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SVB Q3 State of the Markets Report

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The IPO Window Reopens:
We finally saw the IPO window crack open in Q3 2016, as proceeds from technology M&A are leaving investors flush with cash to reinvest and driving demand for IPOs and follow-on offerings.

In this third-quarter update on State of the Markets, my team analyzed investment and exit data to identify key trends impacting clients:

1. The number of IPOs exceeded private IPOs for the first time since Q2 2013, as crossover investors’ interest in large pre-IPO financings dropped off.

2. In the U.S., the pace of unicorn exits in Q3 exceeded new entrants.

3. After plummeting in the first half of 2016, values of publicly traded unicorns showed signs of recovery.

Learn more by reading the new State of the Markets report. As with any review of the markets, conditions can turn quickly. We are, however, confident that the fundamentals driving innovation will be strong through the end of 2016.

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SVB Q3 State of the Markets Report

  1. 1. State of the Markets The IPO Window Reopens Third Quarter 2016 Written by SVB Analytics: Steve Allan, CFA Head of Analytics Sean Lawson Manager Steven Kakowski Associate Steven Pipp Associate John Ortelle Manager
  2. 2. State of the Markets State of the Markets 2 1 Market Dynamics ⁻ Investment and Exit Trends 2 Key Themes ⁻ M&A Restores Valuation Confidence ⁻ Public Unicorns Grow into Their Private Values
  3. 3. State of the Markets 3 Market Dynamics
  4. 4. Equity Markets Weather Macro Storms State of the Markets 4 Nasdaq Composite Index: Sep. 2008 – Sep. 2016 The U.S. equity markets have withstood several cycles of global macroeconomic and geopolitical uncertainty since early 2014, but in Q3 2016 reached all-time highs. 0 1,000 2,000 3,000 4,000 5,000 6,000 Sep '08 Sep '09 Sep '10 Sep '11 Sep '12 Sep '13 Sep '14 Sep '15 Sep '16 Source: S&P Capital IQ, Bloomberg, FiveThirtyEight Year 2000 Peak Market Movers: Q3 2016 26% 26% 47% 48% 53% Sep '16 Nov '16 Dec '16 Feb '17 Mar '17 Implied Probability: Fed Funds Futures 25 50 75 100% Sep ‘16 67.5% 32.5% Clinton Trump Presidential Election Forecasts
  5. 5. Negative Yields Become New Normal State of the Markets 5 WGBI Country Yields: 9/30/2016 Source: S&P Capital IQ, Citi Research 10-Year Bond Yields: G-7 Nations: Q1 2015 – Q3 2016 Country 1 2 5 7 10 15 30 Switzerland Germany Japan Sweden Denmark Netherlands France Spain Italy United Kingdom United States Australia Norway Canada Negative -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% Q1 '15 Q2 '15 Q3 '15 Q4 '15 Q1 '16 Q2 '16 Q3 '16 Italy Japan Germany France United Kingdom Canada United StatesPositive Years to Maturity Through Q3 2016, the yields for more than one third of debt outstanding – totaling over $10 trillion – issued by countries in the World Government Bond Index (WGBI) traded below zero, while yields for many G7 nations continued a descent towards zero.
  6. 6. Crossovers Curtail Private Funding State of the Markets 6Source: CBInsights Global Investments in Venture Rounds: Crossover Investors TotalRounds AverageRoundSize $35M $46M $139M $153M $90M $0M $20M $40M $60M $80M $100M $120M $140M $160M $180M 0 10 20 30 40 50 60 2012 2013 2014 2015 Q1 - Q3 2016 Tiger Global Management Goldman Sachs Wellington Management Fidelity Investments Coatue Management T. Rowe Price Blackrock Average Round Size ($MM) Some of the largest fund managers who took a primary role in funding large, late-stage private rounds have become less active through Q3 2016.
  7. 7. 2016: Return of the Tech IPO State of the Markets 7Source: CB Insights, S&P Capital IQ IPO and PIPO Transactions for U.S. Technology Firms: Q1 2013 – Q3 2016 0 5 10 15 20 25 30 Q1 '13 Q3 '13 Q1 '14 Q3 '14 Q1 '15 Q3 '15 Q1 '16 Q3 '16 IPOs Private IPOs 27 4 11 7 Tech IPO “Boom” Tech PIPO Boom Since 2013, late-stage companies have opted to raise private capital rather than enter the public markets, as 2015 saw four times as many private IPOs (PIPOs: rounds >$100M) as IPOs. In Q3 2016, however, that trend reversed as tech IPOs exceeded PIPOs as a result of crossover investors pulling back from large, new investments and the IPO window opening.
