 30% 31%

41%

21% 14%23% 10%

51%56%

46% 49%

Founding Team Composition(By Gender per Industry)

Consu

mer

Intern

et

Enter

prise

Software

Hardware

Cleante

ch

Health

care

0%10%20%30%40%50%60%70%80%90%

100%

Both Men and Women onFounding Team

Only Women on FoundingTeam

Only Men on FoundingTeam

75%

3%

23% 17% 23% 15% 13%

2% 2% 2%

6%

81%

72%83% 85%

Startups’ Profitability (By Revenue Level)

22%32% 35%

78%68% 65%

0%10%20%30%40%50%60%70%80%90%

100%

< $5M Revenues $5.0 - $24.9MRevenues

$25.0 - $99.9MRevenues

No

Yes

Startups’ Profitablity (By Industry)

28% 32%17%

29%17%

72% 69%83%

71%83%

0%10%20%30%40%50%60%70%80%90%

100%

ConsumerInternet

EnterpriseSoftware

Healthcare Hardware Cleantech

No

Yes

Business Environment: Tech Economy Continues To Perform as the Economy Stabilizes

Highlights:

▶ Nearly six in 10 companies (58 percent) met or

exceeded revenue targets, down somewhat from

the past two years but meaningfully better than in

the depth of the recession.

▶ About as many executives expect to miss

2012 targets as hit them (41 and 43 percent,

respectively).

▶ Executives in this year’s survey are

substantially less likely to predict they’d

exceed targeted revenues than in previous

surveys.

▶ Companies with revenues over $25 million are

far more likely to outperform their targets, and

somewhat less likely to underperform their

targets.

▶ Hardware companies are the most likely to

miss targets.

▶ Startup executives remain optimistic, believing

2012 was better than 2011, and 2013 will be better

than 2012.

▶ Software executives are more likely than

other executives to say business conditions

are better than a year ago. But that optimism

isn’t universally shared: year-over-year,

the number of software executives who say

business conditions are somewhat worse more

than doubled.

▶ Healthcare executives are the most downbeat

— less likely to say business conditions are

better, and more likely to say they are worse.

▶ Looking toward 2013, hardware and software

companies are the most upbeat, and

healthcare companies are the most downbeat.

By and large, startups continued to meet their

revenue targets in 2012. Interestingly, executives were

substantially less likely to say their company would

exceed their target (only 15 percent, down from 23

percent a year earlier). Hardware companies were the

most likely to miss targets; healthcare companies were

the most likely to meet or beat targets. Companies

with revenues over $25 million were far more likely to

outperform their targets, and somewhat less likely to

underperform their targets.


13

Performance Against Revenue Targets (By Number of Employees)

34%47% 43%

55%39%

35%

12% 14%21%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Above TargetRevenues about on TargetBelow Target

Under 10Employees

10 - 49Employees

50 - 499Employees

Performance Against Revenue Targets (By Company Size in Revenue)

Pre-Rev

enue

< $5M

Reven

ues

$5 -

$24.9

M

Reven

ues

$25 -

$99.9

M

Reven

ues

0%10%20%30%40%50%60%70%80%90%

100%

Above TargetRevenue About on TargetBelow Target

28%44%

53%

33%

65% 39%34%

33%

7%16% 13%

34%

Performance Against Revenue Targets (By Industry)

Consu

mer

Intern

et

Enter

prise

Software

Health

care

Hardware

Cleante

ch0%

10%20%30%40%50%60%70%80%90%

100%

Above TargetRevenue about on TargetBelow Target43% 42%

34%

56% 49%

45% 40% 50%

30% 45%

10% 18% 15% 14%6%

Performance Against Revenue Targets (By Year)

50%38% 35%

42%

34%

39% 42%43%

15% 24% 22%15%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Above TargetRevenues About on TargetBelow Targets

2010 2011 2012 2013

“My company is on target to grow at a 36x rate with all the capital invested from the track record of this past year. Exciting times.”

President/CEO, Consumer Internet/Digital Media Startup

“Great time for innovation in high tech.”

COO, Hardware Startup


Highlights (con’t):

Roughly six in 10 executives continue to believe

that conditions in 2012 are better than a year earlier,

though we saw an uptick in the number who believe

things are somewhat worse than they’d been.

Interestingly, software executives are more likely

than executives in other sectors to say that business

conditions are better than a year ago (65 percent for

software versus 60 percent overall). But the number

Business Conditions Compared to Last Year (By Company Size in Employees)

16% 18% 16%

25% 22% 24%

61% 59% 60%

0%10%20%30%40%50%60%70%80%90%

100%

BetterSameWorse

Under 10 Employees

10 - 49 Employees

50 - 499 Employees

Business Conditions Compared to Last Year (By Company Size in Revenue)

Pre-Revenue < $5M Revenues

$5 - $24.9M Revenues


0%10%20%30%40%50%60%70%80%90%

100%

17% 16% 18%10%

31%16%

22% 33%

52%68% 59% 58%

BetterSameWorse

Business Conditions Compared to Last Year (By Industry)

Consu

mer

Intern

et

Enter

prise

Software

Health

care

Hardware

Cleante

ch0%

10%20%30%40%50%60%70%80%90%

100%

BetterSameWorse

13% 13%25%

17% 15%

21% 23%

28%

15%33%

66% 64%47%

68%53%

Business Conditions Compared to Last Year (By Year)

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2010 2011 2012 2013

Much Better

Somewhat Better

Same

Somewhat Worse

Much Worse

23%

38%36% 35%

46%

19%

9%

4% 4%

9%

13%

8%

3% 3%

25%27%

24%27%

25% 26%

of software executives who say business conditions

are somewhat worse more than doubled, from five

percent to 12 percent. Healthcare executives are the

most downbeat, with only 47 percent saying business

conditions are better, 16 percent saying they are

somewhat worse, and nine percent saying they are

much worse.


