SVB State of the Markets Report

State of the Markets Shifting Investor Sentiment Drives Recalibration April 2016

Written by SVB Analytics:

Steve Allan, CFA Head of SVB Analytics

Sean Lawson Manager

Steven Kakowski Associate

Steven Pipp Associate

John Ortelle Manager

What does the rest of 2016 hold for the innovation economy? SVB Analytics took a look at how we got here to help inform where we may be headed. In the second quarter of 2016, we anticipate lower public valuations, a continued IPO drought and a refocus on profits instead of growth at all costs. After the rapid run-up of the past two years, we see this as a healthy recalibration. Our review also shows that since the beginning of 2016, VCs continue to raise impressive amounts of capital, debt remains cheap and private valuations are strong (even if recent IPOs currently struggle in the public markets). That said, the late-stage mega-rounds characteristic of 2014 and 2015 appear to be a thing of the past as investors look for more protection for their investments. This is leading to investors requiring tighter terms and companies adopting leaner operations. As with any review of the markets, conditions can turn quickly. We are, however, confident that the fundamentals driving innovation are alive and well in 2016. Steve Allan, CFA Head of SVB Analytics

The Innovation Economy in 2016

State of the Markets

State of the Markets 3

1 Macro Environment

2 Valuations

3 Exits

4 Key Takeaways


Macro Environment

Capital Is Still Cheap


With interest rates remaining near record lows, investors scour the markets for returns

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

2000 2002 2004 2006 2008 2010 2012 2014 2016

5-Year Nominal Interest Rate

U.S. Treasury 5-Year Constant Maturity: January 2000 – March 2016

Source: S&P Capital IQ

Companies Are Stockpiling Cash


S&P 500 companies’ cash as a percentage of assets approaches 11 percent, indicating that companies remain risk averse in the post-financial crisis environment

Quarterly Cash and S.T. Investments – S&P 500 (Ex – Financials): Q1 2007 – Q4 2015

4%

5%

6%

7%

8%

9%

10%

11%

12%

$0.3

$0.5

$0.7

$0.9

$1.1

$1.3

$1.5

Cash and S.T. Investments Cash as a % of Total Assets

$ Tr

illio

ns

% o

f Ass

ets


Volatility Was Relatively Low Until Mid-2015


Markets saw a sustained period of calm for nearly three years, from 2012 to 2015


^VIX: March 2008 – March 2016

0

10

20

30

40

50

60

70

80

90

Mar 2008 Mar 2009 Mar 2010 Mar 2011 Mar 2012 Mar 2013 Mar 2014 Mar 2015 Mar 2016

Macro Forces Weigh on U.S. Market


Nasdaq Composite Index: January 2011 – March 2016

After years of impressive growth, bull market decelerates amid global macroeconomic headwinds

Since January 2014

U.S. Dollar Hits 10-Year Highs

Oil Price Hits 10-Year Lows

China Yuan & Market Shocks


Nasd

aq

0

1,000

2,000

3,000

4,000

5,000

6,000

2011 2012 2013 2014 2015 2016

Year 2000 Peak

New Capital Sources Chase Venture Returns


Venture capital deployments reached their highest level since 2000, driven by increased nontraditional crossover investor appetite from mutual and hedge funds

U.S. Venture Capital Deployed vs. Fundraised by Year: 2000 – 2015

$0

$10

$20

$30

$40

$50

$60

$70

$80

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

VC Fundraising VC Investments CVC Investments Crossover Investments

$105

Source: 2016 NVCA Yearbook, SVB Analytics estimates

Summary: Macro Environment


Capital is inexpensive…

…public markets and private investments soared…

…thanks to relative stability.


