State of the Markets The Early Harvest Second Quarter 2017

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1 State of the Markets 207 The Early Harvest Second Quarter 207

2 State of the Markets: Second Quarter 207 Four months in, 207 is shaping up to be a year of harvesting and replanting for the innovation economy. The SVB team examined the private-company growth propelled by the large capital raises of and the subsequent plunge in large investments and exits in 206. Given the activity we ve seen in the first quarter of 207, we are forecasting significant harvesting of returns resulting from the last decade of sweeping innovations. We predict many private companies will find numerous avenues open in 207 for raising cash. For those companies with the strongest growth stories those who are reaching their previously frothy valuations the public equity market, sparingly available in 206, is opening to new issuances. For companies still growing into their private valuations, yet in need of capital, there are exceedingly well-capitalized private equity firms seeking buyout opportunities. Further, as technology accelerates disruption of incumbent business models, we expect an increase in strategic corporate acquisitions designed in many cases to help the corporates stay relevant in the 2st century. But 207 isn t only about harvesting returns. Venture capitalists, flush with cash after raising $42 billion in 206, will have many opportunities to fund the next crop of innovative companies that are poised to drive disruption for the next decade. State of the Markets 2

3 State of the Markets: Second Quarter 207 Predictions: Year to Date 2 Market Dynamics 3 Decisions Ahead for Late Stage 4 The Early Harvest: IPO Conditions 5 Encouraging Outlook for UK 6 Closing Thoughts State of the Markets 3

4 Preliminary Grades on 207 Predictions The themes of 206 have provided reliable insight into what 207 holds for the venture landscape. But risks remain: Unexpected economic or geopolitical events could shock the innovation economy. Q Predictions With plenty of capital in VC war chests, valuations remain stable across early stages but fall in later stages without crossover participation. With public company valuation confidence restored and a stable of maturing unicorns, 207 sees 2 to 3 times the number of IPOs as 206. Tech giants spending spree reaches the VC-backed ecosystem but with mixed success compared to the most recent private valuation. Valuations IPOs M&A Q2 Updates Early indications for 207 point toward a plateau in valuations, as comparable capital levels flow to fewer deals. After a slow start to 207 following the U.S. presidential election, IPOs have picked up steam. Bellwether Snap Inc. successfully listed in March. Two unicorns were acquired in Q 7 as many as went public. Expect future deals both explosive (AppDynamics, $3.6B) and tame (SimpliVity, <$B). With full coffers, fundraising in 207 falls from the 206 high, but interest from LPs stays high. Fundraising After peak fundraising in 206, Q 7 saw the fewest VC funds closed since Q3 5. LPs seem to have turned their attention to private equity firms. With rates rising, asset managers look for growth elsewhere. This helps deflate the overheated market for late-stage capital. Crossovers Late-stage mega-rounds appear to be a thing of the past. The Fed raised rates again in March, and expectations are high for additional hikes. Sources: S&P Capital IQ, The Wall Street Journal, Bloomberg and PitchBook. State of the Markets 4

5 Market Dynamics State of the Markets 5

6 Post-Election Rally Reaches New Peaks The bull run in U.S equities showed no signs of slowing post-election, touching all-time highs even in the face of fiscal policy stumbles and geopolitical uncertainty. Nasdaq Composite Index: Q2 6 Q Post 206 Election: +4% U.S. investment incentives Tax reform Year 2000 Peak Geopolitical concerns Reduced trade and/or immigration Rising rates 4000 April May June July Aug. Sept. Oct. Nov. Dec. Jan. Feb. Mar Source: S&P Capital IQ. State of the Markets 6

7 The Federal Reserve Tightens Monetary Policy Strong economic growth indicators in the United States have led the Fed to hike rates three times since October 205, departing from a decade of dovish interest rates. The market believes there are more to come. Fed Funds Effective Overnight Rate: Q2 07 Q 7 6% Probability of a Rate Hike based on Fed Funds Futures: As of 3/3/ % 5% 4% 56.7% 63.0% 3% 2% % Three rate hikes in the last 8 months 3.3% 0% April Jan. Jan. Jan. Jan. Jan May June July Sept. Sources: S&P Capital IQ and Bloomberg. State of the Markets 7