15

Outlook on Business Conditions in 2013 (By Company Size in Employees)

9% 10% 6%

16% 19%19%

75% 72% 76%

0%10%20%30%40%50%60%70%80%90%

100%

BetterSameWorse

Under 10 Employees

10 - 49 Employees

50 - 499 Employees

Outlook on Business Conditions in 2013 (By Company Size in Revenue)

10% 8% 7% 6%

21%14% 17% 24%

Pre-Revenue < $5M Revenues



0%10%20%30%40%50%60%70%80%90%

100%

BetterSameWorse

69%78% 76% 71%

Outlook on Business Conditions in 2013 (By Industry)

Consu

mer

Intern

et

Enter

prise

Software

Health

care

Hardware

Cleante

ch0%

10%20%30%40%50%60%70%80%90%

100%

BetterSameWorse

6% 5%15%

6% 8%

17% 17%

23%

9%20%

76% 78%62%

86%72%

Outlook on Business Conditions in 2013 (By Year)

8% 5% 9% 8%

18%17%

19% 18%

74% 78% 72% 74%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

BetterSameWorse

2010 2011 20132012

By stage, smaller, pre-revenue companies are

meaningfully less likely than their peers who’ve

started earning revenues to say things are better,

and more likely to say conditions are about the same.

Overall, the largest companies in the survey (by revenue)

are the least likely to see things as worse.

Looking forward, executives are about as likely as

those in the previous two surveys to say business

conditions for their companies will be better in the

coming year. Hardware and software companies are

the most upbeat (with 85 percent and 78 percent,

respectively, saying conditions will be better).

Healthcare executives are again the most downbeat,

with only 62 percent saying conditions will be better

and 15 percent predicting they will get worse. And, as

was true when comparing 2012 to 2011, pre-revenue

companies are more likely than companies earning

up to $5M to say conditions going forward will be the

same, while revenue-generating companies (earning

up to $5M) are more likely to believe conditions will

be much better in the coming year.


Startups Remain a Job-Creation Engine … But Can They Find the People They Need?

Highlights:

▶ Nearly nine in 10 startups (87 percent) plan to hire

new employees in 2013, up from 83 percent in last

year’s survey.

▶ Software, hardware, and cleantech executives

are most likely to hire.

▶ While healthcare companies’ expectations

are less robust than their peers, a substantial

number of healthcare executives will be

hiring.

▶ Eighty-two percent of executives we surveyed

are looking for workers with STEM (Science,

Technology, Engineering, and Math) skills.

▶ Four in 10 executives (40 percent) say it is

the most critical job skill. Only one in five (17

percent) say management, marketing, and

other non-STEM skills are most critical.

▶ Hardware executives are the most focused on

workers with STEM skills.

▶ Finding the right workers will be difficult.

▶ Nine in 10 executives say it is challenging to

find workers with the skills needed to grow

their businesses.

▶ Software and hardware executives face the

greatest challenges.

▶ Finding people with the right skills tops the list of

challenges, followed by competition for workers.

The cost of salaries and benefits is also a factor,

particularly for smaller companies with only a

handful of employees.

Since we launched the Startup Outlook in 2010,

we have tracked startups’ plans to hire. Every year,

startups have been a bright spot in an otherwise dismal

jobs landscape. But this year sets a new record for

hiring expectations.

Nine in 10 (87 percent) of the respondents to this

year’s survey plan to hire new employees in 2013, up

slightly from last year’s survey (83 percent). Software,

hardware, and cleantech executives are most likely

to hire, at 91 percent, 90 percent, and 90 percent,

respectively. While healthcare companies are less

likely to hire than their peers, a substantial number —

78 percent — plan to hire.

We did not see meaningful differences in hiring

expectations by company size, although directionally

the larger companies (by employees and revenues)

seemed to have somewhat higher expectations for

hiring — a good sign for the overall amount of job

creation in the high growth economy.

Yet while the jobs are there, nine in 10 (87 percent)

of the surveyed executives said that it is challenging

to find workers with the skills they need. This is

particularly true for software and hardware executives,

and for the somewhat more mature companies.


17

Across sectors, executives are looking for workers with

STEM (Science, Technology, Engineering, and Math)

skills. Four in 10 (40 percent) say it is the most critical

job skill, versus only one in five (17 percent) who say

management, marketing, and other non-STEM skills

are most critical. Four in 10, or 42 percent, report

both skill sets will be critical in 2013. STEM skills are

particularly critical to very early-stage companies and

to hardware companies.

Plans to Hire in 2013(by Industry)

Likely to HireNeither Likely nor UnlikelyUnlikely to Hire

Consu

mer

Intern

et

Enter

prise

Software

Health

care

Hardware

Cleante

ch0%

10%20%30%40%50%60%70%80%90%

100%

3% 6%18%

6% 7%5% 3%

5%

4% 3%

92% 91%78%

90% 90%

Plans to Hire in 2013(By Year)

17% 11% 11% 9%

10%

6% 6% 4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Likely to HireNeither Likely nor UnlikelyUnlikely to Hire

73%84% 83% 88%

2010 2011 2012 2013

“Provide 21st century computational thinking skills to children in K12 space to enhance their creativity to prepare them for

Science, Technology, Engineering and Math jobs.”


“Educate our workforce and expand the visa program in the meantime to create a supply of qualified workers.”