Valuations

Private Valuations Continued Growing in 2015


Median Pre-Money Valuations Series Seed through Series B: 2011 – 2015

Median pre-money valuations have roughly doubled over the past five years across most investment stages

Median Pre-Money Valuations Series C through Series D+: 2011 – 2015

This value increase in the later stages is fueled by (and requires) rounds larger than those typically provided by VCs

$4 $4 $5 $5 $6

$7 $8 $9 $12

$14

$21 $21

$26

$33

$41

$0M

$5M

$10M

$15M

$20M

$25M

$30M

$35M

$40M

$45M

2011 2012 2013 2014 2015Seed Series A Series B

$50 $50 $56 $60

$74

$84 $92

$99

$135

$180

$0M

$20M

$40M

$60M

$80M

$100M

$120M

$140M

$160M

$180M

$200M

2011 2012 2013 2014 2015Series C Series D+

Source: Pitchbook

Tech Companies Stay Private Longer


Years from founding to IPO (median): 1999 – 2015

The median age of tech companies at IPO has increased following stricter regulatory requirements post – 2000 dotcom bubble and 2008 financial crisis

With greater access to capital from

traditional and nontraditional

sources and rising valuations, tech

companies are choosing to delay

the scrutiny and transparency of

public markets. 0

2

4

6

8

10

12

14

16

1999 2001 2003 2005 2007 2009 2011 2013 2015

Median tech company age at IPO

Source: Dr. Jay Ritter, University of Florida

3 4

7

2

7

3 3

6

13 11

13 12

15

25 27

12 13

8

4

12 11

10

1

7

3

9

1

7

0

5

10

15

20

25

30

Private IPOs IPOs

2015: Year of the Private IPO


Late-stage companies are opting to raise private capital rather than IPO; 2015 saw four times as many private IPOs (rounds >$100M) as IPOs

Source: CB Insights, S&P Capital IQ

IPO and PIPO Transactions for U.S. Technology Firms: Q1 2012 – Q1 2016

0

Who Are the Crossovers Funding Private IPOs?


As companies delay public offerings, some of the largest fund managers have taken a primary role in funding late-stage rounds

Source: CBInsights

Global Investments in Venture Rounds – Crossover Investors

Tota

l Rou

nds

$35M $46M

$139M

$153M

$110M

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

0

10

20

30

40

50

60

2012 2013 2014 2015 2016

Tiger Global Management Goldman Sachs Wellington Management

Fidelity Investments Coatue Management T. Rowe Price

Blackrock Average Round Size ($MM)

Q1

Average Round Size ($M)

Average Round Size ($M)

The Advent of the Unicorn


The number of private companies with $1B+ valuations has tripled since 2014, with nearly half of all unicorn value concentrated in the top 12 “decacorns”

Source: Wall Street Journal

Private Companies with Reported $1B+ Valuations: Q1 2014 – Q1 2016

Unicorn Market Value Concentration: March 2016

0

20

40

60

80

100

120

140

160

Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16

$1 - 2B $2-5B $5-10B $10-15B $15-20B $20B+

Uber $51B

Xiaomi $46B Airbnb $26B

Palantir $20B

Meituan-Dianping

$18B Snapchat $16B

WeWork $16B

Didi Kuaidi $16B Flipkart

$15B SpaceX $12B

Pinterest $11B

Dropbox $10B

All Other $278B

New Unicorn Entrants Eclipse Exits


Net Change in Unicorns by Year: 2014 – Q1 2016

The pace of new companies reaching $1B+ valuations far exceeds the pace of exits, creating a backlog of private companies with a combined market value of more than $500B

Total Market Values

Apple $615B

Note: Exits include IPOs, M&A and revaluations below $1B. Source: Wall Street Journal; Google Finance 3/31/16

Year End Unicorns

2013

Exits New Year End Unicorns

2015

Year End Unicorns

2014

Exits New Exits New March End Unicorns

2016

45 -15

+49 79 -11

+76 144 -2

+4 146

0

20

40

60

80

100

120

140

160

All Unicorns $535B

Google $521B Facebook $321B

Unicorn IPOs $115B


Exits

-500%

-400%

-300%

-200%

-100%

0%

100%

200%

300%

400%

500%

Private Investors Reap Unicorn Rewards


Nearly two-thirds of unicorn exits yielded positive returns relative to the final private valuation for late-stage investors

