Contents. The PitchBook Platform. Credits & Contact

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1 AUSTIN 2016

2 Credits & Contact PitchBook Data, Inc. JOHN GABBERT Founder, CEO ADLEY BOWDEN Vice President, Market Development & Analysis Content GARRETT JAMES BLACK Senior Analyst BRYAN HANSON Data Analyst JENNIFER SAM Senior Graphic Designer Contents Contact PitchBook pitchbook.com RESEARCH EDITORIAL Introduction 3 Review: Austin in the US venture ecosystem Economy 5 Investment activity 6-10 Exits & fundraising Select league tables 13 4 SALES sales@pitchbook.com COPYRIGHT 2017 by PitchBook Data, Inc. All rights reserved. No part of this publication may be reproduced in any form or by any means graphic, electronic, or mechanical, including photocopying, recording, taping, and information storage and retrieval systems without the express written permission of PitchBook Data, Inc. Contents are based on information from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Nothing herein should be construed as any past, current or future recommendation to buy or sell any security or an offer to sell, or a solicitation of an offer to buy any security. This material does not purport to contain all of the information that a prospective investor may wish to consider and is not to be relied upon as such or used in substitution for the exercise of independent judgment. Photo courtesy of Eric Hunt, Wikimedia Commons. The PitchBook Platform The data in this report comes from the PitchBook Platform our data software for VC, PE and M&A. Contact sales@pitchbook.com to request a free trial. 2

3 A promising venture ecosystem facing hurdles Introduction When it comes to analyzing trends in venture investment, thinking in terms of an ecosystem is one of the more powerful approaches, as much within venture capital is not quite as quantifiable as one would like. Moreover, framing an investment ecosystem as an overlapping, interlocking system of cycles is especially illuminating when it comes to analysis of VC within a specific region, given the interplay between general business cycles, fund investing lifecycles, policy mandates and more. For example, the primary narrative for the US venture industry throughout 2016 has been a decline in activity even as valuations have remained relatively strong, with certain metropolitan areas enjoying more resilient numbers than others. But when zeroing in on one of those metropolitan areas, the location-specific historical trend in the supply of startups jockeying for and garnering VC investment becomes a more critical component for analysis. The metro-specific growth over the past several years also matters considerably. On top of that, it s important to highlight how metro-specific venture activity is necessarily limited by the speed of the spread of viable information within a given network, plus the size of the nodes in a venture network, i.e. the size of capital sources. Likewise, livability and interconnectivity within a metro matter, ranging from metrics such as ease of doing business to tax rates to typical rents to sprawl. The purpose of this PitchBook report series is to place PitchBook venture data within a broader context on a more geography-specific basis, the better to illustrate potential use cases for analysis. It s critical to note that within that broader context one must take timing into account. The growth percentage over time is an important indicator of a venture ecosystem s overall health, as one of my collaborators remarked during our review, and there is always more to any existing ecosystem than can be rendered in a dataset. Look up a company. And its cap table. And its investors. And its EBITDA multiples. And its board members. In seconds. The PitchBook Platform has the data you need to close your next deal. Learn more at pitchbook.com As this is the inaugural installment of the metro-specific series, we welcome your feedback and questions reach out to us at reports@pitchbook.com. I d like to thank S3 Ventures, Sante Ventures, the Austin Chamber of Commerce, PTV Healthcare Capital, and the National Venture Capital Association, among others whom assisted in the production of this report. GARRETT JAMES BLACK Senior Analyst 3

