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State of the Venture Capital Industry
1
PreMoney - Dec 5th 2017
Mark Suster, @msuster
Upfront Ventures
Some things
most people
know
2
In 2013-2015,
the VC market overheated,
driving irrational behavior
Valuations up 3x
3
Capital invested up 2x
$6.2B to $16.7B
A) Median pre-money valuation for VC-backed tech startups rose from $17M in 1Q’13 to $68M in 3Q’15, where 4Q’15 dropped to $28M, Dow Jones VentureSource Venture Capital Report 4Q’15
B) Total dollars raised by startups from 1Q’13-3Q’15 grew from $6.2B to $16.7B, where 4Q’15 dropped to $12.3B, PWC National MoneyTree Report 3Q’16
$17M to $68M
4
…and we ushered in
the age of

“the unicorn”*
Illustration by Goran Factory for Fortune
* Credit to Aileen Lee! :)
5
High prices,
often with structure
Art by Freepik
VC: “You name the price,
I name the terms.”
6
We’re starting to see
some correction in the
over-valued companies
7
Many predicted that
winter was coming.
What happened to winter?
8
Twice as many VCs did cut investment pace in 2016.

Winter was real
Made fewer investments Made more investments
16%
31%
Q. What was your deal activity like in 2016 vs. 2015? Excluding follow ons. Excluded 53% of respondents that answered “about the same pace”
Source: Upfront Ventures survey of VCs (N=114), Jan 2017
9
And 76% of VCs reported valuations declined in 2016
Valuations decreased Valuations increased
8%
76%
Q. Would you say valuations in 2016 were higher, lower or remained about the same vs. 2015? Excluded 16% of respondents that answered “about the same.”
Source: Upfront Ventures survey of VCs (N=114), Jan 2017
10
2016 was the year our industry took cost-cutting seriously and
most say this work is behind them
25%
12%
63%
Q. Which statement best describes the spending behavior at most of the more mature companies in which you are on the board or observe (i.e. not super early stage)?
Source: Upfront Ventures survey of VCs (N=114), Jan 2017
Cut costs in 2016
Planning to cut costs in 2017
No change
Just 12%
cutting in
2017
11
Winter DID come.
But it sure was mild!
Blame Global Warming.
Seriously.
12
“Global” warming—part 1: China, Japan, Asia more broadly
“Global” warming —
Influx of foreign capital into US startups
1
13
2009 2010 2011 2012 2013 2014 2015 2016
$29B
$10B$9B
$12B
$7B
$4B$4B
$1B
Note: Includes all FDI in all states and industries excluding real estate
Source: Rhodium Group China Investment Monitor
Chinese Foreign Direct Investment (FDI) has poured into the US.
Tech sector has clearly benefitted
14
The US has FANG, China has BAT: Baidu, Alibaba & Tencent.
All very aggressive in US investments.
15
Baidu launched two major funds in 2016 —
increasing investment pace to match its peers
Baidu Venture
Early-stage fund
AI, AR / VR, next-gen tech
Baidu Capital
Late-stage tech fund
$50-100M checks
$200M
$3B
16
led $800M Series C in
(Feb 2016)
This is like 20
seed funds in just
one deal!