Source: Wall Street Journal; S&P Capital IQ

Unicorn Returns at M&A or at IPO Date Close

IPO M&A

Last Private Exit Q1 2016

0%

-20%

-40%

-60%

-80%

-100%

<1x IC Recovered

Unicorn Values Fall Precipitously after IPO


The vast majority of unicorns have plummeted since entering the public market


Publicly Traded Unicorn Returns

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

~70% of Unicorns now trade below their IPO closing price

Median Return: -37%


0%

-20%

-40%

-60%

-80%

Public Values Point to Unicorn Mispricing

State of the Markets 21 Source: Wall Street Journal, S&P Capital IQ

Total Returns Compared to Unicorns’ Last Private Round

At the end of Q1 2016, the majority of publicly traded unicorns traded below their final private valuation, indicating a shift in focus towards profitability

-400%

-300%

-200%

-100%

0%

100%

200%

300%

400%

500%


0%

-20%

-40%

-60%

-80%

Size Limits Exit Options

State of the Markets 22 Source: CBInsights, Wall Street Journal

With a limited number of buyers for $1B+ companies, an IPO may be the only choice for those seeking an exit

All Tech Exits Unicorn Exits

57% IPO

2% IPO 8 16

4

2014 – 2015 2014 – Q1 2016

IPO M&A

IPO Window Is Uncertain in 2016

State of the Markets 23 Source: S&P Capital IQ

U.S. Tech IPOs vs. Nasdaq Performance

During market downturns, the IPO window narrows

U.S. Tech IPOs Nasdaq

IPO

s on

U.S

. Exc

hang

es

0

10

20

30

40

50

60

70

80Nasdaq

202 164

Growth-Stage Mega-Rounds Are Slowing


With public markets less receptive to companies with large private valuations and unproven business models, private markets are scaling back private IPOs

Source: CB Insights, S&P Capital IQ

$0.5 $0.5 $1.2 $0.3 $1.6

$0.4 $0.6 $1.0

$3.4 $3.1 $2.9 $3.7 $3.7

$6.1 $7.0

$2.4 $3.0 3 4

7

2

7

3 3

6

13 11

13 12

15

25 25

12 13

$0.0

$1.0

$2.0

$3.0

$4.0

$5.0

$6.0

$7.0

$8.0

0

5

10

15

20

25

30

Proceeds ($B USD) Private IPOs

Total Proceeds ($B USD)

Private IPO Transactions for U.S. Technology Firms: Q1 2012 – Q1 2016

Summary: Valuations and Exits


Private valuations soared… …with a flood of crossover capital…

…but IPOs have underperformed… …and even that window is closing.


Key Takeaways

Exit Conditions Remain Uncertain

State of the Markets 27 Source: S&P Capital IQ; Yahoo! Finance

Tech IPO Count: H1 2012 – H2 2015

Companies look for a sustained period of low volatility before going public

0

5

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40

45

Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16

H1 2012 H2 2012 H1 2013 H1 2013 H1 2014 H2 2014 H1 2015 H2 2015 Q1 2016

^VIX: Q2 2012 – Q1 2016

20

15

10

5

0

$0.0

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0

$70.0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

VC Fundraising VC Investments

VCs Are Flush with Cash


Cheap capital and crossover investors have left VCs with sizeable war chests

Source: 2016 NVCA Yearbook, SVB Analytics estimates

U.S. Venture Capital Deployed vs. Fundraised by Year: 2002 – 2015

$ Bi

llion

s

0

50

100

150

200

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

U.S. Venture Funding – Capital Reserve Index (Indexed to 2002)