  8. 8. Unicorn Births Decelerate State of the Markets 8Source: The Wall Street Journal Private Companies with Reported $1B+ Valuations: Q1 2014 – Q3 2016 Unicorn Market Value Concentration: September 2016 Uber $68B Xiaomi $46B Didi Chuxing $33B Airbnb $26B Palantir $20B Lufax $19B Meituan-Dianping $18B Snapchat $18B WeWork $16B Flipkart $15B SpaceX $12B Pinterest $11B Dropbox $10B All Others $280B 0 20 40 60 80 100 120 140 160 180 Less than $2B $2-5B $5-10B $10-15B $15-20B Greater than $20B The number of private companies with $1B+ valuations has tripled since 2014, with more than half of all unicorn value concentrated in the top 13 “decacorns.” The pace of newly minted unicorns, however, began declining in Q4 2015.
  9. 9. Tech Companies Stay Private Longer State of the Markets 9 Years from Founding to IPO (Median): 1999 – Q3 2016 0 2 4 6 8 10 12 14 16 1999 2001 2003 2005 2007 2009 2011 2013 2015 Q3 2016 Source: Dr. Jay Ritter, University of Florida U.S. Unicorns 2000 Dotcom Crash 2008 Financial Crisis 90th 10th Median 25th 75th With access to funding from traditional and nontraditional sources, tech companies are choosing to delay the scrutiny and transparency of public markets, and the median age of current U.S. unicorns suggests this trend will continue.
  10. 10. Net Change in Unicorns by Year: 2014 – September 2016 Unicorn Exits Converge with New Entrants State of the Markets 10 Total Market Values All Unicorns $591B 1Exits include IPOs, M&A and revaluations below $1B. 2Sum of market caps for unicorns at the close of their respective first day of trading Source: The Wall Street Journal, S&P Capital IQ Year End Unicorns 2013 Exits Entrants Year End Unicorns 2015 Year End Unicorns 2014 Exits Entrants Exits Entrants Sep. End Unicorns 2016 45 -15 +49 79 -11 +76 144 149 0 20 40 60 80 100 120 140 160 Apple $609B Google $543B Facebook $368B Unicorns at IPO2 $92B The number of new companies reaching $1B+ valuations still exceeds the number of exits.1 While this has created a backlog of private companies with a combined market value of more than $550B, the pace of unicorn exits is converging with the pace of entrants. -10 +15
  11. 11. As Exit Conditions Improve, IPO Window Opens State of the Markets 11Source: S&P Capital IQ; Yahoo! Finance U.S. Tech IPO Count: H1 2012 – Q3 2016 20 15 10 5 0 ^VIX: Jan 2012 – June 2016 0 10 20 30 40 50 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 H1 2012 H2 2012 H1 2013 H1 2013 H1 2014 H2 2014 H1 2015 H2 2015 H1 2016 Q3 2016 Companies look for a sustained period of low volatility before going public. Decreased volatility in Q3 2016 signals improving market conditions and a reopening of the IPO window.
  12. 12. State of the Markets 12 Q3 2016 Key Themes
  13. 13. Market Downswing and Idle Cash Spur SaaS M&A State of the Markets 13 Cloud Software M&A Deals Announced: Q2 – Q3 2016 Source: S&P Capital IQ $26.0B ImpliedEnterpriseValue($B) NTMRevenueMultiple Financial Buyers Median Rev Multiple: 3.5x Strategic Buyers Median Rev Multiple: 5.6x 3.4x 6.1x 5.1x 3.4x 3.6x 2.1x 3.0x 5.6x 5.0x 3.2x 3.1x 8.3x 7.7x 8.5x 6.7x 0.0x 1.0x 2.0x 3.0x 4.0x 5.0x 6.0x 7.0x 8.0x 9.0x 10.0x $0.0 $1.0 $2.0 $3.0 $4.0 $5.0 $6.0 $7.0 $8.0 $9.0 $10.0 SciQuest Cvent Marketo Infoblox Qlik Rackspace Opower Textura Apigee inContact ININ Demandware Blue Coat NetSuite LinkedIn Accel-KKR Vista Equity Vista Equity Vista Equity Thoma Bravo Apollo Group Oracle Oracle Google Nice Genesys Salesforce Symantec Oracle Microsoft On the heels of the Q1 market downswing, Q2 and Q3 saw a wave of M&A interest from both strategic and financial buyers for publicly-traded1 high-growth cloud software companies. 1Including Blue Coat
  14. 14. 0.0x 1.0x 2.0x 3.0x 4.0x 5.0x 6.0x 7.0x 8.0x 9.0x 10.0x 3/31/15 6/30/15 9/30/15 12/31/15 3/31/16 6/30/16 9/30/16 M&A Flurry Restores Valuation Confidence State of the Markets 14 Cloud Software includes enterprise software companies with IPOs since 2004 on major markets. NTM Revenue Multiples for IPOs based on earliest estimates adjusted to IPO closing price. Source: S&P Capital IQ Third Quartile Median StrategicAcquisitions Median:5.3x TEAM: 12xRPD: 11x FinancialAcquisitions Median:3.5x LNKD: 6.7x N: 8.5x TWLO: 9x APIC: 6x APIC: 5.0x INST: 6x 4.5 Month Gap Between IPOs 14 Public SaaS Acquisitions RAX: 2.1x CVT: 6.1x NTNX: ~8x EVBG: ~6x SCWX: 3x “Good Times” Valuations for cloud software companies plummeted in early 2016, and financial and strategic buyers took the opportunity to purchase 14 public SaaS companies. This activity has helped to restore confidence in high-growth software valuations. Cloud Software NTM Revenue Multiples: Q2 2015 – Q3 2016