17
But there are a huge number of other Chinese funds now moving into venture
that you’ve never heard of with a mandate to bring innovation back to China
Government-backed funds Cross-Border Funds
Private Corporations
18
invested $690M in
(Mar & Oct 2016)
19
Of course it’s not just China:
SoftBank / Saudi Arabia’s PIF

/ Mubadala
$100B tech fund
(Oct 2016)
&
20
As oil prices have collapsed, the Arab states have been
eager to diversify their assets
$165M
Kuwait
201520142013 2016
$3.5B
Saudi Arabia
21
Temasek (Singapore’s soverign wealth fund)
opened a US venture office & allocated
more capital to US deals
$350M AUM
22
invested $800M in
(Jan 2017)
23
93% of VCs have seen an increase in interest from an
international LP base*
Q. In the last fund you raised, did you see increased interest from international sources of capital to invest as LPs in your fund? *Excluded those that answered “Didn’t reach out, so don’t know”
Source: Upfront Ventures survey of VCs (N=114), Jan 2017
93%
7%
More international LPs
No increase
24 Designed by Freepik
Global warming —
Rise of the corporate VC
2
25
Increasing number of corporates have active venture investing arms
2012 2013 2014 2015 2016
61
131
US Active CVC Investors By Quarter
Source: CBInsights
26
Of course there are the usual suspects…
Source: CBInsights
80-90
deals/year
70-90 50-70 30-50 20-30
27
invested $200M in
(Oct 2016)
Active corporates continue to write large checks…
28
invested $500M in
(Jan 2016)
But large checks are coming from many sources now
29
ramps up venture fund to $530M (Nov 2016)
30
When Sesame Street became a venture investor,
you know the market has moved
31
Unlike VCs, in 2016 twice as many Corporates made more
investments than cut back. They filled in the gap
Made fewer investments Made more investments
34%
18%
Q. What was your deal activity like in 2016 vs. 2015? Excluding follow ons.
Source: Upfront Ventures + CBInsights survey of CVCs (N=40), Jan 2017
32
Global warming —
Exits supported by M&A
from non-traditional buyers
3
33
acquired for $5.8B
acquired for $3.3B
acquired for $1.2B
for $3.5Bacquired
for $1.4Bacquired
New, traditionally non-tech buyers entered the
M&A market, seeking innovation and technology
…
Source: Dow Jones VentureSource
acquired for $1.4B
acquired for $1.0B
is acquiring for $3.7B
34 Source: Aberdeen Assets
Middle-market PE also entered, seeking growth
acquired
35
There is certainly a backlog of scaling companies looking for liquidity
Source: CB Insights
36
Global warming —
VCs have significant dry powder
4
LPs have finally restocked coffers with distributions
(plus many new LPs getting into the game)
37
2012 2013 2014 2015 1H'2016
8
28
32
2223
6
15
17
13
15
Contributions ($B) Distributions ($B)
Source: Cambridge Associates
Only 1H 2016
38
2009 2010 2011 2012 2013 2014 2015 2016
# of funds closed Capital raised ($B)
42
3535
21
2423
20
12
253255
268
204
190
141
153
122122
153
141
190
204
268
255 253
Source: Pitchbook/NVCA Venture Monitor 4Q’16
More LP money = more funds, more dollars = warmer winter
39
2016 saw many megafunds raised. Many back in market in 2018
$1B$1B$1.1B$1.2B$1.2B$1.2B$1.3B
$1.6B
$2B
$2.5B
$3.2B
11 firms raised $1B+
12 firms
raised $500M+
Source: DowJones Venture Source 1Q’16, 2Q’16, 3Q’16; Pitchbook data; represented aggregate sums over funds raised that invest in US tech ecosystem by each VC
40
…and 300+ more!
Source: CBInsights
Microfunds are
now a well-
established market,
with many scaling
fund sizes
41
Low interest rate environment encourages more capital to chase venture
capital yields (cited by 77% of LPs as large driver of VC industry increases)
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Q: In 2016 many investors warned “Winter is Coming” referring to a slowdown in venture markets. That slowdown happened but was very short lived. Which of the following are relevant?
Source: Upfront Ventures survey of LPs (N=78), Jan 2017; Federal Reserve
Federal Funds Rate, 2007 to 20165.25%
.25%
.75%
42
Repatriation of offshore capital may fuel more M&A and
investments
$49B
$52B
$62B
$113B
$230B
Note: Cash figures include cash, cash equivalents and liquid marketable securities held offshore
Source: Moody’s Investor Service, as of end of 2016
Top 5 Companies by Offshore Cash
Top 5 alone have
$500+ billion in
offshore cash
So where are we heading?