Private Valuations Reveal Divergence


Amid the recent public market pullback, investors are focusing on the most promising companies, curtailing new early-stage bets while doubling down on late-stage rounds

Source: Pitchbook

Median Pre-Money Valuations Series Seed through Series B: 2011 – Q1 2016

Median Pre-Money Valuations Series C through Series D+: 2011 – Q1 2016

$4 $4 $5 $5 $6 $6

$7 $8 $9 $12

$14 $16

$21 $21

$26

$33

$41

$37

$0M

$5M

$10M

$15M

$20M

$25M

$30M

$35M

$40M

$45M

2011 2012 2013 2014 2015 Q1 2016

Seed Series A Series B

$50 $50 $56 $60

$74

$100 $84 $92 $99

$135

$180

$261

$0M

$50M

$100M

$150M

$200M

$250M

$300M

2011 2012 2013 2014 2015 Q1 2016

Series C Series D+

Investor Sentiment Shapes IPO Market


During bull markets, tech companies focus on growth at the expense of profitability at IPO, but as investor sentiment shifts away from growth, IPO candidates need to show strong unit economics and a clear path to profitability

Source: Dr. Jay Ritter, University of Florida

Percentage of Companies Profitable at IPO: 1995 – 2015

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Tech IPOs Non-Tech IPOs

?

Early Trends in 2016

State of the Markets 31 Source: SVB Analytics, S&P Capital IQ, Wall Street Journal, Mattermark

Revenue Multiple Compression

Cost Cutting & Layoffs

Alternative Investment Structures

The public markets are no longer valuing growth at all costs. Instead, investors are favoring proven business models, which is driving recent multiple compression.

Now that a path to profitability is as important as growth, companies must carefully manage cash burn to withstand adverse market conditions.

Given the uncertain exit horizon, alternative investment structures with stronger protective covenants will likely replace equity mega-rounds.


Appendix

Report Authors

33

Steven Pipp Associate, SVB Analytics [email protected]

Steve Allan, CFA Head of SVB Analytics [email protected]

Sean Lawson Manager, SVB Analytics [email protected]

John Ortelle Manager, SVB Analytics [email protected]

Steven Kakowski Associate, SVB Analytics [email protected]

State of the Markets

Special Thanks Vincent Timoney Director Silicon Valley Bank Rob Tompkins Managing Director Silicon Valley Bank Dan Zaelit Director Silicon Valley Bank Natalie Dillon Associate Silicon Valley Bank Daren Motsuoka Associate Silicon Valley Bank

About Silicon Valley Bank For more than 30 years, Silicon Valley Bank has helped innovative companies and their investors move bold ideas forward, fast. SVB provides targeted financial services and expertise through its offices in innovation centers around the world. With commercial, international and private banking services, SVB helps address the unique needs of innovators.


This material, including without limitation to the statistical information herein, is provided for informational purposes only. The material is based in part on information from third-party sources that we believe to be reliable, but which have not been independently verified by us and for this reason we do not represent that the information is accurate or complete. 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. SVB Analytics is a member of SVB Financial Group and a non-bank affiliate of Silicon Valley Bank. Products and services offered by SVB Analytics are not FDIC insured and are not deposits or other obligations of Silicon Valley Bank. SVB Analytics does not provide investment, tax, or legal advice. Please consult your investment, tax, or legal advisors for such guidance. ©2016 SVB Financial Group. All rights reserved. Silicon Valley Bank is a member of FDIC and Federal Reserve System. SVB>, SVB Financial Group, and Silicon Valley Bank are registered trademarks. (0416-077)

About SVB Analytics SVB Analytics, a non-bank affiliate of Silicon Valley Bank, serves the strategic business needs of entrepreneurs, corporates and investors in the global innovation economy. For more than a decade, SVB Analytics has helped global business leaders make informed decisions by providing market intelligence, research, and consulting services. Powered by proprietary data, SVB Analytics has a unique view into the technology and life science sectors.

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SVB State of the Markets Report