Is Venture Over‐valued? Numbers to
ponder… Sand Hill Econometrics October 20, 2015

The Sand Hill Index An
index of value for venture‐funded companies Like a stock market index, eg, Wilshire 5000 or ^DJTSM – Value‐weighted Continuously invested Compiled on a current‐value basis Shows changes over time for a portfolio invested in all venture‐funded companies

Data – VentureSource (DowJones)
82,000 valuation events (rounds and exits) 25,000 companies 9,000 companies still private now 16,400 total exits 1,900 IPOs 7,500 acquisitions 7,000 failures

Index Computation Strategy A value
for every company every month Companies enter index upon first round of funding Companies exit at IPO, Acquisition, or Shutdown If company raises a round, shares value, we use it If company raises a round, no value, we estimate it For IPOs, use pre‐money value If shutdown, value = 0 If acquisition, value shared, we use it If acquisition, no value shared, we estimate it Interpolate between rounds, and extrapolate after last round Essential: Adjust estimated values for selection bias.

Data challenges: 1) Gravefinder bot
to find quiet failures. 2) Rounds: Upward bias in reported values. Correct bias using uncensored, secret, data. 3) About half of acquired companies do not share a value. Many are actually failures. To estimate missing values, we use everything we know about the company (money raised, industry, location, level of the stock market, years from first round, business status, bridge before exit, whether acquirer was public or private, and more), plus data we have gathered on effort required to find findable values. Bigger effort to find a value ⇒lower value.

The Index 0 1,000 2,000
3,000 4,000 5,000 6,000 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 The Sand Hill Index: All Industries © 2014 Sand Hill Econometrics, Inc. ALL RIGHTS RESERVED The Sand Hill Index: All Industries

Industries 0 2,000 4,000 6,000
8,000 10,000 12,000 14,000 16,000 18,000 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 The Sand Hill Index: All Industries Compared Other Info Tech - Hardware Health Retail © 2014 Sand Hill Econometrics, Inc. ALL RIGHTS RESERVED Total Info Tech - Software Cleantech

Some summary statistics Total $$
invested in exited companies $410 bn Total $$ value of exiting companies $1,215 bn $$ Value to investors from exits $700 bn $$ Value to founders & ees $515 bn Gross nominal return to investors: 18%/yr All figures are before fees and carry % of founders with $ > 0 at exit: 30% Market Cap of companies still private now $870 bn $$ invested in companies still private now $250 bn

0.00% 0.50% 1.00% 1.50% 2.00%
2.50% 3.00% 3/1/1992 10/1/1992 5/1/1993 12/1/1993 7/1/1994 2/1/1995 9/1/1995 4/1/1996 11/1/1996 6/1/1997 1/1/1998 8/1/1998 3/1/1999 10/1/1999 5/1/2000 12/1/2000 7/1/2001 2/1/2002 9/1/2002 4/1/2003 11/1/2003 6/1/2004 1/1/2005 8/1/2005 3/1/2006 10/1/2006 5/1/2007 12/1/2007 7/1/2008 2/1/2009 9/1/2009 4/1/2010 11/1/2010 6/1/2011 1/1/2012 8/1/2012 3/1/2013 10/1/2013 5/1/2014 12/1/2014 VC Market Cap as Percent of US Public Market Cap

Are a few high‐value mature
companies responsible? Look at first rounds. 0.00 2.00 4.00 6.00 8.00 10.00 12.00 1990Q1 1990Q4 1991Q3 1992Q2 1993Q1 1993Q4 1994Q3 1995Q2 1996Q1 1996Q4 1997Q3 1998Q2 1999Q1 1999Q4 2000Q3 2001Q2 2002Q1 2002Q4 2003Q3 2004Q2 2005Q1 2005Q4 2006Q3 2007Q2 2008Q1 2008Q4 2009Q3 2010Q2 2011Q1 2011Q4 2012Q3 2013Q2 2014Q1 2014Q4 Total money raised in first rounds, 1990‐2015q2 ($ millions)

What about value per dollar
raised in first rounds? 0.00 1.00 2.00 3.00 4.00 5.00 6.00 1990Q1 1990Q4 1991Q3 1992Q2 1993Q1 1993Q4 1994Q3 1995Q2 1996Q1 1996Q4 1997Q3 1998Q2 1999Q1 1999Q4 2000Q3 2001Q2 2002Q1 2002Q4 2003Q3 2004Q2 2005Q1 2005Q4 2006Q3 2007Q2 2008Q1 2008Q4 2009Q3 2010Q2 2011Q1 2011Q4 2012Q3 2013Q2 2014Q1 2014Q4 Pre‐money value per $ raised, first rounds, 1990‐2015q2

And the number of companies
doing a first round? 0 100 200 300 400 500 600 700 800 900 1990Q1 1990Q4 1991Q3 1992Q2 1993Q1 1993Q4 1994Q3 1995Q2 1996Q1 1996Q4 1997Q3 1998Q2 1999Q1 1999Q4 2000Q3 2001Q2 2002Q1 2002Q4 2003Q3 2004Q2 2005Q1 2005Q4 2006Q3 2007Q2 2008Q1 2008Q4 2009Q3 2010Q2 2011Q1 2011Q4 2012Q3 2013Q2 2014Q1 2014Q4 New companies per quarter, 1990‐2015

Who gets the exit value?
0 20 40 60 80 100 120 140 160 180 200 Venture Capital Exit Value by year, bns of $$ founders investors

And the role of Northern
California? (note two cliffs in market cap – Google exit in 2004, Facebook exit in 2012) 0 0.1 0.2 0.3 0.4 0.5 0.6 Mar‐92 Dec‐92 Sep‐93 Jun‐94 Mar‐95 Dec‐95 Sep‐96 Jun‐97 Mar‐98 Dec‐98 Sep‐99 Jun‐00 Mar‐01 Dec‐01 Sep‐02 Jun‐03 Mar‐04 Dec‐04 Sep‐05 Jun‐06 Mar‐07 Dec‐07 Sep‐08 Jun‐09 Mar‐10 Dec‐10 Sep‐11 Jun‐12 Mar‐13 Dec‐13 Sep‐14 Jun‐15 Northern California, % of mkt cap and money raised NoCal % of Mkt Cap No Cal % of $$ raised