Upfront vc analysis 2016

1. Venture Capital 2016 - Some Upfront Views 1 Mark Suster @msuster

2. There is Some Stuff We All Know We all know the funding markets for venture-backed startups have been strong for 7 straight years 2

3. LP contributions to the VC industry are back to pre-recession levels and anecdotally 2016 seems likely to increase further 3 US VC fundraising activity 0 75 150 225 300 $0 $15 $30 $45 $60 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Capital raised ($B) # of funds closed 235 271 209 218 192 176 162 214 235236233 $28 $31 $18 $20$19 $13 $16 $25 $30$31$30 233 236 235 214 162 176 192 218 209 271 235 Source: Dow Jones VentureSource; Upfront analysis.

4. With more money (and new non VC entrants) venture financings have obviously increased. 2015 was an enormous year (2x pre recession) 4 US VC ﬁnancing activity 0 2,500 5,000 7,500 10,000 $0 $25 $50 $75 $100 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Capital invested ($B) # of rounds closed 8,097 9,381 8,563 7,572 6,428 5,193 4,3164,533 4,119 3,145 2,574 $77 $68 $44 $40$42 $30 $26 $36$35 $28 $23 2,574 3,145 4,119 4,533 4,316 5,193 6,428 7,572 8,563 9,381 8,097 Source: PitchBook 2015 Annual U.S. Venture Industry Report; Upfront analysis.

5. And what's interesting is that if you look at the spread between dollars raised by VCs and dollars invested, you see the huge shift from a decade ago of non-VC capital 5 Source: Upfront analysis. US VC fundraising vs ﬁnancing (2006-07, $B) 0 35 70 105 140 175 Funds raised by VCs Funds invested by VCs 6361 1x US VC fundraising vs ﬁnancing (2014-15, $B) 0 35 70 105 140 175 Funds raised by VCs Funds invested by VCs 145 59 2.5x

6. Angel & Seed deals have grown fastest but dollars have scaled massively into a smaller number of later-stage deals (doubling in just 2 years) 6 Source: PitchBook 2015 Annual U.S. Venture Industry Report; Upfront analysis. US VC # of rounds closed by stage US VC capital invested ($B) by stage 0 10 20 30 40 50 2010 2011 2012 2013 2014 2015 0 1,000 2,000 3,000 4,000 5,000 2010 2011 2012 2013 2014 2015 Early Stage CAGR 21% 36% 16% CAGR 1% 22% 3% Angel/ Seed Late Stage Early Stage Late Stage Angel/ Seed

7. And the dollars into late-stage deals has largely been driven by non- traditional VCs entering the market (up 50% in the last 3 years) 7 Source: CBInsights, VC-backed $20M+ rounds; non-VC defined as Asset Mgmt, Corporate/Corporate VC, Family Office, Hedge & Mutual Funds; Upfront analysis. Non-VC participation in US $20 million-plus rounds 0% 15% 30% 45% 60% 2012 2013 2014 2015 55% 47%47% 37% CAGR ’12-’15 15%

8. M&A pace hasn’t matched the increases in funding pace so VC mark-ups have been good but cash distributions less so 8 US VC-backed M&A activity 300 375 450 525 600 $0 $38 $75 $113 $150 2011 2012 2013 2014 2015 Amount Paid ($B) Number of M&As 473 510 470 462 542 $54 $81 $42$43$47 542 462 470 510 473 Source: Dow Jones VentureSource Venture Capital Report 4Q’15; Upfront analysis.

9. IPO exits are down 32% in volume and 38% in value 9 US VC-backed IPO activity 0 30 60 90 120 $0 $4 $8 $11 $15 2011 2012 2013 2014 2015 Raised ($B) through IPO Number of IPOs 66 107 73 50 46 $6 $9 $8 $11 $5 46 50 73 107 66 Source: Dow Jones VentureSource Venture Capital Report 4Q’15; Upfront analysis. 50

10. But there are other truths that people have only recently begun to speak about 10

11. 11 Public Tech Markets are obviously off dramatically in the past three months beginning the question of what this means for private valuations NASDAQ LinkedIn Apple Twitter (9%) (18%) (19%) (41%) Source: 3-month valuations November 02, 2015 to January 29, 2016; Upfront analysis.

