Startup Outlook Report 2013


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The Silicon Valley Bank Startup Outlook report is based on an annual survey of private startup companies across the U.S. in the software, life science, hardware and cleantech sectors. This year, we surveyed startups in the UK for the first time too, and those findings can be found at The reports found on this page break down the survey results and feature the issues that are of most importance to startup companies, such as hiring high skilled workers and dealing with the medical device tax. As more reports are completed you will find the updates here, so please mark this page and visit us again in the near future.

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Startup Outlook Report 2013

  1. 1. 20Public PolicyIssuesKey Findings4UnderstandingStartups10Hiring Talent1612BusinessEnvironment32U.S. VersusU.K. StartupsStartup Outlook2013 Report
  2. 2. Executive SummaryKey Findings2013 Survey RespondentsUnderstanding StartupsBusiness EnvironmentHiring TalentThe Impact of Public Policies on StartupsIntellectual Property ProtectionTax ReformU.S. ManufacturingMedical Device TaxU.S. Versus U.K. StartupsPart 1: OverviewPart 2: Detailed Findings147101216202024252832Startup Outlook Report 2013
  3. 3. 1Part 1: Overview“The Federal Government needs to be as flexible andlean as a small startup. Learn to pivot and learn to endorsenew technology that will stay here in the US.”President/CEO, Healthcare StartupExecutive SummaryWhen 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. Disruptivetransformation is spreading into areas ripe for change: mobility, financial servicesand education, to name just three. Nine in 10 startups are hiring. Most entrepreneurscontinue to believe we’re on an upward trajectory, that 2012 was better than 2011 andthat 2013 will be better than 2012. Innovation is at the top of corporate America’sagenda, as evidenced by the broad, deep array of “traditional” corporations that haveestablished venture investing arms or innovation centers. Technology remains themost trusted sector on the planet, according to the 2013 Edelman Trust Barometer.Startup Outlook Report 2013
  4. 4. “Excess federal regulation and fiscal uncertainty has achilling effect on the business environment.”CFO, Medical Device Startup“Help find more ways to allow creative minds to explore andfinance new ideas beyond the current VC networks.”President/ CEO, Hardware Startup“Please find ways to financially support innovation within smallercompanies and startups. We are the engine of the economy and needa bit of help to get going and keep going.”COO, Software Startup“We are bullish on our company’s growth, however feel the governmentpolicies will not help us at all. Further regulations and tax increases willstifle all business, and hurt our customers, who may look for ways toeliminate or reduce our product content.”CFO, Cleantech Startup2Startup Outlook Report 2013
  5. 5. Executive Summary (con’t.)Yet for all of our optimism about the technology sector,this year’s Startup Outlook again shows that we’renot doing what we need to do to help this importantpart of our economy thrive. Nine in 10 startups planto hire new employees, but an equal number say it ischallenging to find workers with the skills they need.Sixty percent of software executives think businessconditions in 2012 were better than 2011, but the numberwho think business conditions were worse doubledyear-over-year, from six percent to 13 percent. Andthe critically important healthcare sector remainschallenged, with a majority of healthcare executivesbelieving business conditions in 2012 were the same orworse as 2011 and one in 10 seeing them as much worse.Startups don’t want or need a lot of help. Entrepreneursare remarkably versatile and solutions-oriented. Butthey do need a few things from government — likean education system that teaches students aboutscience, technology, engineering and math (theso-called “STEM” skills); an immigration system thatwelcomes people who bring talent and energy toour economy; an intellectual property system thatrewards invention, not litigation; and a tax system thatprovides certainty, predictability, and an incentive toinvest in real companies, doing real things. And theyneed government to avoid misguided policies — like thenew 2.3 percent tax on the topline revenues of medicaldevice companies, including device startups that aren’tyet profitable.We publish the Startup Outlook survey annually to helpgive startups a voice. We hope that if people see firsthandthe opportunities and challenges entrepreneurs face, theywill recognize the immense potential startups offer to ourcountry. We hope they’ll also see how short-sighted orseemingly benign policies can hurt the companies we needto drive our economy in the coming decade.In the end, we think good business decisions and goodpublic policy both come down to a few things. We needto base decisions on facts. We need to embrace the rightkinds of risks. We need to invest in the underpinningsof a strong economy, such as infrastructure and basicresearch and development. And we need to focus oncreating a better future, not entrenching the status quo.We hope this year’s Startup Outlook promotes this kindof forward-looking, fact-based discussion and providesnew insights to policymakers and business leaders. Welook forward to participating in those discussions anddoing what we can to help innovative companies thrive.
  6. 6. Key FindingsUnderstanding Startups: A Few Facts▶▶ Most startups don’t earn a profit. That’s true evenwhen they earn significant topline revenues,and even in capital-efficient sectors (like software)where the cost to start a company have declinedmeaningfully in recent years.▶▶ Twenty-two percent of startups have one or morewomen on their founding team.▶▶ Forty-six percent of startups have one or moreforeign born persons on their founding team.Tech Economy Continues to Perform as theEconomy Stabilizes▶▶ Startups have performed well in 2012 with 58percent of executives saying that they either met oror exceeded revenue targets.▶▶ This isn’t dampening entrepreneurs’ enthusiasm.Executives are as likely as in previous years to saythat current business conditions compared to lastyear are “better” and that conditions in the comingyear will continue to improve.▶▶ Software executives are more likely than otherexecutives to say business conditions are betterthan a year ago. But that optimism isn’t universallyshared, even within the software sector: year overyear, the number of software executives who saybusiness conditions are somewhat worse morethan 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 … ButCan They Find the People They Need?▶▶ Respondents are even more likely than in pastyears to say they’re hiring, with nearly nine in 10executives 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 focusedon workers with STEM skills.▶▶ But finding the right workers will be a realchallenge. Nine in 10 executives say it is hard tofind workers with the skills needed to grow theirbusinesses. Software and hardware executives facethe greatest challenges.The Impact of Public Policies on StartupsIn this year’s survey, we dig deeper into a handfulof issues that are front and center on the policylandscape: intellectual property protection, federal taxand fiscal policies, U.S. manufacturing, and the new2.3 percent excise tax on medical device companies’topline revenues.Intellectual Property Protection▶▶ About half of the surveyed executives seeIP as a “key strategic asset,” but litigationis a real issue for startups. Nearly one infour respondents faces lawsuits. Healthcarestartups are hardest hit, but softwarecompanies are the most likely to be suedby non-practicing entities, patent assertionentities, or “patent trolls.”4Startup Outlook Report 2013
