Southern California Startup Outlook 2017 KEY INSIGHTS FROM SILICON VALLEY BANK’S STARTUP OUTLOOK SURVEY

@SVB_Financial #StartupOutlook

U.S. Startup Outlook 2017 - SoCal Report 2

Capitalizing on consumer, software, space and life science innovations, companies from all over Southern California are thriving. They are fueled by a flourishing ecosystem that includes a growing number of local equity capital sources from both venture capitalists and corporate investors. We expect 2017 will continue the string of great years, with several VCs closing large funds and multiple high-growth companies filing to go public.

In this second annual Southern California-focused report, you’ll learn how tech and healthcare executives from San Luis Obispo to San Diego view the opportunities and challenges in 2017. These findings come out of a larger annual SVB survey of nearly 950 entrepreneurs, primarily based in the U.S., U.K. and China.

Entrepreneurs all over tell us that they are experiencing a greater amount of uncertainly this year compared to last. Consequently, that uncertainty has led to a more cautious outlook. However, they’re still hiring, and they’re still optimistic.

While Southern California may be considered an “emerging” tech hotbed, the truth is that our region has birthed a tremendous amount of innovative companies that are now powering the digital age. Of these next-generation stars — Snap, Ring, ZipRecruiter, Dollar Shave Club, Blackline, Hulu and SpaceX — the youngest is six years old.

SVB continues to grow its footprint in Southern California. Last year, our Santa Monica office more than doubled market share of early-stage companies in Los Angeles. SVB’s Orange County and San Diego markets

also grew substantially. The survey shows some interesting differences between this dynamic Southern California ecosystem and the broader survey findings. Here are a few contrasts:

• Southern California startups were more likely to be in the consumer internet/digital media and healthcare sectors.

• These respondents also tended to have less revenue than the average U.S. startup, but a higher percentage reported they planned to turn a profit.

• Around fundraising, Southern California startups said they planned to rely more on corporate venture compared with the U.S. overall.

We will use these findings in two ways: To help inform policymakers about how to support companies across our region and help startups execute on new strategies for success. Please view all of the Startup Outlook 2017 reports. We hope these findings from Southern California, the U.S., U.K. and China offer you insights and benchmarks as you chart your business’ course in 2017.

Rob Freelen Managing Director Market Manager, Los Angeles Silicon Valley Bank

Strength in the SoCal Innovation Sector

LETTER FROM

M

ARKET MAN

AGER

U.S. Startup Outlook 2017 - SoCal Report 3

SoCal startups are cautiously optimistic More than half of SoCal startups say they expect business conditions to improve in 2017, and only 6% think conditions will worsen.

Describe your outlook on business conditions for your company this year compared to last:

BUSIN

ESS CON

DITION

S

40% Will stay the same

6% Will be worse

54% Will be better

U.S. Startup Outlook 2017 - SoCal Report 4

Extremely challenging

37%

23%

FUN

DING

More SoCal startups find fundraising “extremely challenging” Fundraising is difficult for all startups, but nearly 37% of SoCal startups say it is “extremely challenging,” compared to 23% for the U.S. overall. SoCal has far fewer resident VCs than Silicon Valley, which often requires startups to bootstrap longer.

What is your view of the current fundraising environment?

SoCal U.S.

U.S. Startup Outlook 2017 - SoCal Report 5

Venture capital

Corporate Private equity

Angel/Micro VC

Individual Other

39%

10%

51%

16%

FUN

DING

After VC, SoCal startups depend on corporate venture Overwhelmingly, startups expect their next round of financing to come from VCs. In SoCal, corporate investors also play a meaningful role: 19% of SoCal startups say corporate investors are their second most likely source of capital compared to just 11% for U.S. startups overall. The region’s concentration of digital media startups attracts more corporate investment, particularly in AR and VR companies.

Other includes: organic, growth, bank debt, IPO, grant, crowdfunding, merger.

6% 13%

7% 6% 8% 13% 11%

19%

What do you expect to be your company’s next source of funding?

SoCal U.S.

U.S. Startup Outlook 2017 - SoCal Report 6

Majority of SoCal startups expect to be acquired Acquisition is the dominant realistic, long-term exit strategy of all startups. Despite excitement around IPOs, few startups expect to go public. That is even truer in SoCal, where just 4% expect to have an IPO, compared to 16% nationally.

More SoCal startups are focused on consumers rather than enterprises, which typically leads to faster profitability. With profitability, companies can choose to stay private longer.

What is the realistic long-term goal for your company?

53%

Acquisition

U.S.18% Stay private

16% IPO

13% Don’t know

58%

Acquisition

4%

IPO

25% Stay private

SoCal

13% Don’t know

FUN

DING

U.S. Startup Outlook 2017 - SoCal Report 7

SoCal startups expect M&A to be even stronger in 2017 Nine of 10 SoCal startups predict as many or more mergers and acquisitions in 2017. One of the more interesting M&A trends is the increased appetite of acquirers outside the technology sector, creating additional opportunities for startups.