4 Review: Austin in US venture ecosystem Snapshot of Austin MSA s size within the US venture ecosystem as a whole In early August 2016 we released the first US Venture Ecosystem: FactBook, the largest PitchBook report ever and a compendium of venture and relevant economic datasets for the top 12 (by overall venture activity) metro areas within the US. Just as a recap, we have reproduced the table ranking the size of the 12 venture ecosystems below, to provide some context for where the Austin MSA venture ecosystem stood in terms of overall size in mid More rigorously assessing the quality of a given venture ecosystem is something we are still working toward, so we d like to stress that size does not entail quality in any way. What is more important to note from the table below before moving on is which key factors in the venture industry matter most for a smaller ecosystem which Austin certainly is among the ones already enumerated in the introduction. Note: As of 6/30/2016, this ranking was generated by weighting capital raised, VC invested, VC activity and venture-backed exit value equally, tallying up their ranking in each area, then summing and sorting from lowest to highest, with a lower score indicating a larger ecosystem. MSA Size of VC ecosystem, ranked Total VC funds raised since 2006 Total VC invested since 2010 Total # of VC rounds since 2010 Total exit value since 2010 San Francisco #1 #1 $117.6 billion #1 $101.4 billion #1 9,710 #1 $90.8 billion San Jose #2 #4 $35.5 billion #2 $43.3 billion #3 4,152 #2 $63.5 billion New York #3* #2 $43.6 billion #3 $33.9 billion #2 6,174 #4 $17.6 billion Boston #3 #4 $41.2 billion #4 $30.7 billion #4 3,664 #3 $28.7 billion Los Angeles #5 #9 $2.7 billion #5 $21.3 billion #5 3,403 #5 $11.2 billion Seattle #6 #5 $7.6 billion #7 $8.4 billion #6 1,717 #10 $6.7 billion Chicago #7 #7 $3.4 billion #8 $8.3 billion #9 1,348 #6 $9.95 billion Washington, DC #8 #6 $4.8 billion #9 $8.2 billion #7 1,416 #9 $7.4 billion San Diego #9 #11 $1.5 billion #6 $9.4 billion #10 1,317 #7 $8.7 billion Austin #10 #10 $1.9 billion #10 $6.6 billion #8 1,376 #12 $3.7 billion Philadelphia #11 #8 $3.0 billion #12 $4.8 billion #11 1,003 #11 $5.4 billion Atlanta #12 #12 $1.15 billion #11 $5.0 billion # #8 $7.8 billion. *New York and San Jose technically tied but given San Jose s exit value and VC invested we gave it second place. 4

5 Economy Austin s current economic condition & recent trends When assessing how the health of the local economy impacts the venture ecosystem, some primary factors to look at are tax burdens, relative wages, rental rates and the supply of talent. Seasonal temporary hiring contributed to Austin s unadjusted employment rate declining to 3% in December 2016, while Texas on the whole saw a 4.6% seasonally adjusted jobless rate in November 2016, per the Texas Workforce Commission. Austin and Texas on the whole are still exhibiting significantly strong numbers, but by and large it appears the marked expansion since the financial crisis is slowing. The Federal Reserve Bank of Dallas released data in late December showing the Austin Business-Cycle Index grew by an annualized rate of 2.9% in October 2016, considerably below relative to the last decade as a whole. We emphasize year-over-year changes the better to gauge more recent changes that will have affected current sentiment so the impact of monthly or quarterly influxes of data do not overly drown out longer-term trends. Such longer-term perspectives are crucial to take into account when considering typical venture investment cycles. That said, a more recent decline in economic indicators, however, will contribute to and may have already clouded domestic and outside investor sentiment, at least somewhat. For now, the state of the Austin economy is still quite healthy any negative changes are distinct mainly due to the fact they are in proportion to previous, markedly strong numbers. A brief note on Austin s livability: Given the increasing popularity of events such as SXSW and Austin s persisting cultural reputation, as well as a sizable transportation bill that passed recently and input from multiple domestic Austin metropolitan statistical area parties, it appears the area is still and will remain quite attractive as a residence for some time. Texas has no corporate, individual income or state property tax. It also ranks 41st among the 50 US states in taxes paid per $1,000 of personal income, at $88. Select statistics Labor force, 2016* 1,101,336 Labor force growth, Oct. 15-Oct % Employment growth, Oct. 15-Oct % Unemployment growth, Oct. 15-Oct % Average hourly earnings of all employees, August 2016 $27.35 Growth in average hourly earnings of all employees, 2015 YTD-2016 YTD 2.4% Change in existing building inventory, 2015 YTD-2016 YTD 0.93% Change in vacancy rate, 2015 YTD-2016 YTD -0.2% Change in quoted full-service equivalent rental rates 8.2% Quoted full-service equivalency rental rate $32.7 Change in existing home sales, 2015 YTD-2016 YTD 3.8% Change in existing home average price, 2015 YTD-2016 YTD 5.3% Metro Business Cycle Index, August 2016 (Oct. 1980=100) Change in Metro Business Cycle Index, 2015 YTD-2016 YTD 6.4% Austin Business-Cycle Index, October 2016* 2.9% Monthly change in unemployment rate, September 2016-October 2016* -0.2% Change in percentage of homes sold that were affordable for medianincome families, 2Q Q 2016* 2.4% Sources: US Bureau of Labor Statistics, CoStar Group, Federal Reserve Bank of Dallas, Real Estate Center at Texas A+M University & National Association of Realtors, & Texas Workforce Commission, data not seasonally adjusted. YTD as of 11/19/2016 excepting average hourly earnings, which are as of 9/29/2016. Office rental data is as of 10/6/2016, residential as of 11/1/2016. *As of 12/1/