  7. 7. 5▶▶ Overall, about half of all executives say theythink IP is an important asset and worth thecost, but views vary dramatically by sector.Two in three hardware, healthcare andcleantech executives share this view, whilesoftware executives are much more likelyto focus on non-legal means to create theircompetitive advantage.Tax Reform▶▶ When asked which federal tax change wouldbest promote their company’s near-termsuccess, startups focus first on using the taxcode to provide incentives to invest in startups(23 percent agree with this).▶▶ Helping startups preserve scarce dollarsto invest in their growth (remember, moststartups aren’t profitable) comes in second,with one in five (19 percent) believing a taxcredit to offset employment and other taxeswould be most beneficial.▶▶ Fifteen percent of executives ask Congress to“just get it done so we have certainty.”▶▶ Healthcare, hardware and cleantechexecutives highlight the importance ofR&D, through R&D tax credits and directgovernment investments in R&D.U.S. Manufacturing▶▶ Just over one in three startups (35 percent)either currently manufacture or plan to startmanufacturing in the next 18 months. Anda great deal of this activity will occur in theUnited States. Eighty percent of respondentssay they will do at least some manufacturingin the U.S. When deciding where to locatemanufacturing facilities, the number onefactor for startups is the availability of workerswith the necessary skills.▶▶ Manufacturing has the potential to createmiddle class jobs. Approximately two in threeof these jobs require some combination of highschool education, experience, and training,but not a college diploma.Medical Device Tax▶▶ Eight in 10 executives at medical devicestartups (82 percent) believe the 2.3 percentrevenue tax that went into effect at thebeginning of 2013 will affect their company’slong-term growth.▶▶ Device startups — the vast majority of whichare not yet profitable — have a variety of waysthey plan to cope with the tax. One in threewill try to pass most or all of the increasedcost to customers. Nearly as many (28percent) will focus on expanding overseasinstead of in the U.S., while others will cuthiring, R&D, and/or growth.Startup Outlook Report 2013
  8. 8. U.S. Versus U.K. Startups:Similarities and Differences▶▶ For the first time, we included U.K. entrepreneursin this year’s Startup Outlook survey.▶▶ Like their U.S. counterparts, U.K. entrepreneursare performing strongly and are optimisticabout future conditions and growth. In fact, U.K.entrepreneurs express greater confidence thantheir U.S. peers.▶▶ Two-thirds of U.K. startups reported revenues in2012 – roughly the same as in the U.S. with 64percent of revenue-generating startups.▶▶ However, U.K. revenue generating startups weremuch more likely to be profitable in 2012 — 46percent, compared to 27 percent of U.S. startups.▶▶ Like their U.S. counterparts, nine in 10 U.K.startups are hiring and are primarily lookingfor workers with STEM (Science, Technology,Engineering, and Math) skills.▶▶ As in the United States, finding the right workerswill be difficult.▶▶ Directionally, U.K. executives’ views on intellectualproperty mirror their U.S. peers, although theyare less likely to classify IP as a “key strategicasset,” and more likely to describe it as primarily adefensive tool. U.K. entrepreneurs are less likely toface IP disputes and more likely to focus on non-legal means rather than on IP rights to create acompetitive advantage.▶▶ Nine in 10 (90 percent) of entrepreneurs in thisstudy say the U.K. fundraising environment ischallenging. Over half say government initiativesthat would help the startup sector are greateraccess to government grants and funds designedspecifically for startups and tax reform.▶▶ Twenty-six percent of startups in the U.K. surveyhave women on founding team, similar to the22 percent for startups in the U.S. survey.▶▶ Thirty-seven percent of startups in the U.K.survey have foreign born members on foundingteam, compared to 46 percent for startups in theU.S. survey.
  9. 9. 72013 Survey RespondentsStartup Outlook 2013 is Silicon Valley Bank’s fourthannual survey of the views of executives at startupcompanies across the United States. We’ve defined“startups” as high-growth technology and healthcarecompanies with less than $100 million in revenuesand fewer than 500 employees.We retained an independent, third-party market researchfirm, Koski Research, to conduct an online survey on ourbehalf as in prior years The survey was conducted fromDecember 4 through December 20, 2012.We received responses from 758 executives of U.S.based, high growth technology and healthcarestartups — approximately three times as manyresponses as in the 2012 survey. Eighty-sevenpercent were C-level executives, with 81 percenteither CEOs or CFOs. The responses by sector wereas follows:▶▶ Software: 433 responses▶▶ Healthcare: 220 responses▶▶ Hardware: 50 responses▶▶ Cleantech: 63 responseAs in previous years, we received the largest number ofresponses from software company executives. In orderto provide more meaningful insights into this segment,in this year’s survey we distinguished between twotypes of software companies: consumer internetcompanies and enterprise software companies. Ofthe 433 software executives who responded to thesurvey, 158 (36 percent) were from consumer internetcompanies and 274 (64 percent) were from enterprisesoftware companies. Due to the small sample size forhardware and cleantech companies, survey responsesfrom these executives are directional and are notcompared statistically to other groups.Survey Respondents by Industry SegmentSoftware Life Science Hardware Cleantech201020112012201344%32%14%6%55%22%17%7%49%27%12%7%57%29%7%8%“WecannotproducemorethanChinabutwecaninnovatemorethantherestoftheworld.”President/CEO, Software StartupStartup Outlook Report 2013
  10. 10. 2013 Survey Respondents (con’t.)In terms of geography, we received responses fromexecutives in 37 states across the country plus theDistrict of Columbia. Northern California remains themost active region for startups and accounted for 39percent of all responses, followed by Massachusetts with11 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 fortwo or more percent.As in prior years, our focus is on high growth startups,measured both in terms of revenues and number ofemployees. We saw a notable increase this year in thenumber of respondents with fewer than 10 employees.This was driven by consumer internet startups, 56percent of which had fewer than 10 employees.On the revenue front, we saw an increase in the numberof companies that are not yet earning revenues —from 29 percent in 2012 to 36 percent in 2013. Theyear-over-year increase in the number of pre-revenuecompanies was driven by software companies. Sixteenpercent of software respondents in the 2012 surveysaid they were not yet earning revenues. That numberrose to 28 percent in the 2013 survey. By sector, wesaw the largest number of pre-revenue companiesin the healthcare and cleantech sectors (55 and 42percent, respectively).Percentage of Respondents by Region48%9%7%20%3%4%4%2%1%CaliforniaSouthwestSoutheastNorthwestNortheastMid AtlanticMidwestMountain WestOutside of U.S.750 startup executives from across the US responded tothe Silicon Valley Bank surveyStates who responded States who did not respond8Startup Outlook Report 2013