43
44
Foreign capital
Corporate investors
Increased LP distributions
New VC funds, bigger funds
Repatriation of capital
Likely robust M&A and IPO markets
Good prognosis for venture and

tech market funding 2018
↑
+ ↑
+ ↑
+ ↑
+ ↑
+ ↑
=
45
Unsurprisingly VCs are very bullish about the markets in 2017
Optimistic & bullish Innovations, but uncertainty Concerned
11%
28%
61%
Q. Which of the following statements best describes your personal mood heading into 2017?
Source: Upfront Ventures survey of VCs (N=114), Jan 2017
46
The current category VCs are most interested in funding is
AI / Machine Learning
85% rates it more
interesting than other areas
AI / ML
AR / VR
IoT
Blockchain
Bots-based
commerce
58% rates it the most
important area in next 5-10 years
Q. How do you feel about the following investment areas?
Source: Upfront Ventures survey of VCs (N=114), Jan 2017
47
Of the major emerging venture categories, VCs are most
skeptical about bots-based commerce and blockchain
53% thinks it’s too hyped
Bots-based
commerce
Blockchain
AR / VR
IoT
AI / ML
13% is deeply
skeptical
Q. How do you feel about the following investment areas?
Source: Upfront Ventures survey of VCs (N=114), Jan 2017
48
IC … Whoa!
Largely driven by crypto-gains / diversification / tax avoidance
234
$3.7B
ICOs in 2017
Total raised in 2017
Project Total Raised
Filecoin $257M
Tezos $232M
EOS Stage 1 $185M
Paragon $183M
Bancor $153M
Top Five ICOs of 2017
Source: https://www.coinschedule.com/stats.php
$16m Average
ICO Warnings
49
• Over-capitalization
• Lack of governance
• (Too) early liquidity
• Scams / Long-Term Trust
• Governmental regulations
50
What does this all mean?
Global is likely here to stay
Warming is the forecast for funding the next 2 years
Returns are ultimately what matter.

Over-funding creates new & different challenges.

I suspect we’ll debate over-funding in 2018-2022
I predict ICO backlash
51
Thank you!
52
Mark Suster, @msuster

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

  • 1. State of the Venture Capital Industry 1 PreMoney - Dec 5th 2017 Mark Suster, @msuster Upfront Ventures
  • 3. In 2013-2015, the VC market overheated, driving irrational behavior Valuations up 3x 3 Capital invested up 2x $6.2B to $16.7B A) Median pre-money valuation for VC-backed tech startups rose from $17M in 1Q’13 to $68M in 3Q’15, where 4Q’15 dropped to $28M, Dow Jones VentureSource Venture Capital Report 4Q’15 B) Total dollars raised by startups from 1Q’13-3Q’15 grew from $6.2B to $16.7B, where 4Q’15 dropped to $12.3B, PWC National MoneyTree Report 3Q’16 $17M to $68M
  • 4. 4 …and we ushered in the age of
 “the unicorn”* Illustration by Goran Factory for Fortune * Credit to Aileen Lee! :)
  • 5. 5 High prices, often with structure Art by Freepik VC: “You name the price, I name the terms.”
  • 6. 6 We’re starting to see some correction in the over-valued companies
  • 7. 7 Many predicted that winter was coming. What happened to winter?
  • 8. 8 Twice as many VCs did cut investment pace in 2016.
 Winter was real Made fewer investments Made more investments 16% 31% Q. What was your deal activity like in 2016 vs. 2015? Excluding follow ons. Excluded 53% of respondents that answered “about the same pace” Source: Upfront Ventures survey of VCs (N=114), Jan 2017
  • 9. 9 And 76% of VCs reported valuations declined in 2016 Valuations decreased Valuations increased 8% 76% Q. Would you say valuations in 2016 were higher, lower or remained about the same vs. 2015? Excluded 16% of respondents that answered “about the same.” Source: Upfront Ventures survey of VCs (N=114), Jan 2017
  • 10. 10 2016 was the year our industry took cost-cutting seriously and most say this work is behind them 25% 12% 63% Q. Which statement best describes the spending behavior at most of the more mature companies in which you are on the board or observe (i.e. not super early stage)? Source: Upfront Ventures survey of VCs (N=114), Jan 2017 Cut costs in 2016 Planning to cut costs in 2017 No change Just 12% cutting in 2017
  • 11. 11 Winter DID come. But it sure was mild! Blame Global Warming. Seriously.