6 Investment activity An overview of Austin s venture investment activity Overall, the rate of venture investing in Austin startups has slid considerably, after a boom period of two years straight Austin MSA venture activity 78 $633 Deal Value ($M) $846 $ $ $688 # of Deals Closed 156 $ $ $ $1, $1, $978 Investment in Austin-based startups is on the downswing relative to elevated activity from 2014 to Beginning in the final quarter of 2015, activity has oscillated in a subdued fashion on a quarterly basis, although aggregate capital invested flatlined in the back half of There are multiple challenges that could contribute to a cyclical downturn within Austin specifically, relative to the nationwide decline. As we ve already seen, the local economy is healthy, but among these challenges are: an insufficient supply of startups decreasing the probability of VCs finding worthwhile opportunities; lack of robust domestic sources of capital; declining interest on the part of both local and outside investors due to increases in perception of risk; and a sluggish recycling of capital. So which of these are most relevant for Austin, right now? Austin MSA venture activity $600.0 $500.0 $400.0 Deal Value ($M) # of Deals Closed $ $ $ $0.0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

7 According to the most recent edition of the Kauffman Index of Startup Activity, the Austin metro area ranked first in the US in its rate of new entrepreneurs and fourth in terms of startup density (defined as number of startups per 1,000 firm population), plus second in growth entrepreneurship. It should be noted that the composition of that startup population is diverse enough that it may not be exactly representative of the types of industries that are likely to attract venture capital food vendors such as taco trucks, for instance. The strong supply of new business formation makes sense in the context of economic data it s simply less expensive to build companies in Austin. Accordingly, the total supply of startups likely to vie for funding is not as much of an issue, from both quantitative and anecdotal angles. resolutely high median financing size and post-valuation particularly at the late stage imply that investors supply of capital is still ample, yet the benchmarks for obtaining financings of such size have shifted upward. Each venture ecosystem across the US will First financings have also declined considerably in number through the end of 2016 but value has remained stable First-time financings of Austin MSA-based startups 25 Deal Value ($M) experience somewhat insulated rises in those metrics, interconnected as they are by information flow but insulated somewhat by relative costs and available/willing sources of capital. It s easy to ascribe such a shift to a typical period in any investment cycle where # of Deals Closed But inflated financings and valuations are. Coupled with a decline in financing activity overall plus a drop-off in the number of first-time financings (although VC invested in first-time rounds is quite robust), the $150 $148 $167 $105 $103 $119 $249 $103 $197 $189 $144 Activity may be declining, but median sums invested remain resolutely high Median venture financing size ($M) in Austin MSA Valuations are either up or at least staying flat Median venture financing post valuation ($M) in Austin MSA $12.0 $90.0 $10.0 Angel/Seed Early Stage VC Later Stage VC $9.3 $80.0 $70.0 Angel/Seed Early Stage VC Later Stage VC $8.0 $60.0 $60.0 $6.0 $5.9 $50.0 $40.0 $4.0 $3.96 $4.0 $30.0 $33.5 $2.0 $0.7 $1.0 $20.0 $10.0 $20.8 $21.5 $5.0 $4.5 $0.0 $

8 investors fear of overexuberance and oversupply of capital leading to slumping returns on sums invested and consequently begin to pull back somewhat. Thus, once reversion to the mean has completed, Austin is likely to see venture financing creep up once more, barring significant macro shocks. However, when it comes to metro-level analysis, the pipeline of previously financed companies eligible for follow-on rounds becomes more crucial. Sufficient levels of funding across the entire capital stack has a greater impact when analyzing overall activity on a metro scale. There was a significant ramp-up in seed-stage financings in tandem with a much more modest increase in Series A fundings across the past few years, for example. This increase doubtless already fed into Series A financings that are occurring now. Yet any potential slump in the seed stage such as that which was observed in 2016 through late November could portend ill for the width of the startup pipeline when it comes to Series A funding down the line. Such a phenomenon could well have come into effect in 2016 already, happening to any given series of financing and subsequent rounds. Accordingly, with overall supply not being an issue yet the benchmarks of quality for startups to garner venture financing having moved upward in a highly valued climate, the Proportionally, later stages are still resilient yet Series A financings hit a multiyear low in 2016 Austin MSA VC activity (#) by series 200 Quite coincidentally, Series B financings saw no less than $211.5M in total value in 2016 Austin MSA VC activity ($M) by series $1, Seed Series A Series B Series C Series D+ $1,200.0 $1,000.0 Seed Series A Series B Series C Series D+ 120 $ $ $ $ $ Aligning with national trends, early-stage numbers have been hit hard Austin MSA VC activity (#) by round size Capital invested in significantly sized rounds has declined but not as sharply Austin MSA VC activity ($M) by round size 300 $1, Under $500K $500K-$1M $1M-$5M $5M-$10M $10M-$25M $25M+ $1,400 $1,200 Under $500K $500K-$1M $1M-$5M $5M-$10M $10M-$25M $25M+ 200 $1, $ $600 $ $ $