  11. 11. 9Annual Trailing Revenues(By Industry)ConsumerInternetEnterpriseSoftwareHealthcareHardwareCleantech0%10%20%30%40%50%60%70%80%90%100%$50M or more$25M to less than $50M$10M to less than $25M$5M to less than $10M$1M to less than $5MLess than $1MPre-revenue34%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 Revenues25%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%201120122013Pre-revenueLessthan$1M$1Mto<$5M$5Mto<$10M$10Mto<$25M$25Mto<$50M$50MormoreNumber of Employees(By Industry)0%10%20%30%40%50%60%70%80%90%100%ConsumerInternetEnterpriseSoftwareHealthcare Hardware Cleantech250+100-24950-9925-4910-24Fewer than 1056%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 Employees20102011201220130%5%10%15%20%25%30%35%40%45%Fewerthan 1010 to 24 25 to 49 50 to 99 100 to 249 250 ormore34%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 themarket in small bets rather than trying to pick a few winners. The marketwill choose the winners better than the government ever could.”President/CEO, Cleantech StartupStartup Outlook Report 2013
  12. 12. Understanding StartupsHigh-growth startups have an outsized long-termimpact on the U.S. economy, generating revenues equalto an estimated 21 percent of U.S. GDP and creatingroughly 11 percent of all U.S. private sector jobs.(Venture Impact: The Economic Importance of VentureCapital-Backed Companies to the U.S. Economy, 6th Ed.(2011)).In order to reach this size and scale, however, thesecompanies need to make significant investments foran extended period of time. To better understand therelationship between size and profitability, we askedrevenue-generating respondents in this year’s surveywhether they expected to be profitable in 2012. As thefollowing charts illustrate, whether one looks by sectoror 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 declinedmeaningfully in recent years.This year we added two survey questions to determinewho is creating startups. The data indicate that womenremain under-represented among startup founders(with only about one in four startups having one ormore women on their founding team), while peopleborn outside the United States are an important overallpart of the startup ecosystem (with about half of allstartups having one or more foreign-born person ontheir founding team).Part 2: Detailed Findings“Immediate reforms to visa policy for skilled workers are necessary to ward off abrain drain AND to help stimulate the economy through …startups that are driven by … tax-paying people that may havebeen born elsewhere in the world.”President/CEO, Cleantech Startup 10Startup Outlook Report 2013
  13. 13. Founding Team Composition(By Place of Birth per Industry)ConsumerInternetEnterpriseSoftwareHardwareCleantechHealthcare0%10%20%30%40%50%60%70%80%90%100%Both Represented onFounding TeamOnly Persons BornOutside U.S. on FoundingTeamOnly Persons Born in U.S.on Founding Team60%19%21%28% 30% 31%41%21% 14%23% 10%51%56%46%49%Founding Team Composition(By Gender per Industry)ConsumerInternetEnterpriseSoftwareHardwareCleantechHealthcare0%10%20%30%40%50%60%70%80%90%100%Both Men and Women onFounding TeamOnly Women on FoundingTeamOnly Men on FoundingTeam75%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 - $99.9MRevenuesNoYesStartups’ Profitablity(By Industry)28% 32%17%29%17%72% 69%83%71%83%0%10%20%30%40%50%60%70%80%90%100%ConsumerInternetEnterpriseSoftwareHealthcare Hardware CleantechNoYes
  14. 14. Business Environment: Tech EconomyContinues To Perform as theEconomy StabilizesHighlights:▶▶ Nearly six in 10 companies (58 percent) met orexceeded revenue targets, down somewhat fromthe past two years but meaningfully better than inthe depth of the recession.▶▶ About as many executives expect to miss2012 targets as hit them (41 and 43 percent,respectively).▶▶ Executives in this year’s survey aresubstantially less likely to predict they’dexceed targeted revenues than in previoussurveys.▶▶ Companies with revenues over $25 million arefar more likely to outperform their targets, andsomewhat less likely to underperform theirtargets.▶▶ Hardware companies are the most likely tomiss targets.▶▶ Startup executives remain optimistic, believing2012 was better than 2011, and 2013 will be betterthan 2012.▶▶ Software executives are more likely thanother executives to say business conditionsare better than a year ago. But that optimismisn’t universally shared: year-over-year,the number of software executives who saybusiness conditions are somewhat worse morethan doubled.▶▶ Healthcare executives are the most downbeat— less likely to say business conditions arebetter, and more likely to say they are worse.▶▶ Looking toward 2013, hardware and softwarecompanies are the most upbeat, andhealthcare companies are the most downbeat.By and large, startups continued to meet theirrevenue targets in 2012. Interestingly, executives weresubstantially less likely to say their company wouldexceed their target (only 15 percent, down from 23percent a year earlier). Hardware companies were themost likely to miss targets; healthcare companies werethe most likely to meet or beat targets. Companieswith revenues over $25 million were far more likely tooutperform their targets, and somewhat less likely tounderperform their targets.12Startup Outlook Report 2013
  15. 15. 13Performance 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 onTargetBelow TargetUnder 10Employees10 - 49Employees50 - 499EmployeesPerformance Against Revenue Targets(By Company Size in Revenue)Pre-Revenue<$5MRevenues$5-$24.9MRevenues$25-$99.9MRevenues0%10%20%30%40%50%60%70%80%90%100%Above TargetRevenue About onTargetBelow Target28%44%53%33%65% 39%34%33%7%16% 13%34%Performance Against Revenue Targets(By Industry)ConsumerInternetEnterpriseSoftwareHealthcareHardwareCleantech0%10%20%30%40%50%60%70%80%90%100%Above TargetRevenue about onTargetBelow 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 onTargetBelow Targets2010 2011 2012 2013“My company is on target to grow at a 36x rate with all the capitalinvested 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 StartupStartup Outlook Report 2013
  16. 16. Highlights (con’t):Roughly six in 10 executives continue to believethat conditions in 2012 are better than a year earlier,though we saw an uptick in the number who believethings are somewhat worse than they’d been.Interestingly, software executives are more likelythan executives in other sectors to say that businessconditions are better than a year ago (65 percent forsoftware versus 60 percent overall). But the numberBusiness 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%BetterSameWorseUnder 10Employees10 - 49Employees50 - 499EmployeesBusiness Conditions Compared to Last Year(By Company Size in Revenue)Pre-Revenue < $5MRevenues$5 - $24.9MRevenues$25 - $99.9MRevenues0%10%20%30%40%50%60%70%80%90%100%17% 16% 18%10%31%16%22% 33%52%68%59% 58%BetterSameWorseBusiness Conditions Compared to Last Year(By Industry)ConsumerInternetEnterpriseSoftwareHealthcareHardwareCleantech0%10%20%30%40%50%60%70%80%90%100%BetterSameWorse13% 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 2013Much BetterSomewhat BetterSameSomewhat WorseMuch Worse23%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 conditionsare somewhat worse more than doubled, from fivepercent to 12 percent. Healthcare executives are themost downbeat, with only 47 percent saying businessconditions are better, 16 percent saying they aresomewhat worse, and nine percent saying they aremuch worse.14Startup Outlook Report 2013