Highlights (con’t.):

What makes it challenging for startups to hire and

retain workers with the skills they need?

Finding people with the right skills tops the list,

particularly for enterprise software, healthcare and

cleantech companies. (Interestingly, however, this is a

less important issue in the Northern California market.)

Competition for workers comes in second. We asked

about two particular types of competition for workers:

competing against larger companies — a distinct

problem for hardware startups — and competition more

HiringCompanies’ Most Critical Skills in 2013 (By Industry)

Cleante

ch

Hardware

Health

care

Consu

mer

Intern

etEn

terpr

ise

Software

38% 34%45%

67%

39%

17%15%

23%

4%

18%

45% 51%32% 29%

43%

0%

20%

40%

60%

80%

100%

120%

Both Equally Critical

Management, Marketing,Sales, Operations and Other Non-STEM Skills

STEM Skills

How Challenging is it to Find Workers with the Skills You Need? (By Revenues)

Not Very Challenging

Somewhat Challenging

Extremely Challenging

Pre-Revenue < $5M in Revenues

$5 - $24.9M in Revenues


30% 26%36% 35%

55% 59%57% 58%

15% 15%7% 8%

0%

20%

40%

60%

80%

100%

120%

How Challenging is it to Find Workers with the Skills You Need? (By Number of Employees)


Some what Challenging

Extremely Challenging29% 31% 29%

53% 57% 63%

17% 12% 8%

0%

20%

40%

60%

80%

100%

120%

Under 10Employees

10 to 49Employees

50 to 499Employees

How Challenging is it to Find Workers with the Skills You Need? (By Industry)

Enter

prise

Software

Consu

mer

Intern

et

Health

care

Hardware

Cleante

ch


Somewhat Challenging

Extremely Challenging35% 39%

17%32%

23%

54%54%

64%

56%58%

10% 7%20% 12% 19%

0%

20%

40%

60%

80%

100%

120%

generally — a distinct problem for consumer internet

companies and in Northern California. The cost of

salaries and benefits is also a factor, particularly for

smaller companies with only a handful of employees.

The survey results also demonstrate that startups are

focused on access to workers with the skills they need

— not immigration — as the true issue. Immigration

reform is a necessary piece of solving the talent

problem, particularly in the near term, but technology

startups appear to see the issue as a workforce issue,

not an immigration issue.


19

Most Challenging Aspect of Finding and Retaining Talent (By Number of Employees)

3%

3%

2%

0% 10% 20% 30% 40% 50%

Other

Immigration Regulations

Too Hard to Compete with Larger Companies

Too Much Competition Generally

Cost of Salaries and Benefits

Finding People with the Right Skills

31%

46%

44%

32%

21%

18%

16%

14%

22%

8%

11%

12%

7%

6%

5%

Under 10 Employees

10 to 49 Employees

50 to 499 Employees

Most Challenging Aspect of Finding and Retaining Talent (By Industry)

28%

42%

46%

35%

46%

25%

18%

31%

26%

28%

30%

17%

10%

7%

13%

4%

7%

5%

9%

4%

3%

5%

1%

5%

0%

0% 10% 20% 30% 40% 50%

Consumer Internet

Enterprise Software

Healthcare

Hardware

Cleantech Other


Too Hard to Compete with Larger CompaniesToo Much Competition GenerallyCost of Salaries and BenefitsFinding People with the Right Skills

Hiring Companies’ Most Critical Skills in 2013(By Company Size in Revenues)

0%

20%

40%

60%

80%

100%

120%



STEM Skills

Pre-Revenue < $5M in Revenues

$25 - $99.9Min Revenues


52%34% 35% 29%

10%

21% 22%25%

38% 45% 43% 46%

Hiring Companies’ Most Critical Skills in 2013 (By Company Size in Employees)

0%

20%

40%

60%

80%

100%

120%



STEM Skills48%

38%30%

12%18%

25%

40% 43% 45%

Under 10Employees

10 to 49Employees

50 to 499Employees

Most Challenging Aspect of Finding and Retaining Talent (By Region)

60%

Other





Finding People with the Right Skills

34%

49%

42%

26%

25%

24%

21%

7%

16%

8%

4%

12%

8%

7%

4%

3%

7%

2%

0% 20% 40%

Northern CA

Boston MA

Other Regions

Most Challenging Aspect of Finding and Retaining Talent (By Revenues)

0% 10% 20% 30% 40% 50%

Other





Finding People with the Right Skills40%

39%

41%

40%

27%

27%

17%

19%

13%

15%

24%

19%

8%

8%

14%

19%

8%

5%

3%

2%

4%

4%

1%

2%

Pre-Revenue

< $5M in Revenues

$5 - $24.9M inRevenues



The Impact of Public Policies on Startups

In past surveys, we’ve asked startups how government

policies affect their ability to succeed. This year, we

decided to shift gears and dig deeper into a handful

of policy issues. We asked about two of the issues

that have consistently topped startups’ lists in

prior surveys: intellectual property protection and

federal tax and fiscal policies. In addition, we tried

to understand better what drives startups’ decisions

about where to locate manufacturing facilities. Finally,

we asked a series of questions designed to get a clearer

picture for how medical device companies are coping

with a new, 2.3 percent excise tax on topline revenues,

which went into effect on January 1, 2013.

Intellectual Property Protection

Highlights:

▶ Close to half of the respondents (46 percent) say IP

is a “key strategic asset.” Hardware, healthcare and

cleantech executives are much more likely to take

this view than software executives, who are much

more likely to see IP primarily as a defensive tool.