8 Rising Rates Lead to Real Capital Movement As the sun sets on an era of historically low rates, fund managers are once again able to find yields in debt instruments. Investors in Q 7 clamored for floating-rate corporate loans, which perform well in rising interest rate environments, with outsized demand actually reducing the cost of borrowing for firms. This led to the highest quarterly volume of repricings in the last 5 years. Quarterly Volume of Corporate Leveraged-Loan Repricing: Q 02 Q 7 $250B $200B $50B $00B $50B $0B Adopted from: Wirz, Matt. U.S. Firms Slash Interest Tab in $00 Billion Refinancing Blitz. The Wall Street Journal. Feb. 8, Data source: Leveraged Commentary and Data, an offering of S&P Global Market Intelligence. State of the Markets 8

9 Decisions Ahead for Late Stage State of the Markets 9

10 Froth Subsides from an Otherwise Healthy Ecosystem As crossover investors chase returns elsewhere, $00M-plus rounds are again something of a rarity. Late-stage companies, which may have otherwise continued to rely on growth capital, will face decisions as to how to adapt to a shifted landscape. Venture Capital Invested in Information Technology by Round Size: 202 Q 7 $20B Split by Round Size: $00 999M $B+ $25 50M $50 00M $0 9M $0 24M $8B $6B $4B $2B $00M+ Rounds $0B $8B $6B $4B $2B $0B Q Q2 Q3 Q4 202 Source: PitchBook. Q Q2 Q3 203 Q4 Q Q2 Q3 204 Q4 Q Q2 Q3 205 Q4 Q Q2 Q3 206 Q4 Q 207 State of the Markets 0

11 Options Available to the Late Stage Lacking the crossover mega-rounds of 204 and 205, which extended private runway, today s late-stage ventures face a familiar assortment of possibilities worth exploring some more lucrative than others. $00M+ Rounds Financial Buyers Strategic Buyers IPO State of the Markets

12 Turning to Strategic Investors Sell or Raise? Consolidation continues as tech giants look for inorganic growth and accelerated access to hot markets particularly autotech and developer tools. Many of these acquisitions were of publicly traded companies, including the four largest: NXP, LinkedIn, Mobileye and NetSuite. Notable Strategics $200M+ Acquisitions: 206 Q 7 Most Active CVC s Deal Participation: 206 Q 7 Apple Alphabet Microsoft Split by Total Round Size: Deals $50M+ Deals <$50M 70 Oracle Intel Cisco Qualcomm Adobe Salesforce GV Intel Capital Qualcomm Ventures Salesforce Ventures Comcast Ventures. Mobileye, NXP and Quip had been announced but had not closed as of March 3, 207. Sources: S&P Capital IQ and PitchBook. State of the Markets 2

13 Names to Know in Private Equity Private equity took notice of steep declines in tech valuations in mid-206, prompting a string of acquisitions. Be on the lookout for more investment following new fundraising in 206 and 207. Notable Private Equity Firms: Technology HQ Vista Equity Partners KKR Insight Venture Partners Thoma Bravo Silver Lake Austin, TX New York, NY New York, NY Chicago, IL Menlo Park, CA Fundraise $0.5B March 207 $3.9B March 207 $6.0B In Process $7.6B Sept. 206 $5.0B April 207 Notable Investments $.8B Acquisition May 206 $.6B Acquisition April 206 Series G 2 Apr. 207 Series C 2 Feb. 206 Series F Jun. 204 Series D Oct. 205 Minority Investment Apr. 207 $3.0B Acquisition June 206 $24B MBO 2 / $67B Acq. 2 Feb. 203 / Oct. 205 Series G March 207 $.5B Acquisition Sept. 206 Series D 2 June 206 Series C April 207 $2.4B Acquisition Dec. 204 Growth Financing Aug According to The PE Hub; March 7, Denotes participation. Sources: Company websites, Crunchbase, Bloomberg, The PE Hub, S&P Capital IQ and PitchBook. State of the Markets 3