  17. 17. 15Outlook 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%BetterSameWorseUnder 10Employees10 - 49Employees50 - 499EmployeesOutlook on Business Conditions in 2013(By Company Size in Revenue)10% 8% 7% 6%21%14% 17% 24%Pre-Revenue < $5MRevenues$5 - $24.9MRevenues$25 - $99.9MRevenues0%10%20%30%40%50%60%70%80%90%100%BetterSameWorse69%78% 76%71%Outlook on Business Conditions in 2013(By Industry)ConsumerInternetEnterpriseSoftwareHealthcareHardwareCleantech0%10%20%30%40%50%60%70%80%90%100%BetterSameWorse6% 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%BetterSameWorse2010 2011 20132012By stage, smaller, pre-revenue companies aremeaningfully less likely than their peers who’vestarted 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 asthose in the previous two surveys to say businessconditions for their companies will be better in thecoming year. Hardware and software companies arethe 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 betterand 15 percent predicting they will get worse. And, aswas true when comparing 2012 to 2011, pre-revenuecompanies are more likely than companies earningup to $5M to say conditions going forward will be thesame, while revenue-generating companies (earningup to $5M) are more likely to believe conditions willbe much better in the coming year.Startup Outlook Report 2013
  18. 18. Startups Remain a Job-CreationEngine … But Can They Find thePeople They Need?Highlights:▶▶ Nearly nine in 10 startups (87 percent) plan to hirenew employees in 2013, up from 83 percent in lastyear’s survey.▶▶ Software, hardware, and cleantech executivesare most likely to hire.▶▶ While healthcare companies’ expectationsare less robust than their peers, a substantialnumber of healthcare executives will behiring.▶▶ Eighty-two percent of executives we surveyedare looking for workers with STEM (Science,Technology, Engineering, and Math) skills.▶▶ Four in 10 executives (40 percent) say it isthe most critical job skill. Only one in five (17percent) say management, marketing, andother non-STEM skills are most critical.▶▶ Hardware executives are the most focused onworkers with STEM skills.▶▶ Finding the right workers will be difficult.▶▶ Nine in 10 executives say it is challenging tofind workers with the skills needed to growtheir businesses.▶▶ Software and hardware executives face thegreatest challenges.▶▶ Finding people with the right skills tops the list ofchallenges, followed by competition for workers.The cost of salaries and benefits is also a factor,particularly for smaller companies with only ahandful 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 dismaljobs landscape. But this year sets a new record forhiring expectations.Nine in 10 (87 percent) of the respondents to thisyear’s survey plan to hire new employees in 2013, upslightly from last year’s survey (83 percent). Software,hardware, and cleantech executives are most likelyto hire, at 91 percent, 90 percent, and 90 percent,respectively. While healthcare companies are lesslikely to hire than their peers, a substantial number —78 percent — plan to hire.We did not see meaningful differences in hiringexpectations by company size, although directionallythe larger companies (by employees and revenues)seemed to have somewhat higher expectations forhiring — a good sign for the overall amount of jobcreation in the high growth economy.Yet while the jobs are there, nine in 10 (87 percent)of the surveyed executives said that it is challengingto find workers with the skills they need. This isparticularly true for software and hardware executives,and for the somewhat more mature companies.16Startup Outlook Report 2013
  19. 19. 17Across sectors, executives are looking for workers withSTEM (Science, Technology, Engineering, and Math)skills. Four in 10 (40 percent) say it is the most criticaljob skill, versus only one in five (17 percent) who saymanagement, marketing, and other non-STEM skillsare most critical. Four in 10, or 42 percent, reportboth skill sets will be critical in 2013. STEM skills areparticularly critical to very early-stage companies andto hardware companies.Plans to Hire in 2013(by Industry)Likely to HireNeither Likely norUnlikelyUnlikely to HireConsumerInternetEnterpriseSoftwareHealthcareHardwareCleantech0%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 norUnlikelyUnlikely to Hire73%84% 83% 88%2010 2011 2012 2013“Provide 21st century computational thinking skills to childrenin K12 space to enhance their creativity to prepare them forScience, Technology, Engineering and Math jobs.”President/CEO, Software Startup“Educate our workforce and expand the visa program in themeantime to create a supply of qualified workers.”President/CEO, Software StartupStartup Outlook Report 2013
  20. 20. Highlights (con’t.):What makes it challenging for startups to hire andretain workers with the skills they need?Finding people with the right skills tops the list,particularly for enterprise software, healthcare andcleantech companies. (Interestingly, however, this is aless important issue in the Northern California market.)Competition for workers comes in second. We askedabout two particular types of competition for workers:competing against larger companies — a distinctproblem for hardware startups — and competition moreHiringCompanies’ Most Critical Skills in 2013(By Industry) CleantechHardwareHealthcareConsumerInternetEnterpriseSoftware38% 34%45%67%39%17%15%23%4%18%45% 51%32% 29%43%0%20%40%60%80%100%120%Both EquallyCriticalManagement,Marketing,Sales, Operationsand OtherNon-STEM SkillsSTEM SkillsHow Challenging is it to Find Workers with the SkillsYou Need? (By Revenues)Not VeryChallengingSomewhatChallengingExtremelyChallengingPre-Revenue < $5M inRevenues$5 - $24.9Min Revenues$25 - $99.9Min Revenues30% 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 SkillsYou Need? (By Number of Employees)Not VeryChallengingSome whatChallengingExtremelyChallenging29% 31% 29%53% 57% 63%17% 12% 8%0%20%40%60%80%100%120%Under 10Employees10 to 49Employees50 to 499EmployeesHow Challenging is it to Find Workers with the SkillsYou Need? (By Industry)EnterpriseSoftwareConsumerInternetHealthcareHardwareCleantechNot VeryChallengingSomewhatChallengingExtremelyChallenging35% 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 internetcompanies and in Northern California. The cost ofsalaries and benefits is also a factor, particularly forsmaller companies with only a handful of employees.The survey results also demonstrate that startups arefocused on access to workers with the skills they need— not immigration — as the true issue. Immigrationreform is a necessary piece of solving the talentproblem, particularly in the near term, but technologystartups appear to see the issue as a workforce issue,not an immigration issue.18Startup Outlook Report 2013
