2018 PHILADELPHIA VENTURE REPORT

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1 2018 PHILADELPHIA VENTURE REPORT Data provided by

2 IT S NOT A RISK WHEN YOU HAVE WHAT IT TAKES. Matt Klinger Senior Vice President Mid-Atlantic (703) We believe in the risk takers, the game-changers and the disrupters those committed to leveraging innovation to make the world a better place. Bridge Bank, founded in 2001 in Silicon Valley, serves small-market and middle-market businesses across many industries, as well as emerging technology companies and the private equity community. Geared to serving both venture-backed and non-venture-backed companies, Bridge Bank offers a broad scope of financial solutions including growth capital, equipment and working capital credit facilities, sustainable energy project finance, venture debt, treasury management, assetbased lending, SBA and commercial real estate loans, ESOP finance and a full line of international products and services. BridgeBank.com Bridge Bank, a division of Western Alliance Bank. Member FDIC.

3 Contents Introduction 3 Dealmaking 4-6 Outside & non-traditional investors 7 Exits & fundraising 8 Data as of: December 31, 2018 Note: This report covers the Philadelphia- Camden-Wilmington Metropolitan Statistical Area (Philadelphia), which includes parts of Pennsylvania, New Jersey, Delaware and Maryland. All data and charts cited throughout the report are based on companies and/or investors headquartered in this region. Introduction The Philadelphia entrepreneurial community is on the rise! Driven by continued growth and international prominence in life sciences (and in particular, cell and gene therapy) along with a strengthening enterprise software scene, Philadelphia cracked the top 10 most active regions in the US for venture in Our angel investment community continues to grow along with increased investment from Silicon Valley VCs, corporate investors and the growth stage-focused private equity community. Philadelphia set a high-water mark for venture investment in 2018 with close to $1.4 billion and we are already off to a fast start in Entrepreneurs increasingly are planting their flag in Philadelphia to take advantage of the tech labor pool, high quality of living and access to top commercial markets. Please join me in thanking our sponsors of this report. PACT looks forward to working with them and all of you to continue to elevate Philadelphia! Dean Miller, President & CEO Report Sponsors 3

4 Dealmaking The Philadelphia metro area achieved one clear record in 2018 and nearly tallied another. Almost $1.4 billion was invested across 194 venture financings, with the former figure outstripping any prior year by a significant sum and the latter almost matching the prior high of 195 in The steadiness of activity within the Philly metro is striking; the past five years have each seen just around 190 completed VC rounds, even as VC invested in aggregate has varied. A likely contributor to the steadiness could have been the surge in early-stage financing volume, even as angel & seed financing volume dipped between 2017 and Deal size inflation has occurred across the global venture ecosystem, leaving hardly any ecosystem out; the Philadelphia MSA observed much of the same, although to a much lesser degree when comparing median financing sizes by stage. The $600,000 median for angel & seed deals, however, is nearly the highest figure recorded, while early- and late-stage rounds are also tracking at historical highs if not record. Such a sum would also explain why the area clocked a near-record $100 million in angel & seed capital invested in 2018 alone, across 70 transactions. However, analyzing venture activity by size ranges, it is worth noting that proportions of volume have held relatively steady. That does differ from broader venture ecosystem trends and could suggest that even as some inflation in deal sizes and valuations has occurred, it has yet to exert a significant impact upon overall investment activity. Larger rounds are certainly boosting Philadelphia MSA VC deal activity $508.6 $526.9 $551.5 $450.4 $607.0 $564.9 $828.2 $920.6 $1,115.4 $749.6 $1,396.9 Philadelphia MSA angel & seed deal activity $26.4 $22.6 $49.4 $32.2 $41.0 $108.4 $82.1 $99.2 $78.4 $99.7 4

5 overall VC invested; $886 million was invested in the bracket of $25 million or more in 2018, more than ever before and a record proportion of total VC invested. This is probably more a result of the ecosystem maturing sufficiently to produce a small crop of companies capable of raking in such sums, however, than it is the result of any domestic competition yielding inflation. Another contributor to the steadiness of financing trends across the Philly ecosystem, as well as the resistance to overinflation of valuations, is the diverse array of sectors garnering funding. Although software retains a plurality over time, as opposed to multiple other venture ecosystems, it never attains a majority, and moreover, the variance in year-over-year funding activity is considerable. As enterprise and consumer software have seen some of the fiercest competition in the past decade, helping underpin significant valuation expansion therein, the volume of financing in other sectors that are less competitive could help depress the overall level of median deal sizes. Median Philadelphia MSA VC deal sizes ($) by stage $7 $6 $5.0 $5 $4.2 $4 $3 $2 $1.8 $1.0 $1 $0.6 $0 $0.4 Angel & seed Early stage Late stage Philadelphia MSA VC deals ($) by size 100% 90% 80% 70% $25M+ 60% $10M-$25M 50% $5M-$10M $1M-$5M 40% $500K-$1M 30% Under $500K Participation from corporate investors has also contributed to aggregate VC activity, although not to a lofty extent overall excepting a mammoth tally of associated deal value in Hitting a high of 22 completed financings in 2018 a record for the decade corporate players joined in larger deals than ever before, for a cumulative total of $799 million in VC invested. As may be suspected, a few large transactions were responsible for such a jump, chief among them the $295 million funding of Harmony Biosciences early in the year by the likes of Novo Holdings among other firms. 20% 10% 0% Philadelphia MSA VC deals (#) by size 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% $25M+ $10M-$25M $5M-$10M $1M-$5M $500K-$1M Under $500K 0% 5