▶ One in four startups — even very early-stage

startups — faces IP lawsuits. Healthcare startups are

the hardest hit, although software startups appear

more vulnerable to suits by non-practicing entities,

patent assertion entities, and “patent trolls.” The

prevalence of suits rises with company size.

▶ Overall, slightly over half (54 percent) of

executives feel IP is an important asset and

worth the cost. But views differ significantly by

“Create general conditions for a successful economy [by enabling immigration for skilled knowledge workers, simplifying and minimizing the

tax burden, and investing in education and infrastructure] and then let entrepreneurs and the market do the rest.”


21

sector. Roughly seven in 10 healthcare, cleantech

and hardware executives take this view, while

only about four in 10 software executives do. In

contrast, six in 10 software executives say they

focus on non-legal means rather than on IP rights

to create a competitive advantage.

Intellectual property historically has topped startups’

list of policy priorities. In the 2012 Startup Outlook

survey, 62 percent said IP protection was a priority, and

only 13 percent said it was not.

Yet how best to use a system of intellectual property

protections to promote innovation is a hotly debated

issue, even within the technology community. Different

industries — and even different executives within the

same sector — can disagree sharply on a host of legal

and policy issues.

As a result, rather than asking again whether IP is

important or asking which policies people think make

the most sense, we asked a series of questions about the

role IP plays in startups’ businesses, how often they face

IP disputes, the nature of those disputes, and how well

the current system is meeting their business needs.

Across the board, startups view intellectual property

both as a strategic asset and a defensive tool. The mix,

however, varies by industry, with software executives

more likely to see it as a defensive tool than their

colleagues in the healthcare, hardware and cleantech

sectors.

We also found that nearly one in four startups —

even very early-stage startups — face IP lawsuits.

Healthcare startups are the hardest hit, with three in 10

respondents reporting that they face lawsuits.

Given the cost of litigating an IP lawsuit, this is an

important and concerning finding. Startups have a

finite amount of cash, and we should be concerned if

IP lawsuits are siphoning that cash away from more

productive uses. In this vein, it is interesting to see

the patterns in the types of lawsuits small companies

are facing. Software executives say they are nearly

four times as likely to be sued by a non-practicing

entity, a patent assertion entity, or a “patent troll” as

in a legitimate dispute with a competitor. In contrast,

healthcare companies are more likely to describe

their suits as primarily as legitimate disputes with

competitors.

Company size, not surprisingly, affects the pattern. The

number of executives who said that they face disputes

and that most of their disputes are with a non-practicing

entity, a patent assertion entity, or a “patent troll” rises

measurably as company size increases.

The 2013 survey also points to a potentially interesting

divergence by region. Northern California (primarily

Silicon Valley) companies are much more likely to report

that they face disputes, and, of those, the majority say

View of Intellectual Property (By Industry)

40%

43%

55%

47%

46%

15%

15%

6%

6%

6%

29%

34%

36%

43%

43%

16%

7%

3%

4%

5%

0% 20% 40% 60%

Consumer Internet

Enterprise Software

Healthcare

Hardware

Cleantech

Not Involved in IP

Combination of Both

Primarily a Defensive Tool

Key Strategic Asset


Highlights (con’t.):

these disputes are primarily suits by a non-practicing

entity, a patent assertion entity, or a “patent troll.” While

other regions largely echo this experience, Boston is

a notable outlier, with executives less likely to report

IP lawsuits and no executives reporting suits by a

non-practicing entity, a patent assertion entity, or a

“patent troll.” This may be a product of the relatively

small sample size for Boston (55 respondents for this

question), but given the magnitude of the difference we

felt it merited including in this report.

Given the issues with relying on the legal system to

protect IP rights, we asked executives about their

views on how they think about IP within their broader

business objectives. (Respondents were able to select

multiple answers, so the totals exceed 100 percent.)

Only about half (54 percent) say they think IP is an

important asset and is worth the cost. Underlying this

statistic, however, are two sharply different views. Just

over one in three software executives say IP is worth

the cost, while two in three healthcare, hardware and

cleantech executives say IP is worth the cost.

Software executives are much more likely to say they

rely on non-legal means (such as moving faster than

Nature of IP Disputes (By Region)

0%

20%

40%

60%

80%

100%

Most IP Disputes areLegitimate Disputes withCompetitors

Most IP Disputes Broughtby NPEs, PAEs, or Trolls

Rarely or Never Face IPDisputes

73%85%

78%

17%0% 15%

10% 15%7%

Northern CA Boston MA Other Regions

Nature of IP Disputes (By Revenues)

0%

20%

40%

60%

80%

100%




$25 -

$99.9

M in

Reven

ues

$5 -

$24.9

M in

Reven

uess< $

5M in

Reven

ues

Pre-Rev

enue

77% 83%71%

55%

9%11%

20%39%

14% 6% 9% 7%

Nature of IP Disputes (By Number of Employees)

0%

20%

40%

60%

80%

100%




80% 77% 71%

11% 12% 22%

9% 10% 7%

Under 10Employees

10 to 49Employees

50 to 499Employees

Nature of IP Disputes (By Industry)

Consu

mer

Intern

et

Health

care

Hardware

Cleante

ch

Enter

prise

Software

81% 81%70% 74% 76%

16% 15%

12%15% 10%

3% 4%18% 10% 14%

0%

20%

40%

60%

80%

100%





23

their competitors), rather than on IP rights, to create

their competitive advantage. Smaller startups also

appear more concerned about the cost of IP — and the

need to divert resources from other more productive

uses — than their larger counterparts. Larger

companies, in contrast, appear to face a meaningful

Business Impact of IP (By Region)