  21. 21. 19Most Challenging Aspect of Finding and RetainingTalent (By Number of Employees)3%3%2%0% 10% 20% 30% 40% 50%OtherImmigration RegulationsToo Hard to Competewith Larger CompaniesToo Much CompetitionGenerallyCost of Salaries andBenefitsFinding People with theRight Skills31%46%44%32%21%18%16%14%22%8%11%12%7%6%5%Under 10 Employees10 to 49 Employees50 to 499 EmployeesMost Challenging Aspect of Finding and RetainingTalent (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 InternetEnterprise SoftwareHealthcareHardwareCleantech OtherImmigration RegulationsToo Hard to Competewith Larger CompaniesToo Much CompetitionGenerallyCost of Salaries andBenefitsFinding People with theRight SkillsHiring Companies’ Most Critical Skills in 2013(By Company Size in Revenues)0%20%40%60%80%100%120%Both EquallyCriticalManagement,Marketing,Sales, Operationsand OtherNon-STEM SkillsSTEM SkillsPre-Revenue < $5M inRevenues$25 - $99.9Min Revenues$5 - $24.9Min Revenues52%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%Both EquallyCriticalManagement,Marketing,Sales, Operationsand OtherNon-STEM SkillsSTEM Skills48%38%30%12%18%25%40% 43% 45%Under 10Employees10 to 49Employees50 to 499EmployeesMost Challenging Aspect of Finding and RetainingTalent (By Region)60%OtherImmigration RegulationsToo Hard to Competewith Larger CompaniesToo Much CompetitionGenerallyCost of Salaries andBenefitsFinding People with theRight Skills34%49%42%26%25%24%21%7%16%8%4%12%8%7%4%3%7%2%0% 20% 40%Northern CABoston MAOther RegionsMost Challenging Aspect of Finding and RetainingTalent (By Revenues)0% 10% 20% 30% 40% 50%OtherImmigration RegulationsToo Hard to Competewith Larger CompaniesToo Much CompetitionGenerallyCost of Salaries andBenefitsFinding People with theRight 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$25 - $99.9M inRevenuesStartup Outlook Report 2013
  22. 22. The Impact of Public Policieson StartupsIn past surveys, we’ve asked startups how governmentpolicies affect their ability to succeed. This year, wedecided to shift gears and dig deeper into a handfulof policy issues. We asked about two of the issuesthat have consistently topped startups’ lists inprior surveys: intellectual property protection andfederal tax and fiscal policies. In addition, we triedto understand better what drives startups’ decisionsabout where to locate manufacturing facilities. Finally,we asked a series of questions designed to get a clearerpicture for how medical device companies are copingwith a new, 2.3 percent excise tax on topline revenues,which went into effect on January 1, 2013.Intellectual Property ProtectionHighlights:▶▶ Close to half of the respondents (46 percent) say IPis a “key strategic asset.” Hardware, healthcare andcleantech executives are much more likely to takethis view than software executives, who are muchmore likely to see IP primarily as a defensive tool.▶▶ One in four startups — even very early-stagestartups — faces IP lawsuits. Healthcare startups arethe hardest hit, although software startups appearmore vulnerable to suits by non-practicing entities,patent assertion entities, and “patent trolls.” Theprevalence of suits rises with company size.▶▶ Overall, slightly over half (54 percent) ofexecutives feel IP is an important asset andworth the cost. But views differ significantly by“Create general conditions for a successful economy [by enablingimmigration for skilled knowledge workers, simplifying and minimizing thetax burden, and investing in education and infrastructure] and then letentrepreneurs and the market do the rest.”President/CEO, Software Startup
  23. 23. 21sector. Roughly seven in 10 healthcare, cleantechand hardware executives take this view, whileonly about four in 10 software executives do. Incontrast, six in 10 software executives say theyfocus on non-legal means rather than on IP rightsto create a competitive advantage.Intellectual property historically has topped startups’list of policy priorities. In the 2012 Startup Outlooksurvey, 62 percent said IP protection was a priority, andonly 13 percent said it was not.Yet how best to use a system of intellectual propertyprotections to promote innovation is a hotly debatedissue, even within the technology community. Differentindustries — and even different executives within thesame sector — can disagree sharply on a host of legaland policy issues.As a result, rather than asking again whether IP isimportant or asking which policies people think makethe most sense, we asked a series of questions about therole IP plays in startups’ businesses, how often they faceIP disputes, the nature of those disputes, and how wellthe current system is meeting their business needs.Across the board, startups view intellectual propertyboth as a strategic asset and a defensive tool. The mix,however, varies by industry, with software executivesmore likely to see it as a defensive tool than theircolleagues in the healthcare, hardware and cleantechsectors.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 10respondents reporting that they face lawsuits.Given the cost of litigating an IP lawsuit, this is animportant and concerning finding. Startups have afinite amount of cash, and we should be concerned ifIP lawsuits are siphoning that cash away from moreproductive uses. In this vein, it is interesting to seethe patterns in the types of lawsuits small companiesare facing. Software executives say they are nearlyfour times as likely to be sued by a non-practicingentity, a patent assertion entity, or a “patent troll” asin a legitimate dispute with a competitor. In contrast,healthcare companies are more likely to describetheir suits as primarily as legitimate disputes withcompetitors.Company size, not surprisingly, affects the pattern. Thenumber of executives who said that they face disputesand that most of their disputes are with a non-practicingentity, a patent assertion entity, or a “patent troll” risesmeasurably as company size increases.The 2013 survey also points to a potentially interestingdivergence by region. Northern California (primarilySilicon Valley) companies are much more likely to reportthat they face disputes, and, of those, the majority sayView 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 InternetEnterprise SoftwareHealthcareHardwareCleantechNot Involved in IPCombination of BothPrimarily a Defensive ToolKey Strategic AssetStartup Outlook Report 2013
  24. 24. Highlights (con’t.):these disputes are primarily suits by a non-practicingentity, a patent assertion entity, or a “patent troll.” Whileother regions largely echo this experience, Boston isa notable outlier, with executives less likely to reportIP lawsuits and no executives reporting suits by anon-practicing entity, a patent assertion entity, or a“patent troll.” This may be a product of the relativelysmall sample size for Boston (55 respondents for thisquestion), but given the magnitude of the difference wefelt it merited including in this report.Given the issues with relying on the legal system toprotect IP rights, we asked executives about theirviews on how they think about IP within their broaderbusiness objectives. (Respondents were able to selectmultiple answers, so the totals exceed 100 percent.)Only about half (54 percent) say they think IP is animportant asset and is worth the cost. Underlying thisstatistic, however, are two sharply different views. Justover one in three software executives say IP is worththe cost, while two in three healthcare, hardware andcleantech executives say IP is worth the cost.Software executives are much more likely to say theyrely on non-legal means (such as moving faster thanNature of IP Disputes(By Region)0%20%40%60%80%100%Most IP Disputes areLegitimate Disputes withCompetitorsMost IP Disputes Broughtby NPEs, PAEs, or TrollsRarely or Never Face IPDisputes73%85%78%17%0% 15%10% 15%7%Northern CA Boston MA Other RegionsNature of IP Disputes(By Revenues)0%20%40%60%80%100%Most IP Disputes areLegitimate Disputes withCompetitorsMost IP Disputes Broughtby NPEs, PAEs, or TrollsRarely or Never Face IPDisputes$25-$99.9MinRevenues$5-$24.9MinRevenuess<$5MinRevenuesPre-Revenue77% 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%Most IP Disputes areLegitimate Disputes withCompetitorsMost IP Disputes Broughtby NPEs, PAEs, or TrollsRarely or Never Face IPDisputes80% 77%71%11% 12% 22%9% 10% 7%Under 10Employees10 to 49Employees50 to 499EmployeesNature of IP Disputes(By Industry)ConsumerInternetHealthcareHardwareCleantechEnterpriseSoftware81% 81%70% 74% 76%16% 15%12%15% 10%3% 4%18%10% 14%0%20%40%60%80%100%Most IP Disputes areLegitimate Disputes withCompetitorsMost IP Disputes Broughtby NPEs, PAEs, or TrollsRarely or Never Face IPDisputes22Startup Outlook Report 2013