12. Private market valuations had risen beyond what some believe are sustainable (up 3x in 2 years). Q4 saw massive correction (we asked VCs if they thought it was an anomaly or a trend). 12 US VC-backed ﬁnancing median pre-money valuation ($M) $0 $20 $40 $60 $80 1Q'13 2Q'13 3Q'13 4Q'13 1Q'14 2Q'14 3Q'14 4Q'14 1Q'15 2Q'15 3Q'15 4Q'15 $28 $68 $53 $60 $58 $37 $51 $22$21 $19 $24 $17 Source: Dow Jones VentureSource Venture Capital Report 4Q’15; Upfront analysis.

13. More than 90% of respondents in the Upfront VC Survey expected valuations to go down in 2016 with a full 1/3rd of investors expecting significant price corrections 13 Do you expect valuations to go up, down or remain about the same as previous quarters? 0% 25% 50% 75% 100% Q4'15 1H'16 Proj 30% 5% 61% 61% 8% 28% 6% Increase About the same Marginally down Significantly down Source: Upfront Survey Jan 2016, 156 VCs for Q4’15, 158 VCs for 1H’16; Upfront analysis.

14. This is coupled with a very visible recalibration of valuations of the pre-IPO mutual fund cohort at places like Fidelity 14 Fidelity’s holdings: % valuation change since purchase Blue Bottle MongoDB Series F Taboola.com Series E Turn Inc. Zenefits Series C Dataminr Series D Dropbox Series C Snapchat Series F 0% 25% 50% 75% 100% Source: Fortune; Blue Bottle, Dropbox, Snapchat and Benefits data as 11/30/2015, rest as of 9/30/2015; Upfront analysis. 0% -25% -50% -75% -100% -61% -54% -45% -44% -35% -29% -15% -47%

15. 15 This has swung sentiment for many experienced VC ﬁrms ﬁrmly toward controlling burn over rapid growth

16. This was clearly borne out in the Upfront VC Survey where 62% of firms are advising companies to cut costs / burn as markets tighten 16 4% 35% 62% Source: Upfront Survey Jan 2016, 156 VCs. Which statement best describes the spending behavior at most of the companies in which you are on the board or observe? Generally cutting costs expecting markets to tighten Don’t see much change from a year ago Generally not too worried about burn rates 100%

17. 17 “Winter is Coming” message received by portfolio companies

18. 18 “Winter is Coming” message received by portfolio companies

19. And with fewer VC exits many partners are more overloaded with boards and financings and feel less pressure to do new deals quickly. FOMO is on the decline. 19 Average number of board / observer seats 0 2 4 6 8 10 Years of investment experience 0-3 years 3-6 years 6-10 years 10-15 years 15+ years 8 7 5 4 3 Source: Upfront Investor Survey, sample size of 76 early to late stage VCs, excluding angel/seed and corporate VCs; Upfront analysis.

20. There is a clear feeling that fund raising cycles are taking longer and 77% felt this pace is likely to slow down even further in 2016 20 Do you expect deals to take longer in the process than previous funding quarters, the same or shorter? 0% 25% 50% 75% 100% Q4'15 1H'16 Proj 77%45% 22% 51% 1%4% Shorter than normal About the same as normal Getting longer Source: Upfront Survey Jan 2016, 159 VCs for Q4’15 and 158 VCs for 1H’16.

21. 50% of respondents indicate they may slow down their pace, 35% thought it would be the same pace as 2015 and only 16% expect 2016 to be robust 21 1%4% 43% 35% 16% Source: Upfront Survey Jan 2016, 158 VCs. How would you generally describe your investment mindset heading into 2016? “Seeing tons of great deal flow and expect this to be a solid year” “Unless a deal is amazing I’m likely to slow my pace a bit” “I don’t feel compelled to do deals” “2016 about the same pace as my last several years” “I’d rather fund when the dust settles

22. With the sentiment of the markets it’s no surprise that a full 82% of VCs expressed caution or concern going into 2016 22 2% 30% 50% 9% 9% Source: Upfront Survey Jan 2016, 155 VCs. Hugely bullish I’m very concerned Things are bad & getting worse Generally cautious Generally optimistic Which of the following statements best describes your mood heading into 2016 100%

23. And how does the growth in funding, valuations and anxiety play in the minds of LPs who fund the VC industry ultimately? 23

24. The good news is that only 7% of LPs believe they will cut back on venture programs with 26% of funds looking to increase exposure 24 4% 22% 67% 7% Source: Upfront Survey Jan 2016, 73 LPs. How would you describe your fund’s current allocation to VC? About the right allocation Aggressively growing venture Too much allocated to venture Trying to grow our venture program