How do you think the M&A market will change in 2017?

43% No change

9% Fewer acquisitions

48% Expect more acquisitions

FUN

DING

U.S. Startup Outlook 2017 - SoCal Report 8

SoCal startups continue to hire A large majority of SoCal startups plan to expand their teams in 2017. For 86% of these startups, finding the right talent is challenging.

What are your projections for hiring new employees this year?

26% Keep at current level

1% Reduce workforce

73% Increase workforce

HIRIN

G &

TALENT

U.S. Startup Outlook 2017 - SoCal Report 9

PUBLIC PO

LICY

What are the most important public policy issues affecting companies like yours?

Access to talent is top policy concern of SoCal startups With finding skilled workers so difficult, SoCal startups named access to talent as the top public policy issue affecting companies like theirs. Healthcare costs are a close second. For more perspective on these issues, and to learn U.S. entrepreneurs’ ideas for the new administration, see Startups to President Trump: Ideas to Grow the U.S. Innovation Economy.

Note: Respondents were given the opportunity to select multiple responses.

30%

46%48%

30% 29%

Access to talent

Healthcare costs

Corporate taxes

Patent litigation

Cyber-security

U.S. Startup Outlook 2017 - SoCal Report 10

HIRIN

G &

TALENT

More than half of SoCal startups have no women in executive positions Women in tech leadership has been a topic of conversation in the U.S. tech community and globally for several years. It is well known that women are underrepresented on startup boards and in the executive suite. While 55% of SoCal startups have no women in a C-level role, just 16% say they have programs in place to increase the number of women in leadership roles.

Percentage of SoCal startups with no women in leadership positions:

No women in executive

positions

63%

No women on board of

directors

55%

U.S. Startup Outlook 2017 - SoCal Report 11

Policy is driving some SoCal startup operations offshore One in four respondents say that regulations prompted them to locate facilities or move non-sales operations outside the U.S., in line with national findings.

PUBLIC PO

LICY

34% Tax policy

31% Regulatory environment

34% Immigration policy27%

Here’s why

Have U.S. laws and regulations materially affected your company’s decision to locate facilities or hire employees for operational non-sales activities outside the U.S.?

Hired or moved operations

offshore

Yes

U.S. Startup Outlook 2017 - SoCal Report 12

ABOU

T THE SU

RVEY

Industry sectorProfitable

56% Yes

Ownership

69%Technology (net)

15%Healthcare (net)

16%Other

Revenue stage

Total respondents

941Primary place of business

62% U.S.

14% U.K.

16%China

8%Other 17%

Pre-revenue

65% Up to $25 million in revenue

18% More than $25 million in revenue

95% Private

5% Public

Our eighth annual survey of technology and healthcare executives offers insight into what’s on the minds of innovation leaders today. For this year’s survey, we received 941 responses covering such topics as how innovation companies are faring, hiring projections and how government policies are affecting business growth. About 10% of the total respondents were located in Southern California.

About the Startup Outlook 2017 survey

Peerless Insights Survey, a third-party firm, conducted the Startup Outlook 2017 survey online on Silicon Valley Bank’s behalf from November 14, 2016, to January 3, 2017.

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SVB Southern California O�ces

Santa Monica o�ce 1901 Main StreetSanta Monica, CA 90405

Los Angeles o�ce 15260 Ventura BoulevardSherman Oaks, CA 91403

San Diego o�ce 4370 La Jolla Village DriveSan Diego, CA 92122

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Peerless Insights Survey, a third-party firm, conducted the Startup Outlook 2017 survey online on Silicon Valley Bank’s behalf from November 14, 2016 to January 3, 2017.

This material, including without limitation to the statistical information herein, is provided for informational purposes only and is compiled from the survey that we worked on with Peerless Insights, a third-party source.

The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decision.

You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation, offer or recommendation to acquire or dispose of any investment or to engage in any other transaction.

Silicon Valley Bank is a member of the FDIC and the Federal Reserve System. Silicon Valley Bank is the California bank subsidiary of SVB Financial Group (Nasdaq: SIVB).

©2017 SVB Financial Group. All rights reserved. SVB, SVB FINANCIAL GROUP, SILICON VALLEY BANK, MAKE NEXT HAPPEN NOW and the chevron device are trademarks of SVB Financial Group, used under license. CompID—274

About Silicon Valley BankFor more than 30 years, Silicon Valley Bank has helped innovative companies and their investors to be successful, providing targeted financial services and expertise. Offering commercial, international and private banking services in innovation centers around the world — including Southern California offices in Santa Monica, Los Angeles, Irvine and San Diego — SVB helps address the unique needs of innovators. Visit svb.com.

Learn more at svb.com/startup-outlook-report.

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