14 What Does It Take to Go Public Today? Despite investor sentiment shifting away from growth at all costs, all of the most recently announced cloud software offerings were unprofitable as of their S- filing. In fact, just two exceeded the Rule of 40 * guideline for measuring software-as-a-service company growth vs. profitability. Selected Metrics from Last SaaS S- Filings: 206 Q 7 Listed Filed Acquired Cloudera Okta 3 Coupa 4 AppDynamics 3 Notes: 20%. Growth: Fiscal Year 207 vs. Fiscal Year 206; Margin: Fiscal Year Growth: Full Year 206 vs. Full Year 205; Margin: Full Year Growth: 9 months ended Oct. 3, 206 vs. 9 months ended Oct. 3, 205; Margin: 9 months ended Oct. 3, 206 0% 4. Growth: 6 months ended June 30, 206 vs. 6 months ended June 30, 205; Margin: 6 months ended June 30, Growth: Full Year 205 vs. Full Year 206; Margin: Full Year 205 0% -80% -70% -60% -50% -40% -30% -20% -0% 0% Operating Margin Alteryx 2 BlackLine 4 Yext 3 Twilio 5 MuleSoft2 Everbridge 4 Apptio 4 00% 90% 80% 70% 60% 50% 40% 30% Revenue Growth *The Rule of 40 is a guideline for software-as-a-service companies to manage growth (approximated by revenue) in sacrifice of profitability (approximated by operating margin). Growth rate + profitability should exceed 40%. For further reading: Source: Company SEC filings. State of the Markets 4

15 The Early Harvest: IPO Conditions State of the Markets 5

16 Multiples Climb Following 206 M&A Blitz Cloud software companies continue to ride a wave of restored confidence in valuation metrics as they enter the public market. After a post-election pause at the start of the year, as of March 3, 207 two cloud software companies had successfully listed and three more had filed: Okta, Yext and Cloudera. NTM Revenue Multiples 0.0x Box Shopify: x Atlassian: 2x Twilio: 0x Q2-Q3 Cloud M&A Coupa: 2x MuleSoft: 2x 8.0x Cloud IPOs 2 BVP Cloud Index Constituents (Median) Demandware Alteryx 6.0x Instructure LinkedIn Apptio 4.0x Xactly Opower 2.0x 0.0x Good Times 6-Month Gap Between IPOs Restored Confidence Jan. 5 April 5 July 5 Oct. 5 Jan. 6 April 6 July 6 Oct. 6 Jan. 7. NTM revenue multiples for IPOs based on earliest estimates, adjusted to IPO date. 2. Multiples above 0x at IPO are represented with an arrow. Sources: S&P Capital IQ and Bessemer Venture Partners. State of the Markets 6

17 Recent Listings Exceed Their Private Values The success of recent IPOs serves as an indication of public market confidence. These companies represent a diverse range of sectors from social media and adtech to communications hardware. Market Cap Relative to Last Private Round for Venture-Backed Tech Companies Listing in 206 Q 7: As of 3/3/ % 50% +06% +423% IPO Date: % 50% 0% -50% Acacia.Comm. Impinj Twilio MuleSoft The Trade Desk Quantenna.Comm. Coupa Nutanix Snap Everspin.Tech. Alteryx Apptio Includes venture-backed technology companies with available private valuation data within five years of IPO. Sources: PitchBook and S&P Capital IQ. State of the Markets 7

18 Markets Calm Waters Ideal for IPO Plunges After the 206 U.S. election, the VIX experienced its longest streak of sub-5 closes since Despite this period of calm, just two technology companies priced in the three months following the election. Snap broke that streak with its $3.4 billion capital raise in early March. 90 VIX Volatility Index (Daily) vs. U.S. Tech IPO Count (Semiannual): 2007 Q Election IPO Count 0 Jan/ Jan/082008Jan/ Jan/0 200 Jan/ 20 Jan/2 202 Jan/3 203 Jan/4 204 Jan/5 205 Jan/6 206 Jan/7Q 7 Sources: S&P Capital IQ and Yahoo! Finance. State of the Markets 8