  • 12. 12 “Global” warming—part 1: China, Japan, Asia more broadly “Global” warming — Influx of foreign capital into US startups 1
  • 13. 13 2009 2010 2011 2012 2013 2014 2015 2016 $29B $10B$9B $12B $7B $4B$4B $1B Note: Includes all FDI in all states and industries excluding real estate Source: Rhodium Group China Investment Monitor Chinese Foreign Direct Investment (FDI) has poured into the US. Tech sector has clearly benefitted
  • 14. 14 The US has FANG, China has BAT: Baidu, Alibaba & Tencent. All very aggressive in US investments.
  • 15. 15 Baidu launched two major funds in 2016 — increasing investment pace to match its peers Baidu Venture Early-stage fund AI, AR / VR, next-gen tech Baidu Capital Late-stage tech fund $50-100M checks $200M $3B
  • 16. 16 led $800M Series C in (Feb 2016) This is like 20 seed funds in just one deal!
  • 17. 17 But there are a huge number of other Chinese funds now moving into venture that you’ve never heard of with a mandate to bring innovation back to China Government-backed funds Cross-Border Funds Private Corporations
  • 19. 19 Of course it’s not just China: SoftBank / Saudi Arabia’s PIF
 / Mubadala $100B tech fund (Oct 2016) &
  • 20. 20 As oil prices have collapsed, the Arab states have been eager to diversify their assets $165M Kuwait 201520142013 2016 $3.5B Saudi Arabia
  • 21. 21 Temasek (Singapore’s soverign wealth fund) opened a US venture office & allocated more capital to US deals $350M AUM
  • 23. 23 93% of VCs have seen an increase in interest from an international LP base* Q. In the last fund you raised, did you see increased interest from international sources of capital to invest as LPs in your fund? *Excluded those that answered “Didn’t reach out, so don’t know” Source: Upfront Ventures survey of VCs (N=114), Jan 2017 93% 7% More international LPs No increase
  • 24. 24 Designed by Freepik Global warming — Rise of the corporate VC 2
  • 25. 25 Increasing number of corporates have active venture investing arms 2012 2013 2014 2015 2016 61 131 US Active CVC Investors By Quarter Source: CBInsights
  • 26. 26 Of course there are the usual suspects… Source: CBInsights 80-90 deals/year 70-90 50-70 30-50 20-30
  • 27. 27 invested $200M in (Oct 2016) Active corporates continue to write large checks…
  • 28. 28 invested $500M in (Jan 2016) But large checks are coming from many sources now
  • 29. 29 ramps up venture fund to $530M (Nov 2016)
  • 30. 30 When Sesame Street became a venture investor, you know the market has moved
  • 31. 31 Unlike VCs, in 2016 twice as many Corporates made more investments than cut back. They filled in the gap Made fewer investments Made more investments 34% 18% Q. What was your deal activity like in 2016 vs. 2015? Excluding follow ons. Source: Upfront Ventures + CBInsights survey of CVCs (N=40), Jan 2017
  • 32. 32 Global warming — Exits supported by M&A from non-traditional buyers 3
  • 33. 33 acquired for $5.8B acquired for $3.3B acquired for $1.2B for $3.5Bacquired for $1.4Bacquired New, traditionally non-tech buyers entered the M&A market, seeking innovation and technology … Source: Dow Jones VentureSource acquired for $1.4B acquired for $1.0B is acquiring for $3.7B
  • 34. 34 Source: Aberdeen Assets Middle-market PE also entered, seeking growth acquired
  • 35. 35 There is certainly a backlog of scaling companies looking for liquidity Source: CB Insights
  • 36. 36 Global warming — VCs have significant dry powder 4
  • 37. LPs have finally restocked coffers with distributions (plus many new LPs getting into the game) 37 2012 2013 2014 2015 1H'2016 8 28 32 2223 6 15 17 13 15 Contributions ($B) Distributions ($B) Source: Cambridge Associates Only 1H 2016