  25. 25. 23their competitors), rather than on IP rights, to createtheir competitive advantage. Smaller startups alsoappear more concerned about the cost of IP — and theneed to divert resources from other more productiveuses — than their larger counterparts. Largercompanies, in contrast, appear to face a meaningfulBusiness Impact of IP(By Region)IP Isnt Important to OurCompanyThe Cost of IP ProtectionDiverts Resources fromMore Productive UsesWe Sometimes Settle Suits orLicense IP Because LitigationIs Too ExpensiveWe Sometimes SettleSuits or License IPBecause Litigation Is TooExpensiveIP Isnt Important to OurCompany0% 20% 40% 60% 80%50%63%55%49%33%45%36%24%30%8%3%8%1%2%2%Northern CABoston MAOther RegionsBusiness Impact of IP(By Revenues)IP Isnt Important to OurCompanyThe Cost of IP ProtectionDiverts Resources fromMore Productive UsesWe Sometimes Settle Suits orLicense IP Because LitigationIs Too ExpensiveWe Sometimes SettleSuits or License IPBecause Litigation Is TooExpensiveIP Isnt Important to OurCompany60%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$5 - $24.9M inRevenues$25 - $99.9M inRevenuesBusiness Impact of IP(By Number of Employees)IP Isnt Important to OurCompanyThe Cost of IP ProtectionDiverts Resources fromMore Productive UsesWe Sometimes Settle Suits orLicense IP Because LitigationIs Too ExpensiveWe Sometimes SettleSuits or License IPBecause Litigation Is TooExpensiveIP Isnt Important to OurCompany51%57%53%44%46%48%37%31%22%6%7%11%2%0%3%0% 20% 40% 60%Under 10 Employees10 to 49 Employees50 to 499 EmployeesBusiness 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 InternetEnterprise SoftwareHealthcareHardwareCleantechIP Isnt Important to OurCompanyThe Cost of IP ProtectionDiverts Resources fromMore Productive UsesWe Sometimes Settle Suits orLicense IP Because LitigationIs Too ExpensiveWe Sometimes SettleSuits or License IPBecause Litigation Is TooExpensiveIP Isnt Important to OurCompany“As a Fast Growth company I do not worry aboutgovernment policy too much. I worry about what I can control.Our outlook is very strong.... Cheers.”President/CEO, Software Startuplitigation-driven problem, with nearly one in fourreporting that they sometimes settle lawsuits or licenseIP they otherwise wouldn’t because it’s too expensiveto defend IP in a lawsuit. Regionally, Boston appears toremain a more IP-centered ecosystem than other markets.Startup Outlook Report 2013
  26. 26. TaxesHighlights:▶▶ When asked which federal tax change wouldbest promote their company’s near-term success,startups focus first on providing incentivesto promote capital formation for high growthcompanies.▶▶ Coming in second is helping preserve startups’scarce capital through a tax credit for pre-profit companies to offset other taxes (such asemployment taxes).▶▶ Fifteen percent of executives ask Congress to “justget it done so we have certainty.”▶▶ Healthcare, hardware and cleantech executiveshighlight the importance of R&D, through R&D taxcredits and direct government investments in R&D.▶▶ Larger companies were more likely to focus onthe overall corporate tax rate and on capital gainstax rates.One of the most pressing issues on the federal agendais our tax system. Most people agree it’s ready for anoverhaul, for a host of reasons. But there’s a lot lessagreement about what, precisely, the solution shouldlook like. Since startups play a critical role in economicgrowth, global competitiveness, and job creation, wethink the U.S. tax system should promote (or at leastnot inhibit) startups’ success. So we asked startupexecutives what they see as the single most beneficialchange Congress could make to promote theircompany’s near-term success.Promoting capital formation — specifically, providinga tax incentive to invest in startups — topped the list.This was particularly true for smaller companies.Promoting capital efficiency — specifically, providinga credit for pre-profit companies to offset other taxes(such as employment taxes) so they can devote theiravailable cash to growing — came in a close second.Promoting simplicity and certainty — specifically, “justget it done” and “make the tax code simpler” — camein third.Healthcare, hardware and cleantech executives weremuch more likely than their colleagues in the softwaresector to highlight the importance of R&D, eitherin the form of R&D tax credits or direct governmentinvestments in R&D. Larger companies (with over$25 million in revenues) were much more likelyto recommend keeping the capital gains tax at thecurrent rate (20 percent, versus six to seven percentfor smaller companies). Not surprisingly, executives’focus on the corporate tax rate rose as their companysizes increased.24Startup Outlook Report 2013
  27. 27. 25Tax 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-Revenue<$5MinRevenues$5-$24.9MinRevenues$25-$99.9MinRevenuesLower Corporate Tax RateR&D Credit orExpenditureMake the Code SimplerJust Get It Done So WeHave CertaintyTax Credit/Offset for Pre-Profit CompaniesTax Incentive to Invest inStartupsTax 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 RateR&D Credit orExpenditureMake the Code SimplerJust Get It Done So WeHave CertaintyTax Credit/Offset for Pre-Profit CompaniesTax Incentive to Invest inStartups32%21%9%17%20%19%14%14%20%10%10%11%12%15%13%6%7%12%Under 10Employees10 to 49Employees50 to 499EmployeesTax 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%ConsumerInternetEnterpriseSoftwareHealthcareHardwareCleantechLower Corporate Tax RateR&D Credit orExpenditureMake the Code SimplerJust Get It Done So WeHave CertaintyTax Credit/Offset for Pre-Profit CompaniesTax Incentive to Invest inStartupsTax Policies to Promote Startups’ Growth23%19%15%10%8% 8%7%5%1%3%0%5%10%15%20%25%TaxIncentivetoInvestinStartupsCredit/OffsetforPre-ProfitCompaniesJustGetItDoneSoWeHaveCertaintyMaketheCodeSimplerPermanentR&DTaxCreditLowerCorporateTaxRateKeepCapGainsRateatCurrentLevelGovernmentInvestmentsinR&DIncentiveforDomesticManufacturingOther“Provide incentives for developing technology, hiring new people,creating manufacturing jobs in the US. We need the incentive in theforms of cash, deregulation, tax incentives.”President/CEO, Medical Device Startup“Reward startups that our actively growing with tiered payroll tax incentivesto help them carry the burden of losses as they get to profitability. Stoptaxing us so much while we are creating jobs and growing the economy.”President/CEO, Software StartupStartup Outlook Report 2013