9 Austin MSA VC activity ($M) by sector Austin MSA VC activity (#) by sector Austin MSA VC activity in healthcare devices & services 4 $14 5 $55 Deal Value ($M) 8 8 $103 $16 10 $48 7 $29 # of Deals Closed 9 9 $71 $114 $27 Commercial Services Consumer Goods & Recreation Energy HC Devices & Supplies HC Services & Systems IT Hardware Media Other Pharma & Biotech Software Commercial Services Consumer Goods & Recreation Energy HC Devices & Supplies HC Services & Systems IT Hardware 6 Media Other Pharma & Biotech Software 12 $37 11 $23 9 stutter in the startup pipeline could lead to repercussions in the years to come for the Austin area. However, the timeline of supply is also regulated by ongoing startup activity within sectors more primed to attract venture investors interest. Particularly analyzing within an ecosystem framework, the formation of sizable new educational institutions or headquarters relocations of major companies plays into such associated startup formation considerably. The opening of the new Dell Seton Medical Center as well as the establishment of a nonprofit Capital City Innovation that will target connecting entrepreneurs with the healthcare research and development efforts at the new center could help engender the creation of new healthcarerelated startups. Anecdotally, the healthcare sector pipeline is still underrepresented in Austin if not the nation as of late in the gradual recovery since the financial crisis, barring a gradual uptick in Austin over the past few years. Sector diversity within a venture ecosystem matters more and more nowadays for longterm health. Particularly as the lines between various sectors blur with advances in enterprise-specific software programs and advances in certain hardware segments, a truly thriving venture/startup ecosystem will see more startups geared toward such confluences. Similar interactions are crucial for sectors apart from general consumer and enterprise software, which have benefited more directly than most from the dramatic decrease in launching costs over the past 15 years. Examples include startups targeting medical records systems in particular with tailored capabilities as opposed to, say, a general filesharing service like Dropbox. Drawing outside investment is critical

10 to the health of any ecosystem, particularly those in mid-growth stages such as Austin s, and encouraging such sector interconnections will be crucial in maintaining outside investors interest. In the past handful of years, Austin has been hyped as a startup destination for multiple reasons, particularly lower launch and operating costs plus enhanced livability and cultural appeal. Amid the slump in activity, the tally of rounds with outside investors participation has remained stable, while financing counts have actually fared better, relatively speaking, than the total number of completed financings, at least in terms of pace in proportion to That may be due more to Austin s relatively lower costs as well as a crop of promising startups emerging from the recent boom in angel/seed investment and now attracting outside interest as they contribute to Austin s reputation as a thriving startup ecosystem. Up until 2016, outside firms/angels participated in far more angel/seed fundings relative to other stages, but through the end of 2016, early and late-stage numbers have remained more resilient proportionally. This also testifies to how Austin s population of startups is still healthy, some of which are still able to garner financing after benchmarks have shifted. Investment in Austin MSA-based companies with participation by investors headquartered outside Texas Investments ($M) by size in Austin MSA-based companies with participation by investors headquartered outside Texas Deal Value ($M) # of Deals Closed $319 $282 $306 $242 $313 $392 $536 $416 $895 $571 $ Under $500K $500K-$1M $1M-$5M $5M-$10M $10M-$25M $25M+ Investment (#) by stage in Austin MSA-based companies with participation by investors headquartered outside Texas 120 Investment (#) by size in Austin MSA-based companies with participation by investors headquartered outside Texas 10 Angel/Seed Early VC Late VC Under $500K $500K-$1M $1M-$5M $5M-$10M $10M-$25M $25M+ 10