25. But LPs expressed caution, too. Nearly 75% of LPs have concerns about investment pace, valuation levels and burn rates of underlying companies. 25 6% 68% 26% Source: Upfront Survey Jan 2016, 72 LPs. How would you describe your fund’s outlook on your existing (VC) managers activities? Very happy with investment activities of our existing managers Deeply concerned about the market behavior A bit concerned by pace, valuation creep and burn rates 100%

26. 61% of LPs believe that VCs are coming back to market to raise money at too quick of a pace - a reflection of anxieties of the over-funding of portfolios 26 61% 15% 24% Source: Upfront Survey Jan 2016, 72 LPs. How would you describe your fund’s outlook in your existing (VC) managers funding (and fund raising) pace? Managers come back at a normal cadence and it hasn’t changed much Managers have been coming back more quickly than in the past and we’re fine with this Managers have been coming back more quickly than in the past and it concerns us 100%

27. But a full 82% of LPs are likely to maintain their existing investment pace 27 10% 82% 8% Source: Upfront Survey Jan 2016, 73 LPs. How would you describe your likely investment pace in venture over the next 3 years? We’re likely to increase our investment pace We’re likely to keep the same investment pace We’re likely to slow down our investment pace 100%

28. While the market for Seed Funds grew enormously in the past 7 years, many LPs still express some concerns about capacity and market crowding 28 23% 66% 11% Source: Upfront Survey Jan 2016, 70 LPs. What is your fund’s outlook on the seed market? Seed delivers the highest potential returns and we’ll continue to invest heavilyThere are too many seed funds and we’re worried they won’t have enough capacity We fund seed VCs but we’re very discerning on which ones we’ll fund

29. Also it’s not too surprising that LPs are most cautious about growth stage funds - in particular concerns about late-stage valuations 29 68% 32% Source: Upfront Survey Jan 2016, 71 LPs. What is your fund’s outlook on later stage venture capital / growth equity? We like growth stage but want a healthy balance of seed, A/B and growth We’re worried that the growth stage is the most over-valued part of the market 100%

30. What to make of all of the uncertainty and potential change in the VC markets? 30

31. 31 Expect loss ratios to go up. But ultimately the creative destruction of these storms can be good. New startup cohorts will sprout where others get cleared out.

32. 32 A slowing pace should be healthy for startups and for VC returns. We believe the next 3 years will value patience over speed at all costs.

33. 33 And despite market concerns in the short-term, as an asset class we see so many industries ripe for innovation and disruption Aerial & Space-techVR & ARTransportation Computational Biology Food & Agriculture

34. Venture Capital 2016 Thank You. 34 Mark Suster @msuster

35. 159 VCs surveyed 35 Fund type 0 20 40 60 Angel Seed VC (Early) VC (Mid) VC (Late) PE Corp (blank) 11 96 19 47 60 7 Source: Upfront Survey Jan 2016. Fund size ($ million) 0 20 40 60 $1-20 $20-100 $300-999 $100-300 $1000+ Evergreen Personal 779 2833 47 19 Survey respondent geography 0 40 80 Norcal SoCal NE US Other US ROW (blank) 178 24 31 79 Position 0 47 93 140 Partner / MD Analyst to Principal Sole proprietor/personal investor 79 134 How long has your ﬁrm existed (years) 0 35 70 0-3 3-10 10-20 20+ 22 36 61 31 Personal investment experience (years) 0 40 80 0-3 3-6 6-10 10-15 15+ 41 23 43 30 13

36. 73 LPs surveyed, part 1 36 Fund type 0 10 20 30 9 445 23 28 Fund size 0 10 20 $0-250M $250-750M $750M-1.5B $1.5-5B $5-10B $10B+ Blank 4 16 7 18 3 11 14 Which of the following best describes your focus on VC? 0 25 50 Only VC Mostly VC Very diverse Not much VC 2 42 10 19 Foundation or Endowment Fund of Funds Family Office Discretionary Advisor Insurance Company Other Survey respondent geography 0 15 30 NorCal SoCal NE US Other US ROW Blank 2 4 28 11 6 22 Source: Upfront Survey Jan 2016.

37. 73 LPs surveyed, part 2 37 Position 0 20 40 60 Partner / MD Analyst to Principal Blank 1 18 54 How long has your ﬁrm been investing in VC (years) 0 20 40 0-3 3-10 10-20 20+ 1 23 30 16 3 How long has your ﬁrm existed (years) 0 20 40 0-3 3-10 10-20 20+ 38 1614 5 Personal investment experience (years) 0 20 40 0-3 3-6 6-10 10-15 15+ 27 23 15 44 Haven’t invested much in VC Source: Upfront Survey Jan 2016.

Upfront vc analysis 2016

Upfront vc analysis 2016

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