  28. 28. U.S. ManufacturingHighlights:▶▶ Over one-third (35 percent) of executives areat 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 currentlymanufacture (64 percent) say theymanufacture “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 tofind ways to re-invigorate U.S. manufacturing, as a wayto grow the U.S. economy and create middle class jobs.In order to understand the opportunities within thestartup sector better, we asked executives about theirmanufacturing plans, what factors drive their decisionsabout where to locate manufacturing facilities, and whatkinds of workers they hire for manufacturing jobs.Not surprisingly, manufacturing is centered in thehealthcare, hardware and cleantech segments.Excluding software, 68 percent of these companiesmanufacture 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 likelyto predict that they will begin manufacturing thantheir revenue-generating peers indicate is likely. Asfor regional differences, Boston area companies reportthat they manufacture at nearly twice the rate of theircounterparts in other regions.Startups use various approaches to manufacturing:in-house, through partners, or a combination of thetwo; domestically, overseas, or a combination of thetwo. In our survey, we found that companies that arecurrently manufacturing tend to rely more heavily onin-house, domestic manufacturing than those whoPlans to Manufacture (by Region)28% 27%42%38%47%36%34%27% 22%Northern CA Boston MA Other RegionsCurrently ManufacturePlan to Manufacture inNext 18 MonthsNo Plans to Manufacture0%10%20%30%40%50%60%70%80%90%100%Plans to Manufacture(by Revenues)Pre-Revenue<$5MinRevenues$5-$24.9MinRevenues$25-$99.9MinRevenuesCurrently ManufacturePlan to Manufacture inNext 18 MonthsNo Plans to Manufacture0%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)ConsumerInternetEnterpriseSoftwareHealthcareHardwareCleantech5% 8%33%50%42%2% 4%31%19% 30%93% 88%35% 31% 28%0%20%40%60%80%100%120%No Plans to ManufacturePlan to Manufacture inNext 18 MonthsCurrently Manufacture26Startup Outlook Report 2013
  29. 29. 27say they will begin manufacturing in the coming 18months, although it is difficult to know what is drivingthose differences.From a policy perspective, two of the most importantquestions to understand are: the factors thatdrive startups’ decisions about where to locatemanufacturing facilities, and the kinds of jobs thesefacilities create.On the first, the question of talent and the availabilityof skilled workers again rises to the top. This isfollowed by two factors relating to the productionprocess: the quality of available production facilities,and the speed of production. The next two factors againconcern the workforce: the cost of salaries and benefits,and the ease/difficulty of managing workers (language,distance, etc.). Rounding out the list are regulatorycosts and delays, proximity to major markets andcustomers, tax incentives, regulatory restrictions,energy costs, and other.This implies that policymakers have an opportunity topromote U.S. manufacturing without having to use taxexpenditures.The Startup Outlook survey also indicates that takingthese steps would be smart — for all Americans, notjust for technology companies. A meaningful numberof the manufacturing jobs that startups would createrequire only a high school diploma or relevant experience,and fewer than one in three of these jobs require acollege education or above.Education/Training Needed for Majority ofManufacturing JobsHigh School Highly ExperiencedWorkers,Regardless ofEducationWe Provided theNecessaryTrainingA Combinationof AboveCollege or Above21%29%21%4%24%0%5%10%15%20%25%30%35%What Drives Startups’ Decisions About Where toLocate Manufacturing Facilities?AvailabilityofWorkerswithNeededSkillsNoneoftheAboveOtherEnergyCostsRegulatoryRestrictions(LandUse,Env.,Labor,Etc.)TaxIncentives/RefundsProximitytoMajorMarkets/CustomersEase/DifficultyofManagingWorkersRegulatoryCosts/DelaysSalariesandBenefitsofManufacturingWorkersSpeedofProductionQualityofAvailableProductionFacilities44%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.Currently ManufacturePlan to Manufacture inComing 18 Months64%23%14%40%16%44%0%10%20%30%40%50%60%70%MostlyDomesticallyMostlyOverseasBothManufacturing: In House Versus Partners33%30%37%11%45% 44%0%5%10%15%20%25%30%35%40%45%50%In House ThroughPartnersCombination ofBothCurrently ManufacturePlan to Manufacture inComing 18 MonthsStartup Outlook Report 2013
  30. 30. The Medical Device TaxHighlights:▶▶ Executives at medical device companies are awareof the 2.3 percent revenue tax that started at thebeginning of 2013.▶▶ Three in four (75 percent) say they know how itwill impact their business. One in four (23 percent)say they have heard of the tax but do not knowhow it will impact their business. Just two percentwere unaware of the tax.▶▶ The top ways to handle the tax are passing alongmost or all of the increased cost to customers (34percent of executives plan to do this) or focusingon expanding overseas instead of in the U.S. (28percent of executives plan to do this).▶▶ Over eight in 10 (82 percent) say the device taxwill have an impact on their company’s long-term growth.This year’s survey also digs into a critically importantsegment of the U.S. innovation economy: the medicaldevice sector. There are a number of reasons whypolicymakers and ordinary Americans should careabout the health of the device industry. Perhaps mostimportantly, new, innovative devices help improvepatient outcomes and reduce costs. In addition, U.S.leadership in commercializing medical devices helpsensure that U.S. patients have early access to new toolsfor diagnosing and treating conditions. The deviceindustry also creates high paying jobs and is a majorexporter 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 harderfor device companies to succeed. This has reducedthe amount of capital being invested in new devicecompanies to an 11-year low. It has also caused a shiftin investments away from capital intensive segments,impeding the discovery and commercialization oftreatments for chronic, costly conditions such asdiabetes, obesity and vascular disease.While Congress and the FDA are taking steps to turnthis around, those efforts are still in the relatively earlystages. And now a new challenge has emerged forgrowing companies: starting January 1, 2013, all devicecompanies must pay a 2.3 percent tax on their totalU.S. sales. This tax applies even to companies that arenot making a profit. We wanted to hear firsthand howexecutives are dealing with the tax and how they thinkit will affect the device industry going forward.28Startup Outlook Report 2013
  31. 31. 29Familiarity with the Device Tax75%23%2%I know how it will impactmy businessI dont know how it willimpact my businessI have never heard of thedevice taxStartups’ Responses to the Device Tax21%21%13%22%30%21%25%0% 5% 10% 15% 20% 25% 30% 35%We will reduce staffing/forego newhiresWe will shift resources away fromgrowing our businessWe will invest less in R&D for ourexisting productsWe will invest less in R&D for newproductsWe will pass along most or all of theincreased costWe will need to raise an additionalround of capitalWe will focus on expanding overseasinstead of domesticallyStartups’ Predictions: Impact of the Tax18%34%27%21%0% 5% 10% 15% 20% 25% 30% 35% 40%No meaningful impactThe tax will impact when webecome profitableThe tax will impact our ability toraise capitalThe tax will impact our chancesof being successful“The Medical Device Tax is punitive and particularly unfair toearlier stage companies struggling to satisfy FDA, CMS and extremelyexpensive clinical trials. We are in the perfect storm and thistax is one more nail in the coffin of this industry.”President/CEO, Medical Device StartupGenerally speaking, executives in the device industrywere aware of the tax, although many were still workingto 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’slong-term growth. One in four will focus on expandingoverseas instead of domestically. At least two in 10will take one or more other steps in response to thetax, including reducing their workforce or foregoingnew hires, shifting resources away from growing theirbusiness, investing less in R&D for existing and newdevices, or trying to raise more capital from investors.Startup Outlook Report 2013