IP Isn't Important to OurCompany

The Cost of IP ProtectionDiverts Resources fromMore Productive Uses

We Sometimes Settle Suits or License IP Because Litigation Is Too Expensive

We Sometimes SettleSuits or License IPBecause Litigation Is TooExpensive

IP Isn't Important to Our Company

0% 20% 40% 60% 80%

50%

63%

55%

49%

33%

45%

36%

24%

30%

8%

3%

8%

1%

2%

2%

Northern CA

Boston MA

Other Regions

Business Impact of IP (By Revenues)






60%

51%

46%

50%

36%

51%

53%

48%

32%

34%

23%

36%

7%

6%

5%

23%

1%

1%

2%

5%

0% 20% 40% 60% 80%

Pre-Revenue

< $5M in Revenues



Business Impact of IP (By Number of Employees)






51%

57%

53%

44%

46%

48%

37%

31%

22%

6%

7%

11%

2%

0%

3%

0% 20% 40% 60%

Under 10 Employees

10 to 49 Employees

50 to 499 Employees

Business Impact of IP (By Industry)

34%

42%

69%

64%

72%

59%

59%

27%

38%

36%

26%

36%

28%

33%

36%

9%

8%

7%

2%

5%

0% 20% 40% 60% 80%

Consumer Internet

Enterprise Software

Healthcare

Hardware

Cleantech IP Isn't Important to OurCompany





“As a Fast Growth company I do not worry about government policy too much. I worry about what I can control.

Our outlook is very strong.... Cheers.” President/CEO, Software Startup

litigation-driven problem, with nearly one in four

reporting that they sometimes settle lawsuits or license

IP they otherwise wouldn’t because it’s too expensive

to defend IP in a lawsuit. Regionally, Boston appears to

remain a more IP-centered ecosystem than other markets.


Taxes

Highlights:

▶ When asked which federal tax change would best promote their company’s near-term success, startups focus first on providing incentives to promote capital formation for high growth companies.

▶ Coming in second is helping preserve startups’ scarce capital through a tax credit for pre-profit companies to offset other taxes (such as employment taxes).

▶ Fifteen percent of executives ask Congress to “just get it done so we have certainty.”

▶ Healthcare, hardware and cleantech executives highlight the importance of R&D, through R&D tax credits and direct government investments in R&D.

▶ Larger companies were more likely to focus on the overall corporate tax rate and on capital gains tax rates.

One of the most pressing issues on the federal agenda is our tax system. Most people agree it’s ready for an overhaul, for a host of reasons. But there’s a lot less agreement about what, precisely, the solution should look like. Since startups play a critical role in economic growth, global competitiveness, and job creation, we think the U.S. tax system should promote (or at least not inhibit) startups’ success. So we asked startup executives what they see as the single most beneficial change Congress could make to promote their company’s near-term success.

Promoting capital formation — specifically, providing a tax incentive to invest in startups — topped the list.

This was particularly true for smaller companies.

Promoting capital efficiency — specifically, providing

a credit for pre-profit companies to offset other taxes

(such as employment taxes) so they can devote their

available cash to growing — came in a close second.

Promoting simplicity and certainty — specifically, “just

get it done” and “make the tax code simpler” — came

in third.

Healthcare, hardware and cleantech executives were

much more likely than their colleagues in the software

sector to highlight the importance of R&D, either

in the form of R&D tax credits or direct government

investments in R&D. Larger companies (with over

$25 million in revenues) were much more likely

to recommend keeping the capital gains tax at the

current rate (20 percent, versus six to seven percent

for smaller companies). Not surprisingly, executives’

focus on the corporate tax rate rose as their company

sizes increased.


25

Tax Policies to Promote Startups’ Growth(Top Six, by Revenues)

32% 27%

5% 4%

16% 21%

23%12%

14% 15%

20%

14%

8% 13%

10%

10%

16% 10%

12%

18%

4% 6%

16%

14%

0%10%20%30%40%50%60%70%80%90%

100%

Pre-Rev

enue

< $5M

in R

even

ues

$5 -

$24.9

M in

Reven

ues

$25 -

$99.9

M in

Reven

ues

Lower Corporate Tax Rate

R&D Credit orExpenditure

Make the Code Simpler

Just Get It Done So WeHave Certainty

Tax Credit/Offset for Pre-Profit Companies

Tax Incentive to Invest inStartups

Tax Policies to Promote Startups’ Growth (Top Six, by Number of Employees)

0%10%20%30%40%50%60%70%80%90%

100%Lower Corporate Tax Rate






32%21%

9%

17%

20%

19%

14%14%

20%

10%10%

11%

12%15%

13%

6%7%

12%

Under 10Employees

10 to 49Employees

50 to 499Employees

Tax Policies to Promote Startups’ Growth (Top Six, by Industry)

26% 21% 23% 17%27%

22%21% 18%

15%11%

17%18%

12%15%

20%

12%11%

7%11%

9%

7%8%

19% 21%

26%8%

11% 5% 2%

0%

0%10%20%30%40%50%60%70%80%90%

100%

Consu

mer Int

ernet

Enter

prise

Soft

ware

Health

care

Hardware

Cleante

ch

Lower Corporate Tax Rate






Tax Policies to Promote Startups’ Growth

23%

19%

15%

10%8% 8% 7%

5%

1%3%

0%

5%

10%

15%

20%

25%

Tax I

ncen

tive t

o

Inves

t in S

tartup

s

Credit/O

ffset

for

Pre-Pro

fit Com

panie

s

Just

Get It D

one S

o

We H

ave C

ertain

ty

Mak

e the

Cod

e

Simple

r

Perman

ent R

&D

Tax C

redit

Lower

Corpo

rate

Tax R

ate

Keep C

ap G

ains

Rate at

Cur

rent L

evel

Govern

ment

Inves

tmen

ts in

R&D

Incen

tive f

or D

omes

tic

Man

ufactu

ring

Other

“Provide incentives for developing technology, hiring new people, creating manufacturing jobs in the US. We need the incentive in the

forms of cash, deregulation, tax incentives.”

