State of the VC Industry
WTF Happened to Winter?
Some Upfront Views
1
Mark Suster, @msuster
Chang Xu, @_changxu

Things you
already 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
IPO downside protection
Participating preferred
$3.6B
valuation
Note: most recent financing in Aug 2015 (Series F); IPO protection on Series A, B, D, E, F, with threshold at $15.78 per share and aggregate proceeds of $100M
Source: Pitchbook VC Unicorn Report 2016, Pitchbook

7
IPO downside protection
Multiple liquidation preferences
Participating preferred
$1.7B
valuation
Note: IPO protection on Series C (2014) and Series D (2015), with threshold at $33.82 and aggregate proceeds of $70M and $100M respectively. Series B (2013) has 2x liquidation preference, Series C has 1.43x
Source: Pitchbook VC Unicorn Report 2016, Pitchbook, The Information

8
Still great companies,
but valuation not
always what it seems

9
Many predicted that
winter was coming.
WTF happened to winter?

10
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

11
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

12
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

13
So, yeah. Winter DID come.
But it sure was mild!
Blame Global Warming.
Seriously.

14
“Global” warming—part 1: China, Japan, Asia more broadly
“Global” warming —
Influx of foreign capital into US startups
1

15
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

16
The US has FANG, China has BAT: Baidu, Alibaba & Tencent.
All very aggressive in US investments.

17
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

18
led $800M Series C in
(Feb 2016)
This is like 20
seed funds in just
one deal!

19
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

20
invested $690M in
(Mar & Oct 2016)

21
led $80M Series B in
(Aug 2016)
Note: Other investors include CMC Holdings (China), Founder H Fund (China), China Assets Holdings (Hong Kong), SoftBank Group (Japan), and several US-based investors

22
invested $50M in
(Jun 2016)
Note: US-based Comcast Ventures, Draper Associates, Presence Capital also participated but did not lead the round

23
Of course it’s not just China:
SoftBank / Saudi Arabia’s
PIF
/ Mubadala
$100B tech fund
(Oct 2016)
&

24
As oil prices have collapsed, the Arab states have been
eager to diversify their assets
$165M
Kuwait
201520142013 2016
$3.5B
Saudi Arabia

25
Temasek (Singapore’s soverign wealth
fund) opened a US venture office &
allocated more capital to US deals
$350M AUM

26
invested $800M in
(Jan 2017)

27
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

28 Designed by Freepik
Global warming —
Rise of the corporate VC
2

29
Increasing number of corporates have active venture investing
arms
2012 2013 2014 2015 2016
61
131
US Active CVC Investors By Quarter
Source: CBInsights

30
Of course there are the usual suspects…
Source: CBInsights
80-90
deals/year
70-90 50-70 30-50 20-30

31
invested $200M in
(Oct 2016)
Active corporates continue to write large checks…

32
invested $500M in
(Jan 2016)
But large checks are coming from many sources now

33
ramps up venture fund to $530M (Nov 2016)

34
When Sesame Street became a venture investor,
you know the market has moved

35
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

36
And half of Corporate investors expect to do even more in 2017
Invest less in 2017 Invest more in 2017
50%
Q. Would you say valuations in 2016 were higher, lower or remained about the same vs. 2015?
Source: Upfront Ventures + CBInsights survey of CVCs (N=40), Jan 2017
3%

37
Global warming —
Exits supported by M&A
from non-traditional buyers
3

38
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

39 Source: Aberdeen Assets
Middle-market PE also entered, seeking growth
acquired

40
All eyes on the Snapchat IPO as a
potential signal for 2017 IPO markets
Biggest
since
Most anticipated
since

41
There is certainly a backlog of scaling companies looking for liquidity
Source: CB Insights

42
Global warming —
VCs have significant dry powder
4

LPs have finally restocked coffers with distributions
(plus many new LPs getting into the game)
43
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

44
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

45
2016 saw many megafunds raised
$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

46
…and 300+ more!
Source: CBInsights
Microfunds are
now a well-
established market,
with many scaling
fund sizes

47
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%

48
Trump’s proposed tax holiday, if passed, will lead to repatriation
of capital, which will in turn 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?
49

50
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 in 2017-18
↑
+ ↑
+ ↑
+ ↑
+ ↑
+ ↑
=

51
Unsurprisingly VCs are very bullish about 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

52
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

53
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

54
Regarding Trump, the venture community is concerned
on a number of point issues
63% some impact
25% very naive
Surveillance &
cyber security
Employment &
social policies
72% some impact
18% deeply worried
Q: Do you believe a Trump Presidency could have an impact on ___?
Source: Upfront Ventures survey of VCs (N=114), Corporate VCs (N=40), and LPs (N=78), Jan 2017; CBInsights assisted with CVC survey
57% worried
20% very concerned
Immigration

55
Overwhelmingly our industry (83%) is very anti-Trump
or dislikes him as a president
Anti-Trump Dislikes Trump Fine with Trump
66%
17% 17%
Q: How do you personally feel about a Trump presidency?
Source: Upfront Ventures survey of VCs (N=114), Corporate VCs (N=40), and LPs (N=78), Jan 2017; CBInsights assisted with CVC survey
but he’s irrelevant

56
But most people don’t believe a Trump presidency will have
much impact on the venture capital industry
Concerned Limited impact Optimistic
25%
70%
5%
Q: Considering all these issues (offshore development, H1-B, M&A, surveillance, China relations / manufacturing, etc.) how will a Trump presidency impact venture capital?
Source: Upfront Ventures survey of VCs (N=114), Corporate VCs (N=40), and LPs (N=78), Jan 2017; CBInsights assisted with CVC survey
Although maybe
this has deepened
since inauguration?

How do LPs feel about the
direction of our industry?
57

58
The good news is that 3x as many LPs are trying to grow their
allocation to the venture asset class vs. feeling over-allocated
Trying to grow VC allocation Over-allocated to VC
11%
32%
Q. How would you describe your fund’s current allocation to VC?
Source: Upfront Ventures survey of LPs (N=78), Jan 2017

59
And for newer funds LPs are actively looking to add managers
to their roster
Looking to add Cutting back, may add 1-2 Too many
2%12%
45%
Q. How would you describe your fund’s current outlook on VC managers?
Source: Upfront Ventures survey of LPs (N=78), Jan 2017
VC managers VC managers

60
Overwhelmingly LPs are concerned about the cadence of VC investments
and frequency of fundraising (Some funds now on 2-2.5 year cycles)
Q. How would you describe your fund’s outlook on your existing (VC) managers funding (and fundraising) pace?
Source: Upfront Ventures survey of LPs (N=78), Jan 2017
23%
11%
66%
VCs are fundraising more quickly
& we’re concerned
We’re fine
with a faster pace
Cadence is normal

61
LPs want a healthy mix across all stages of venture.
A large number said they felt Series A/B was their best fit
and majority are concerned about growth-stage valuations
Q. How would you describe your fund’s outlook on the seed market / traditional Series A/B venture capital / later stage venture capital & growth equity?
Source: Upfront Ventures survey of LPs (N=78), Jan 2017
Seed Series A/B Growth
Over-valued
60%
Over-done 18% Being squeezed 14%
Bullish 7%
Best fit
30%
Invest but
discerning
75%
Want a
healthy mix
57%
Want a
healthy mix
38%

62
What does this all mean?

Global is likely here to stay — despite the efforts of
the Trump Administration
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 :)
63

Thank you!
64
Mark Suster, @msuster
Chang Xu, @_changxu