  32. 32. And, finally, the survey data illustrated that theheadwinds facing the device industry threatens U.S.manufacturing jobs.▶▶ About half of the device respondents (46 percent)currently manufacture devices. Ninety-threepercent of these companies manufacture mostlyin 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 mostlyin the United States.▶▶ More than half of the device manufacturing jobsrequire only a high school degree (28 percent) orhire 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 yearSame as last yearBetter than last yearMedical Device Companies:2012 Compared to 2011 27%32%41% Worse than last yearSame as last yearBetter than last yearAs the data in the earlier sections of this report shows,the device tax compounds other challenges thatthreaten to affect U.S. leadership in medical deviceinnovation. Device companies were much more likelythan startups in other sectors to say they fell far shortof their 2012 revenue targets (17 percent versus ninepercent for other segments). Device executives werealso much less optimistic about business trends thantheir peers in other sectors. Not surprisingly, thistranslated into less robust expectations for hiring thanis true for other startups.Similarly, the data in the remainder of the surveyshows that these companies — and the breakthroughsin medical care they are creating — are small, growingentities that aren’t yet profitable, and hence are highlyvulnerable to a tax on topline revenues.▶▶ Seventy percent of the companies had fewer than25 employees. 98 percent had fewer than 100employees.▶▶ Sixty-one percent aren’t yet earning revenues. Ofthose earning revenues, 56 percent earned lessthan $5 million in 2012, 95 percent earned lessthan $25 million in 2012.▶▶ Fewer than one in 10 expected expect to beprofitable in 2012.30Startup Outlook Report 2013
  33. 33. 31Medical Device Companies:2013 Compared to 2012 15%25%60%Will be worse in 2013Will stay the sameWill be better in 2013Other Respondents:2013 Compared to 2012 5%16%78%Will be worse in 2013Will stay the sameWill be better in 2013Likelihood of Hiring:Medical Device Companies 17%6%77%Not likely to hireNeither likely nor unlikelyLikley to hireLikelihood of Hiring:Other Respondents6%3%91%Not likely to hireNeither likely nor unlikelyLikley to hire“Lean is my only guidance to offer the FDA. Build excellence intosystems that ensure safety, and don’t do anything else. Let markets drive cost-effectiveness. Let the NIH and peer-reviewed guidances determine efficacy.”President/CEO, Medical Device StartupStartup Outlook Report 2013
  34. 34. U.S. and U.K. Startups:Similarities and DifferencesIn 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 areoptimistic about future conditions and growth. In fact,at times U.K. entrepreneurs express greater confidencethan their U.S. peers. Here are some of the views fromacross the pond, on the questions common to thetwo surveys.For a full report on the views of U.K. startups, go to Conditions▶▶ U.K. startups were slightly more likely to exceedrevenue targets than their U.S. peers (18 versus15 percent), and more likely to meet targets (55versus 43 percent).▶▶ U.K. startups were somewhat more likely todescribe business conditions in 2012 as better than2011 (66 versus 60 percent).▶▶ Looking forward, U.K. startups are more optimistic,with eight in 10 (83 percent) saying conditions in2013 will be better than 2012, compared to sevenin 10 (74 percent) of U.S. entrepreneurs.▶▶ Two-thirds of U.K. startups reported revenues in2012 – roughly the same as in the U.S. with 64percent of revenue-generating startups.▶▶ Close to half of U.K. revenue-generating startups(46 percent) expected their company to beprofitable in 2012, compared to around one-quarter of U.S. startups (27 percent). Looking into2013, seven in 10 U.K. entrepreneurs (71 percent)expect their company will be profitable.Hiring▶▶ Like their U.S. counterparts, U.K. startups arehiring. As in the United States, nine in 10 (87percent) plan to hire new employees in 2013.▶▶ Ninety-five percent of U.K. startups with10 or more employees plan to hire, versus84 percent of smaller U.K. startups and 88percent of U.S. startups with 10 or moreemployees.32Startup Outlook Report 2013
  35. 35. 33Hiring (con’t.)▶▶ Similar to U.S. startup executives, U.K. startups arelooking primarily for workers with STEM (Science,Technology, Engineering, and Math) skills.▶▶ Four in 10 (38 percent) say STEM skills are themost critical job skills, versus one-quarter (23percent) who say management, marketing,and other non-STEM skills are most critical.Among U.S. startups, those numbers were 40and 17 percent, respectively.▶▶ As in the United States, finding the right workerswill be difficult.▶▶ Nine in 10 (89 percent) say it is “challenging”to find workers with the skills needed to growtheir 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 IPis primarily a defensive tool, compared to 11percent of U.S. respondents. One-quarter of U.K.respondents (23 percent) say IP is a combination ofboth, compared to 35 percent of U.S. respondents.▶▶ Over eight in 10 U.K. entrepreneurs (84 percent) inthis study rarely or never face disputes, comparedto 77 percent for the United States.▶▶ Over half of U.K. entrepreneurs (57 percent)say they focus on non-legal means rather thanon 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 (90percent) say the U.K. fundraising environmentis challenging.▶▶ Most are looking to angel investors or VCs for theirnext source of funding (39 percent for each).▶▶ Over half of U.K. entrepreneurs say governmentinitiatives that would help the startup sector aregreater access to government grants and fundsdesigned specifically for startups and tax reform(56 percent and 52 percent, respectively).Founding Teams▶▶ Twenty-six percent of startups in the U.K. surveyhave women on founding team, compared to 22percent for startups in the U.S. survey.▶▶ Thirty-seven percent of startups in the U.K. surveyhave foreign born members on founding team,compared to 46 percent for startups in the U.S. survey.Startup Outlook Report 2013
  36. 36. About Silicon Valley BankSilicon Valley Bank is the premier bank for technology,life science, cleantech, venture capital, private equityand premium wine businesses. SVB provides industryknowledge and connections, financing, treasurymanagement, corporate investment and internationalbanking services to its clients worldwide through27 U.S. offices and seven international operations.(Nasdaq: SIVB)www.svb.comAbout the Startup Outlook SurveyIn addition to this comprehensive report, SiliconValley Bank is publishing a series of more detailedreports focusing on different sectors and issues withinthe broader survey. For copies of these additionalreports, as well as to access the Startup Outlook 2010,2011 and 2012 reports, please visit us Outlook Report 2013“Big Data and Cloud computing markets that we are part of will be huge. Financial instabilities make companies look for other vendors so smallstartups like us become a very good option for them as we are agile,cost effective and approachable.”President/CEO,  Software Startup
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