President/CEO, Medical Device Startup

“Reward startups that our actively growing with tiered payroll tax incentives to help them carry the burden of losses as they get to profitability. Stop

taxing us so much while we are creating jobs and growing the economy.”



U.S. Manufacturing

Highlights:

▶ Over one-third (35 percent) of executives are

at companies who currently manufacture

(21 percent) or plan to in the next 18 months

(15 percent).

▶ A great deal of this activity is in the United States.

▶ Two-thirds of those who currently

manufacture (64 percent) say they

manufacture “mostly domestically.”

▶ Four in 10 of those who plan to manufacture

(40 percent) say they will manufacture

“mostly domestically.”

Policymakers and many business leaders would like to

find ways to re-invigorate U.S. manufacturing, as a way

to grow the U.S. economy and create middle class jobs.

In order to understand the opportunities within the

startup sector better, we asked executives about their

manufacturing plans, what factors drive their decisions

about where to locate manufacturing facilities, and what

kinds of workers they hire for manufacturing jobs.

Not surprisingly, manufacturing is centered in the

healthcare, hardware and cleantech segments.

Excluding software, 68 percent of these companies

manufacture or plan to manufacture in the next 18 months,

compared to only 10 percent in the software sector.

Notably, pre-revenue companies are much more likely

to predict that they will begin manufacturing than

their revenue-generating peers indicate is likely. As

for regional differences, Boston area companies report

that they manufacture at nearly twice the rate of their

counterparts in other regions.

Startups use various approaches to manufacturing:

in-house, through partners, or a combination of the

two; domestically, overseas, or a combination of the

two. In our survey, we found that companies that are

currently manufacturing tend to rely more heavily on

in-house, domestic manufacturing than those who

Plans to Manufacture (by Region)

28% 27%42%

38%47%

36%

34%27% 22%

Northern CA Boston MA Other Regions

Currently Manufacture

Plan to Manufacture in Next 18 Months

No Plans to Manufacture

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Plans to Manufacture(by Revenues)

Pre-Rev

enue

< $5M

in R

even

ues

$5 -

$24.9

M in

Reven

ues

$25 -

$99.9

M in

Reven

ues


Plan to Manufacture in Next 18 Months


0%10%20%30%40%50%60%70%80%90%

100%

28%45% 45% 42%

24%

41%50% 54%

49%

14%5% 4%

Plans to Manufacture (by Industry)

Consu

mer Int

ernet

Enter

prise

Soft

ware

Health

care

Hardware

Cleante

ch

5% 8%

33%50%

42%

2% 4%

31%19% 30%

93% 88%

35% 31% 28%

0%

20%

40%

60%

80%

100%

120%


Plan to Manufacture inNext 18 Months



27

say they will begin manufacturing in the coming 18

months, although it is difficult to know what is driving

those differences.

From a policy perspective, two of the most important

questions to understand are: the factors that

drive startups’ decisions about where to locate

manufacturing facilities, and the kinds of jobs these

facilities create.

On the first, the question of talent and the availability

of skilled workers again rises to the top. This is

followed by two factors relating to the production

process: the quality of available production facilities,

and the speed of production. The next two factors again

concern the workforce: the cost of salaries and benefits,

and the ease/difficulty of managing workers (language,

distance, etc.). Rounding out the list are regulatory

costs and delays, proximity to major markets and

customers, tax incentives, regulatory restrictions,

energy costs, and other.

This implies that policymakers have an opportunity to

promote U.S. manufacturing without having to use tax

expenditures.

The Startup Outlook survey also indicates that taking

these steps would be smart — for all Americans, not

just for technology companies. A meaningful number

of the manufacturing jobs that startups would create

require only a high school diploma or relevant experience,

and fewer than one in three of these jobs require a

college education or above.

Education/Training Needed for Majority of Manufacturing Jobs

High School Highly Experienced Workers,

Regardless of Education

We Provided the Necessary

Training

A Combination of Above

College or Above

21%

29%

21%

4%

24%

0%

5%

10%

15%

20%

25%

30%

35%

What Drives Startups’ Decisions About Where to Locate Manufacturing Facilities?

Availa

bility

of W

orke

rs

with N

eede

d Skil

ls

None o

f the A

bove

Other

Energ

y Cos

ts

Regula

tory

Restric

tions

(Land

Use

, Env

., Lab

or, E

tc.)

Tax I

ncen

tives

/Refu

nds

Proxim

ity to

Majo

r

Mark

ets/C

usto

mers

Ease

/Diffi

culty

of M

anag

ing

Wor

kers

Regula

tory

Costs/

Delays

Salarie

s and

Ben

efits

of

Man

ufactu

ring W

orke

rs

Speed

of P

rodu

ction

Quality

of A

vaila

ble

Produ

ction

Facil

ities

44%41%

35% 35%32%

22%19%

16% 14%

7%11%

4%

0%5%

10%15%20%25%30%35%40%45%50%

Manufacturing: U.S. Versus Non-U.S.