  • 38. 38 2009 2010 2011 2012 2013 2014 2015 2016 # of funds closed Capital raised ($B) 42 3535 21 2423 20 12 253255 268 204 190 141 153 122122 153 141 190 204 268 255 253 Source: Pitchbook/NVCA Venture Monitor 4Q’16 More LP money = more funds, more dollars = warmer winter
  • 39. 39 2016 saw many megafunds raised. Many back in market in 2018 $1B$1B$1.1B$1.2B$1.2B$1.2B$1.3B $1.6B $2B $2.5B $3.2B 11 firms raised $1B+ 12 firms raised $500M+ Source: DowJones Venture Source 1Q’16, 2Q’16, 3Q’16; Pitchbook data; represented aggregate sums over funds raised that invest in US tech ecosystem by each VC
  • 40. 40 …and 300+ more! Source: CBInsights Microfunds are now a well- established market, with many scaling fund sizes
  • 41. 41 Low interest rate environment encourages more capital to chase venture capital yields (cited by 77% of LPs as large driver of VC industry increases) 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Q: In 2016 many investors warned “Winter is Coming” referring to a slowdown in venture markets. That slowdown happened but was very short lived. Which of the following are relevant? Source: Upfront Ventures survey of LPs (N=78), Jan 2017; Federal Reserve Federal Funds Rate, 2007 to 20165.25% .25% .75%
  • 42. 42 Repatriation of offshore capital may fuel more M&A and investments $49B $52B $62B $113B $230B Note: Cash figures include cash, cash equivalents and liquid marketable securities held offshore Source: Moody’s Investor Service, as of end of 2016 Top 5 Companies by Offshore Cash Top 5 alone have $500+ billion in offshore cash
  • 43. So where are we heading? 43
  • 44. 44 Foreign capital Corporate investors Increased LP distributions New VC funds, bigger funds Repatriation of capital Likely robust M&A and IPO markets Good prognosis for venture and
 tech market funding 2018 ↑ + ↑ + ↑ + ↑ + ↑ + ↑ =
  • 45. 45 Unsurprisingly VCs are very bullish about the markets in 2017 Optimistic & bullish Innovations, but uncertainty Concerned 11% 28% 61% Q. Which of the following statements best describes your personal mood heading into 2017? Source: Upfront Ventures survey of VCs (N=114), Jan 2017
  • 46. 46 The current category VCs are most interested in funding is AI / Machine Learning 85% rates it more interesting than other areas AI / ML AR / VR IoT Blockchain Bots-based commerce 58% rates it the most important area in next 5-10 years Q. How do you feel about the following investment areas? Source: Upfront Ventures survey of VCs (N=114), Jan 2017
  • 47. 47 Of the major emerging venture categories, VCs are most skeptical about bots-based commerce and blockchain 53% thinks it’s too hyped Bots-based commerce Blockchain AR / VR IoT AI / ML 13% is deeply skeptical Q. How do you feel about the following investment areas? Source: Upfront Ventures survey of VCs (N=114), Jan 2017
  • 48. 48 IC … Whoa! Largely driven by crypto-gains / diversification / tax avoidance 234 $3.7B ICOs in 2017 Total raised in 2017 Project Total Raised Filecoin $257M Tezos $232M EOS Stage 1 $185M Paragon $183M Bancor $153M Top Five ICOs of 2017 Source: https://www.coinschedule.com/stats.php $16m Average
  • 49. ICO Warnings 49 • Over-capitalization • Lack of governance • (Too) early liquidity • Scams / Long-Term Trust • Governmental regulations
  • 50. 50 What does this all mean?
  • 51. Global is likely here to stay Warming is the forecast for funding the next 2 years Returns are ultimately what matter.
 Over-funding creates new & different challenges.
 I suspect we’ll debate over-funding in 2018-2022 I predict ICO backlash 51