  15. 15. Flurry of M&A Leaves Cash-Flush Investors State of the Markets 15Source: S&P Capital IQ $12B $16B $25B $25B $62B $72B $1.5B $2.2B $2.8B $2.9B $3.7B $4.6B $0 $10 $20 $30 $40 $50 $60 $70 $80 Q2 '15 Q3 '15 Q4 '15 Q1 '16 Q2 '16 Q3 '16 $BUSD Announced M&A – Proceedsto Floating Shares Closed M&A – Proceedsto Floating Shares IPO and Follow-On Offerings Cumulative U.S. Software M&A and Public Offerings Q2 2015 – Q3 2016 5.0% 17.1% 34.6% S&P 500 S&P 500 Software & Services Median U.S. Technology IPO "Pop" Total Returns: Q1 – Q3 2016 From Q2 2015 to Q3 2016, capital returned to investors and money managers (e.g. capital that must be reinvested) as software M&A in the U.S. reached $72 billion while IPOs and follow-on offerings only hit $4.6 billion. This dynamic has left investors flush with cash and seeking reinvestment opportunities.
  16. 16. Public Unicorns Grow into Their Private Values State of the Markets 16Source: Wall Street Journal, S&P Capital IQ Total Returns Compared to Tech Unicorns’ Last Private Round Last Private  June 2016  Sep 2016 -400% -300% -200% -100% 0% 100% 200% 300% 400% 500% 600% 0% -20% -40% -60% -80% IPO Date: 2014 2015 2016 6/30 Median Return: -29% 9/30 Median Return: +6% Publicly traded unicorns had seen their valuations plummet in 1H 2016. In Q3, however, investors sought to reinvest capital gained through successful software M&A in the public unicorns.
  17. 17. Private Valuations Reveal Divergence State of the Markets 17Source: Pitchbook Median Pre-Money Valuations Series Seed through Series B: 2012 – Q3 2016 Median Pre-Money Valuations Series C through Series D+: 2012 – Q3 2016 $4 $5 $5 $6 $6 $8 $9 $12 $14 $14 $21 $26 $33 $41 $38 $0 $5 $10 $15 $20 $25 $30 $35 $40 $45 2012 2013 2014 2015 Q3 '16* Seed Series A Series B $50 $56 $60 $74 $90 $92 $99 $135 $180 $200 $0 $50 $100 $150 $200 $250 2012 2013 2014 2015 Q3 '16* Series C Series D+ *As of 8/1/2016 *As of 8/1/2016 Investors are focusing on the most promising companies, curtailing early-stage bets while doubling down on later rounds. As of Q3 2016, capital deployed to venture rounds is on track to exceed 2015 levels. The volume of closed deals, however, is expected to decline as capital is concentrated in fewer companies.
  18. 18. Companies Seek Employee Liquidity Workarounds State of the Markets 18Source: The Wall Street Journal, BuzzFeed News, MIT Technology Review, Bloomberg Technology Even with access to additional capital, mature companies may need to seek nontraditional sources of liquidity to satisfy near-term employee needs and retain talent.
  19. 19. Report Authors State of the Markets 19 Steven Pipp Associate, SVB Analytics spipp@svb.com Steve Allan, CFA Head of SVB Analytics sallan@svb.com Sean Lawson Manager, SVB Analytics selawson@svb.com John Ortelle Manager, SVB Analytics jortelle@svb.com Steven Kakowski Associate, SVB Analytics skakowski@svb.com
  20. 20. 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. State of the Markets 20 This material, including without limitation to the statistical information herein, is providedfor informationalpurposesonly. The materialis based in part on information from third-party sourcesthat we believeto be reliable,but which have not been independentlyverifiedby 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 reliedon in making an investmentor other decision. You should obtain relevantand specific professionaladvice beforemaking any investment decision.Nothing relatingto the material should be construedas a solicitation,offer or recommendation to acquire or dispose of any investmentor to engage in any other transaction. SVB Analytics is a memberof SVB Financial Group and a non-bank affiliate of Silicon Valley Bank. Productsand servicesofferedby SVB Analyticsare not FDIC insured and are not depositsor other obligationsof Silicon Valley Bank. SVB Analytics does not provideinvestment,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 FederalReserve System. SVB>, SVB Financial Group,and Silicon Valley Bank are registeredtrademarks.1016-258 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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