Upfront State of the VC & Tech Industry 2017

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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...

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 ...

7
IPO downside protection
Multiple liquidation preferences
Participating preferred
$1.7B
valuation
Note: IPO protection on...

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...

11
And 76% of VCs reported valuations declined in 2016
Valuations decreased Valuations increased
8%
76%
Q. Would you say v...

12
2016 was the year our industry took cost-cutting seriously and
most say this work is behind them
25%
12%
63%
Q. Which s...

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 indus...

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
A...

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...

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 Asset...

22
invested $50M in
(Jun 2016)
Note: US-based Comcast Ventures, Draper Associates, Presence Capital also participated but ...

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
...

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...

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 Invest...

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 inve...

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...

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-tec...

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'2...

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
...

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
rais...

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 dri...

48
Trump’s proposed tax holiday, if passed, will lead to repatriation
of capital, which will in turn fuel more M&A and inv...

So where are we heading?
49

50
Foreign capital
Corporate investors
Increased LP distributions
New VC funds, bigger funds
Repatriation of capital
Likel...

51
Unsurprisingly VCs are very bullish about 2017
Optimistic & bullish Innovations, but uncertainty Concerned
11%
28%
61%
...

52
The current category VCs are most interested in funding is AI
/ Machine Learning
85% rates it more
interesting than oth...

53
Of the major emerging venture categories, VCs are most
skeptical about bots-based commerce and blockchain
53% thinks it...

54
Regarding Trump, the venture community is concerned
on a number of point issues
63% some impact
25% very naive
Surveill...

55
Overwhelmingly our industry (83%) is very anti-Trump
or dislikes him as a president
Anti-Trump Dislikes Trump Fine with...

56
But most people don’t believe a Trump presidency will have
much impact on the venture capital industry
Concerned Limite...

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-al...

59
And for newer funds LPs are actively looking to add managers
to their roster
Looking to add Cutting back, may add 1-2 T...

60
Overwhelmingly LPs are concerned about the cadence of VC investments
and frequency of fundraising (Some funds now on 2-...

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 m...

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 ne...

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

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