6 Philadelphia MSA VC deal activity with corporate venture capital participation $49.6 $96.2 $206.5 $157.7 $203.2 $136.0 $160.5 $205.3 $199.7 $304.3 $798.9 Philadelphia MSA VC deals ($) by sector Philadelphia MSA VC deals (#) by sector 100 % Software 100 % 90% Pharma & biotech 90% 80% Other 80% 70% 60% 50% 40% Media IT hardware HC services & systems 70% 60% 50% 40% 30% HC devices & supplies 30% 20% Energy 20% 10% Consumer goods & recreation 10% 0% Commercial services 0% 6

7 Outside & nontraditional investors One of the more intriguing debates within the US venture landscape over the past decade has been around the emergence of local venture ecosystems. Specifically, there has been much discussion and evangelization around investment beginning to diversify geographically rather than remained clustered at the coasts. Prominent advocates for diversification include Steve Case and Rise of the Rest initiative, having raised funds to target startups in lesser-known entrepreneurial hubs. It took some time for the data and perspectives to support this expansion, but eventually, even notables such as Sam Altman of Y Combinator have publicly voiced the opinion that startups should take a more geographically diverse view to not only hiring but also running operations, e.g. working with a remote team and utilizing a Bay Area presence only for networking and fundraising. Regardless of what companies themselves are doing, more coastal investors are flocking to fund Philly MSA-based startups. No fewer than 51 deals closed in 2018 with participation from Bay Area-based firms, a clear high for the decade. Fascinatingly, NY-based investors have been pulling back, although much like the Bay Area firms, their aggregate of VC invested is significant. Such a trend does hint that these firms tend to be larger and thus have more resources to pursue opportunities further afield. One underrated factor at play is also the involvement of nontraditional investors; over the years, PE growth investors have stayed relatively active within the area and also participated in a steady trickle of financings. Although 2018 saw only seven such deals, aggregate VC invested was $373 million. Philadelphia MSA VC deal activity with Bay Area investor participation $164.8 $146.8 $137.1 $93.2 $311.6 $183.3 $252.5 $269.2 $421.7 $335.3 $961.4 Philadelphia MSA VC deal activity with New York investor participation $201.8 $236.1 $700.7 $235.0 $120.7 $228.7 $204.2 $759.6 $487.8 $425.8 $760.8 Philadelphia MSA VC deal activity with PE investor participation $174.7 $104.1 $210.7 $229.0 $81.9 $176.9 $165.8 $275.2 $390.2 $228.4 $

8 Exits & fundraising The Philly MSA appears to be at an inflection point in the exits cycle, having seen a consistent decline in volume since 2015 s high of 28 venture-backed exits. That does align in some fashion with the steadiness of venture investment considering the lag between the two can be significant, especially nowadays with plenty of private capital sloshing around. It is important to note that some historically healthy if not record exit value has been created, approximately $2 billion in the past two years alone. Moreover, the recently announced Spark Therapeutics acquisition by Roche could, at $4.8 billion in total equity value, stand as the largest exit ever for the area. What s more intriguing in terms of overall venture ecosystem health is the slide in fundraising tallies over the past three years. Since 2012, 25 venture vehicles have closed on a combined $1.1 billion in capital commitments. That is a fair number, but at the current trajectory of deal flow, it would be exhausted in a year should all outside investment cease; hence the criticality of outside sources of capital. Sheer volume alone is not indicative of an ecosystem s health; the quality of deal flow is also important. However, future growth rates typically would involve an uptick in local fundraising to support a more robust funnel of capital availability across the entire company lifecycle, even presupposing that outside investors with deeper pockets would join in at later stages. Fortunately, early in 2019 there appears to be more of a resurgence in fundraising, as Osage University Partners just closed a fund on $273 million in commitments, exceeding its target of $250 million, to cite one example. Philadelphia MSA VC exit activity $1,347.6 $7.5 $1,905.3 $667.0 $1,596.2 $816.9 $1,370.0 $2,652.5 $306.7 $1,166.4 $908.3 Exit value ($M) Exit count Philadelphia MSA VC fundraising activity $693.6 $590.5 $144.9 $100.0 $255.6 $146.6 $188.8 $237.4 $184.0 $106.0 $4.0 Capital raised Fund count 8

9 Report sponsors