Plan to Manufacture inComing 18 Months

64%

23%

14%

40%

16%

44%

0%

10%

20%

30%

40%

50%

60%

70%

MostlyDomestically

MostlyOverseas

Both

Manufacturing: In House Versus Partners

33%30%

37%

11%

45% 44%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

In House ThroughPartners

Combination ofBoth


Plan to Manufacture inComing 18 Months


The Medical Device Tax

Highlights:

▶ Executives at medical device companies are aware

of the 2.3 percent revenue tax that started at the

beginning of 2013.

▶ Three in four (75 percent) say they know how it

will impact their business. One in four (23 percent)

say they have heard of the tax but do not know

how it will impact their business. Just two percent

were unaware of the tax.

▶ The top ways to handle the tax are passing along

most or all of the increased cost to customers (34

percent of executives plan to do this) or focusing

on expanding overseas instead of in the U.S. (28

percent of executives plan to do this).

▶ Over eight in 10 (82 percent) say the device tax

will have an impact on their company’s long-

term growth.

This year’s survey also digs into a critically important

segment of the U.S. innovation economy: the medical

device sector. There are a number of reasons why

policymakers and ordinary Americans should care

about the health of the device industry. Perhaps most

importantly, new, innovative devices help improve

patient outcomes and reduce costs. In addition, U.S.

leadership in commercializing medical devices helps

ensure that U.S. patients have early access to new tools

for diagnosing and treating conditions. The device

industry also creates high paying jobs and is a major

exporter and an important contributor to the U.S.

balance of trade.

Yet for nearly a decade, rising regulatory costs, delays,

and uncertainty have made it significantly harder

for device companies to succeed. This has reduced

the amount of capital being invested in new device

companies to an 11-year low. It has also caused a shift

in investments away from capital intensive segments,

impeding the discovery and commercialization of

treatments for chronic, costly conditions such as

diabetes, obesity and vascular disease.

While Congress and the FDA are taking steps to turn

this around, those efforts are still in the relatively early

stages. And now a new challenge has emerged for

growing companies: starting January 1, 2013, all device

companies must pay a 2.3 percent tax on their total

U.S. sales. This tax applies even to companies that are

not making a profit. We wanted to hear firsthand how

executives are dealing with the tax and how they think

it will affect the device industry going forward.


29

Familiarity with the Device Tax

75%

23%

2%

I know how it will impactmy business

I don't know how it willimpact my business

I have never heard of thedevice tax

Startups’ Responses to the Device Tax

21%

21%

13%

22%

30%

21%

25%

0% 5% 10% 15% 20% 25% 30% 35%

We will reduce staffing/forego newhires

We will shift resources away fromgrowing our business

We will invest less in R&D for ourexisting products

We will invest less in R&D for newproducts

We will pass along most or all of theincreased cost

We will need to raise an additionalround of capital

We will focus on expanding overseasinstead of domestically

Startups’ Predictions: Impact of the Tax

18%

34%

27%

21%

0% 5% 10% 15% 20% 25% 30% 35% 40%

No meaningful impact

The tax will impact when webecome profitable

The tax will impact our ability toraise capital

The tax will impact our chancesof being successful

“The Medical Device Tax is punitive and particularly unfair to earlier stage companies struggling to satisfy FDA, CMS and extremely

expensive clinical trials. We are in the perfect storm and this tax is one more nail in the coffin of this industry.”


Generally speaking, executives in the device industry

were aware of the tax, although many were still working

to understand how it would affect their business.

Across the board, executives view the tax as a big issue,

with eight in 10 saying it will affect their company’s

long-term growth. One in four will focus on expanding

overseas instead of domestically. At least two in 10

will take one or more other steps in response to the

tax, including reducing their workforce or foregoing

new hires, shifting resources away from growing their

business, investing less in R&D for existing and new

devices, or trying to raise more capital from investors.


And, finally, the survey data illustrated that the

headwinds facing the device industry threatens U.S.

manufacturing jobs.

▶ About half of the device respondents (46 percent)

currently manufacture devices. Ninety-three

percent of these companies manufacture mostly

in the United States.

▶ Most of the remaining device companies (45 percent)

plan to start manufacturing in the next 18 months.

Of these, 50 percent expect to manufacture mostly

in the United States.

▶ More than half of the device manufacturing jobs

require only a high school degree (28 percent) or

hire based on experience regardless of education

(28 percent). Only 16 percent require college or above.

Other Respondents: 2012 Compared to 2011

13%

22%

65%

Worse than last year

Same as last year

Better than last year

Medical Device Companies: 2012 Compared to 2011

27%

32%

41% Worse than last year

Same as last year

Better than last year

As the data in the earlier sections of this report shows,

the device tax compounds other challenges that

threaten to affect U.S. leadership in medical device

innovation. Device companies were much more likely

than startups in other sectors to say they fell far short

of their 2012 revenue targets (17 percent versus nine

percent for other segments). Device executives were

also much less optimistic about business trends than

their peers in other sectors. Not surprisingly, this

translated into less robust expectations for hiring than

is true for other startups.

Similarly, the data in the remainder of the survey

shows that these companies — and the breakthroughs

in medical care they are creating — are small, growing

entities that aren’t yet profitable, and hence are highly

vulnerable to a tax on topline revenues.

▶ Seventy percent of the companies had fewer than

25 employees. 98 percent had fewer than 100

employees.

▶ Sixty-one percent aren’t yet earning revenues. Of

those earning revenues, 56 percent earned less

than $5 million in 2012, 95 percent earned less

than $25 million in 2012.

▶ Fewer than one in 10 expected expect to be

profitable in 2012.