11 Exits & fundraising Datasets of venture-backed exits and local venture fundraising in Austin A central component of any venture ecosystem is the recycling of dollars invested by both LPs and GPs. In the overall fundraising and investing cycle, attrition will occur at certain periods, yet if long-term fund economics do not work out, with fund investors eventually getting their money back, then any local ecosystem cannot survive. And, to reiterate an earlier point, without a reasonably healthy local ecosystem, outside investment simply will not be feasible. Accordingly, the relatively stable level of venture-backed exits of Austin-based companies in 2016 bodes well, although the total value exited is toward the lower end of historical tallies. However, considering the natural lag between investment and exit periods, 2016 exit value is decent relative to annual sums invested between 2006 and Given the historical scale of Austin exits, activity in 2016 has been relatively healthy, although value was toward the lower end Venture-backed exits of Austin MSA-based companies 12 $190 7 $156 Exit Value ($M) 12 $ $ $859 # of Exits $ $ $ $ $ $361 Interestingly, acquisitions are at a decade low Venture-backed exits (#) by type of Austin MSA-based companies Corporate buyers still shell out the most, however Venture-backed exits ($M) by type of Austin MSAbased companies Acquisition Buyout IPO Acquisition Buyout IPO 11

12 The peak of domestic fundraising is still carrying forward, given typical investment lifecycles Austin MSA venture fundraising 4 $821 1 $ $147 Capital Raised ($B) # of Funds Closed $0 3 3 $39 $ $462 $ $97 $75 The timing of fundraising and exit cycles could be initially presumed to roughly sync, with a successful fundraising period overlapping somewhat with hefty sums exited, yet the impact of hype cycles and flourishing local startup scenes should not be overlooked. Hence the surge in domestic funds closed between 2013 and Many of the funds raised even two to three years ago are likely still investing, although some are perhaps nearing the tail end of their active period. With outside investors still maintaining a significant presence in Austin, the role of local firms in syndicates will still be crucial, yet not solely responsible for bolstering investment totals. That said, greater growth is unlikely to occur without a ramp-up in domestic fundraising. A fair number of lucrative exits occurred Venture-backed exits of Austin MSA-based companies (#) by size A clear majority of exit value in several sizable sales Venture-backed exits of Austin MSA-based companies ($M) by size Under $25M $25M-$50M $50M-$100M $100M-$500M Under $25M $25M-$50M $50M-$100M $100M-$500M 12

13 Select league tables Select rankings of most active investors and deals in Austin Most active investors in Austin MSA Select 2016 venture financings of companies headquartered in Austin Capital Factory 10 Silverton Partners 9 Central Texas Angel Network 9 LiveOak Venture Partners 5 Mercury Fund 5 Wild Basin Investments 5 ATX Seed Ventures 4 Floodgate Fund 4 S3 Ventures 4 Techstars 4 UT Horizon Fund 4 Altos Ventures 3 Founders Fund 3 Frontier Tech Ventures 3 New Science Ventures 3 Noro-Moseley Partners 3 Company Deal size ($M) Series/ stage Pivot3 $55.5 C Spredfast $50.1 F Lumos Pharma $34 B Bigcommerce $30 E Sector Systems & info mgmt Media & info services Drug discovery Business/ productivity software Silvercar $28 C Automotive CognitiveScale $21.8 B FloSports $21.2 B Twyla $19 A OutboundEngine $18 C ESO Solutions $17.7 C The Zebra $17 A TrendKite $16.3 D Systems & info mgmt Social/ platform software Specialty retail Media & info services Medical records systems Media & info services Business/ productivity software Select investors Argonaut Private Equity, S3 Ventures Riverwood Capital Deerfield Management GGV Capital, American Express Ventures, SoftBank Capital Audi of America, Austin Ventures Norwest Venture Partners, Intel Capital DCM Ventures, Bertelsmann Digital Media Investments Google Ventures S3 Ventures, Altos Ventures, Silverton Partners Accel-KKR, Wild Basin Investments Ballast Point Ventures, Daher Capital Adams Street Partners, Mercury Fund All league tables are compiled using the number of completed VC rounds for Austin MSA or Austin-based companies in 2016 through December 31. To ensure your firm is accurately represented in future PitchBook reports, please contact survey@pitchbook.com. Venture capital Venture capital, for the purposes of this report, is defined as institutional investors that have raised a fund structured as a limited partnership from a group of accredited investors, or a corporate entity making venture capital investments. Valuations Pre-money valuation: the valuation of a company prior to the round of investment. Post-money valuation: the valuation of a company following an investment. Exits This report includes both full and partial exits via mergers and acquisitions, private equity buyouts and IPOs. Fundraising This report includes Austin-based venture capital funds that have held a final close. Funds-of-funds and secondary funds are not included. 13

14 We do EBITDA multiples, private comps, valuations, market trends, growth metrics. You build a better portfolio. See how the PitchBook Platform can help your private equity firm close your next deal. demo@pitchbook.com