19 Field of $B+ IPO Candidates Remains Crowded Snap s IPO was just the third U.S. tech debut greater than $0 billion since Facebook s 202 offering. Seven others have attained that lofty valuation through private funding, with another 82 above $ billion. U.S. Tech IPOs with Market Caps $B+ Sized by First-Day Market Cap or Last Private Valuation: 202 Q and Beyond Q Q3 Q4 x3 x30 x35. For illustrative purposes only. Sources: S&P Capital IQ and The Wall Street Journal. State of the Markets 9

20 Encouraging Outlook for UK State of the Markets 20

21 UK Shows Vitality in European Venture Landscape While the long-term impacts of the decision to leave the EU are yet to be seen, the period following last summer s referendum saw no significant drop in deal numbers. In fact, recent figures revealed UK tech firms received more venture capital investment than any other European country post-referendum. 2 European Venture Activity by Region: Q 7 European Venture Activity by Metro (Top 5): Q 7 00% Deal Value Deal Count Metro Area Deal Count Deal Value 90% 80% 37.5% 4.6% UK/Ireland London M 70% 60% Southern Europe Nordics Paris M 50% 40% 30% 20% DACH France/Benelux Central & Eastern Europe Berlin M Stockholm M 0% 0% Barcelona 29.0M. The Deal: Equity Investment in the UK 206. Beauhurst (February 207). 2. PitchBook data sourced by London & Partners (January 207). Sources: PitchBook and Beauhurst. State of the Markets 2

22 Strong Fundraising Leads to Full Coffers Global venture capital and private equity firms have $2 billion and $754 billion, respectively, to invest after raising new funds in recent years. We therefore expect to see funds continue investing in the best high-growth UK technology companies through 207 and beyond. Global Venture Capital Overhang: European Venture Fund Size: $40B $20B $00B 206 Overhang by Fund Size $B+ 200M 60M Average Median $80B $500M- $B 20M $60B $40B $20B $250M- $499M- $00M- $249M- 80M 40M <$00M $0B M Based on returns data through June 206 (PitchBook, January 207). Source: PitchBook. State of the Markets 22

23 Closing Thoughts State of the Markets 23

24 Tech Drives Overall Economic Growth Since the hype and collapse of the dot-com era almost two decades ago, technology has steadily increased in importance (and value) for the U.S. economy. Tech companies comprise nearly one-quarter of the S&P 500 index value. As a consequence, all industries face disruption from tech-native companies. S&P 500 Technology Sector Weighting: % Largest U.S. Companies by Market Cap as of 3/3/207 with Value Change Since 3/3/205 Autos Lodging 30% -3% +7% 2 25% 23% 20% 5% -28% 3 +20% 0% -34% 5% Technology Peak of Trough of Slope of Trigger Inflated Disillusionment Enlightenment 0% Expectations % Tech-Native Other -9% -9%. Amazon.com has been included in the technology sector. 2. Value change for Marriott is based on stock price. Marriott acquired Starwood for $3B in cash and stock in September Airbnb value is based on most recent private valuation (March 207). Sources: Company websites, PitchBook, Siblis Research, CNBC and S&P Capital IQ. State of the Markets 24

25 Corporates Take up the Innovation Imperative Old-guard companies have recognized and embraced the need to innovate from soup to nuts and bolts, no sphere of the global economy has been unaffected by this next generation of technology. Number of New Corporate Venture Capital Groups: Deals with CVC Participation: Denotes launch of CVC and/or first investment. 2. Denotes announcement of corporate initiative (accelerator, research facility, etc.) Sources: Company websites, Crunchbase, Fortune, Bloomberg, The Wall Street Journal, Star Tribune, Xconomy, Skift and CB Insights. State of the Markets 25

26 Updated: SVB s Interactive Unicorn Navigator Use our Unicorn Navigator to follow the journeys of the billion-dollar club as they traverse the venture landscape toward an eventual exit now updated with 207 entrants: C3 IoT, View and Zoom Video. Sources: The Wall Street Journal, PitchBook and S&P Capital IQ. State of the Markets 26

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