31

Medical Device Companies: 2013 Compared to 2012

15%

25%60%

Will be worse in 2013

Will stay the same

Will be better in 2013

Other Respondents: 2013 Compared to 2012

5%

16%

78%

Will be worse in 2013

Will stay the same

Will be better in 2013

Likelihood of Hiring: Medical Device Companies

17%

6%

77%

Not likely to hire

Neither likely nor unlikely

Likley to hire

Likelihood of Hiring: Other Respondents

6%3%

91%

Not likely to hire

Neither likely nor unlikely

Likley to hire

“Lean is my only guidance to offer the FDA. Build excellence into systems that ensure safety, and don’t do anything else. Let markets drive cost-

effectiveness. Let the NIH and peer-reviewed guidances determine efficacy.”



U.S. and U.K. Startups: Similarities and Differences

In this year’s survey, we reached out to entrepre-

neurs in the U.K. for the first time. Over 125 U.K.

executives responded.

Like their U.S. counterparts, U.K. entrepreneurs are

optimistic about future conditions and growth. In fact,

at times U.K. entrepreneurs express greater confidence

than their U.S. peers. Here are some of the views from

across the pond, on the questions common to the

two surveys.

For a full report on the views of U.K. startups, go to

http://www.svb.com/startup-outlook-report

Business Conditions

▶ U.K. startups were slightly more likely to exceed

revenue targets than their U.S. peers (18 versus

15 percent), and more likely to meet targets (55

versus 43 percent).

▶ U.K. startups were somewhat more likely to

describe business conditions in 2012 as better than

2011 (66 versus 60 percent).

▶ Looking forward, U.K. startups are more optimistic,

with eight in 10 (83 percent) saying conditions in

2013 will be better than 2012, compared to seven

in 10 (74 percent) of U.S. entrepreneurs.

▶ Two-thirds of U.K. startups reported revenues in

2012 – roughly the same as in the U.S. with 64

percent of revenue-generating startups.

▶ Close to half of U.K. revenue-generating startups

(46 percent) expected their company to be

profitable in 2012, compared to around one-

quarter of U.S. startups (27 percent). Looking into

2013, seven in 10 U.K. entrepreneurs (71 percent)

expect their company will be profitable.

Hiring

▶ Like their U.S. counterparts, U.K. startups are

hiring. As in the United States, nine in 10 (87

percent) plan to hire new employees in 2013.

▶ Ninety-five percent of U.K. startups with

10 or more employees plan to hire, versus

84 percent of smaller U.K. startups and 88

percent of U.S. startups with 10 or more

employees.


http://www.svb.com/startup-outlook-report/

33

Hiring (con’t.)

▶ Similar to U.S. startup executives, U.K. startups are

looking primarily for workers with STEM (Science,

Technology, Engineering, and Math) skills.

▶ Four in 10 (38 percent) say STEM skills are the

most critical job skills, versus one-quarter (23

percent) who say management, marketing,

and other non-STEM skills are most critical.

Among U.S. startups, those numbers were 40

and 17 percent, respectively.

▶ As in the United States, finding the right workers

will be difficult.

▶ Nine in 10 (89 percent) say it is “challenging”

to find workers with the skills needed to grow

their businesses. (Eighty-seven percent of U.S.

executives said the same.)

Intellectual Property (IP)

▶ Just fewer than four in 10 of the U.K. respondents

(38 percent) classify IP as a “key strategic asset,”

compared to 46 percent of the U.S. respondents.

Fifteen percent of U.K. respondents say that IP

is primarily a defensive tool, compared to 11

percent of U.S. respondents. One-quarter of U.K.

respondents (23 percent) say IP is a combination of

both, compared to 35 percent of U.S. respondents.

▶ Over eight in 10 U.K. entrepreneurs (84 percent) in

this study rarely or never face disputes, compared

to 77 percent for the United States.

▶ Over half of U.K. entrepreneurs (57 percent)

say they focus on non-legal means rather than

on IP rights to create a competitive advantage,

significantly more than for U.S. startup executives

(46 percent).

U.K. Fundraising Environment (U.K. Survey Only)

▶ Nine in 10 of entrepreneurs in this study (90

percent) say the U.K. fundraising environment

is challenging.

▶ Most are looking to angel investors or VCs for their

next source of funding (39 percent for each).

▶ Over half of U.K. entrepreneurs say government

initiatives that would help the startup sector are

greater access to government grants and funds

designed specifically for startups and tax reform

(56 percent and 52 percent, respectively).

Founding Teams

▶ Twenty-six percent of startups in the U.K. survey

have women on founding team, compared to 22

percent for startups in the U.S. survey.

▶ Thirty-seven percent of startups in the U.K. survey

have foreign born members on founding team,

compared to 46 percent for startups in the U.S. survey.


About Silicon Valley Bank

Silicon Valley Bank is the premier bank for technology,

life science, cleantech, venture capital, private equity

and premium wine businesses. SVB provides industry

knowledge and connections, financing, treasury

management, corporate investment and international

banking services to its clients worldwide through

27 U.S. offices and seven international operations.

(Nasdaq: SIVB)

www.svb.com

About the Startup Outlook Survey

In addition to this comprehensive report, Silicon

Valley Bank is publishing a series of more detailed

reports focusing on different sectors and issues within

the broader survey. For copies of these additional

reports, as well as to access the Startup Outlook 2010,

2011 and 2012 reports, please visit us at

www.svb.com/startup-outlook-report


“Big Data and Cloud computing markets that we are part of will be huge. Financial instabilities make companies look for other vendors so small

startups like us become a very good option for them as we are agile, cost effective and approachable.”


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