VENTURE CAPITAL IN THE UNITED STATES

VENTURE CAPITAL IN THE UNITED STATES A U.S. FACT PACK 2015 Business Sweden USA

AGENDA Key Findings and Conclusions Venture capital in the U.S. Regional hot spots Size of venture capital investments Areas of investment A closer look on the top three areas of investment How to get U.S. venture capital funding Appendix BUSINESS SWEDEN 13 JANUARY, 2015 2

THE U.S. REMAINS KEY FOR VC, AND CLOSING A DEAL HERE TAKES STRONG PREPARATION VENTURE CAPITAL IN THE U.S. 70% of the global value of all venture capital deals take place in the U.S. A majority of VC deals take place during early stages, the larger amounts does however occur later California, New York and Massachusetts are the major hot spots, with more than 60% of all deals Which geographical area to focus on depends on industry and preferred state of establishment The ICT industry attracts most VC attention by far, with strong hubs in Silicon Valley, SoCal and NYC Healthcare is the second largest area, with hubs in North Carolina, California and Massachusetts The third largest area is green tech, with hubs in California, New York, Massachusetts and Illinois HOW TO GET U.S. VENTURE CAPITAL FUNDING 1. Prove your business (preparation) You need to have traction in the market place or a proven track record before approaching a venture capital firm 2. Get introduced (the initial contact) Getting the initial contact via an introduction is a way of showing that others see you as interesting 3. Be prepared, and listen (the first meeting) Be well prepared for the first meeting, keep to 10-15 slides and do not forget to listen 4. Develop the relationship carefully (the relationship) The average VC-Startup relationship lasts longer than the average American marriage Don t ignore it! SOURCE: BUSINESS SWEDEN USA ANALYSIS BUSINESS SWEDEN 13 JANUARY, 2015 3

CAPITALISTS PROVIDE NOT JUST CAPITAL, BUT COMPETENCY AND NETWORK VENTURE CAPITAL IS USUALLY OF BEST VALUE FOR YOUNG AND GROWING COMPANIES Seed Young Growing Mature Angel investors Family/friends Own capital Venture capital Banks Profit retention Stock market Inst. investors The most common source of financing for a new startup is own capital, capital from friends and family or from angel investors. It is often recommended to start with these sources before getting venture capital (VC), for reasons that will be further explained in the report Angel investors are high net worth individual investors investing in start-up companies. Compared to VCs, they tend to invest in smaller amounts, in earlier growth stages, and in firms they have a personal interest in Venture Capital are professional investors often specialized on specific industries where they have competency and network. They typically invest larger sums than angel investors, have a strong focus on the ROI and often take a place on the company s board STARTUPS HAVE OPTIONS FOR FUNDING, DIFFERENT INVESTORS HAVE DIFFERENT REQUIREMENTS SOURCE: GHOSH & NANDA, NVCA, U.S. SMALL BUSINESS ADMINISTRATION, VCGATE BUSINESS SWEDEN 13 JANUARY, 2015 5

MOST VC DEALS TAKE PLACE IN THE U.S., MAKING UP 68% OF THE GLOBAL VALUE OF ALL VC INVESTMENTS THE U.S. HAS ALWAYS HAD THE LEAD BUT CHINA AND INDIA WERE RISING THROUGH 2013 23% Europe s sovereign debt crisis has muted the VC s mid-term growth potential 70% 70% of all VC deals are done in North America, and 68% in the U.S. 7% Both China s and India s VC industries are expected to continue their growth THE U.S. DOMINATES VC FUNDING, AND CONTINUES TO LEAD AS HUB FOR VC-SEEKING SWEDISH STARTUPS SOURCE: PREQIN, 2013 GLOBALIZING VENTURE CAPITAL REPORT BUSINESS SWEDEN 13 JANUARY, 2015 6

CALIFORNIA, NEW YORK, AND MASSACHUSETTS ARE THE MAJOR HOT SPOTS FOR U.S. VENTURE CAPITAL THERE WERE CLOSE TO 3,200 VC DEALS MADE IN THE U.S. IN 2013 RATIO OF VC DEALS IN TOP AREAS, 2013 WA 1389 deals in California UT CO IL 441 deals in New York 318 deals in Massachusetts PA NC NJ CT California Technology: 35% Business & finance services: 23% Consumer services: 22% Tri-State (New York, New Jersey, Pennsylvania) Consumer services: 29% Technology: 28% Life sciences: 17% Major hot spot Several Some TX GA New England Life sciences: 31% Technology: 30% Business & finance services: 21% Few COMPANIES MAY GEOGRAPHICALLY FOCUS THEIR VC-RAISING EFFORTS DEPENDING ON THEIR INDUSTRY SOURCE: CB INSIGHTS, CRAINS NEW YORK, WILMERHALE BUSINESS SWEDEN 13 JANUARY, 2015 7

WHICH REGION TO FOCUS ON DEPENDS ON INDUSTRY AND PREFERRED STATE OF ESTABLISHMENT VC MARKET OVERVIEW IN CALIFORNIA, MASSACHUSETTS, AND NEW YORK 2013 1 2 3 1 California 40% of the VC deals in the U.S. take place in California, where the ICT sector is dominating with more than 70% in terms of number of deals Silicon Valley is the nation s leading tech-hub, and the SoCal region is getting more attention placing it ahead of NYC in number of VC deals 2 New York 3 Massachusetts 12.7% of the VC deals in the U.S. take place in New York, where ICT dominates with more than 80% in both number of deals and in value NYC has emerged as a leading high-tech hub, as the only region to have seen an increase in number of VC deals the past five years 9% of the VC deals in the U.S. take place in MA, where ICT has the most number of deals but Healthcare is the largest in terms of funding Companies in MA are getting the VC s attention in the biotech industry, where it receives one-quarter of all biotech VC dollars in the country VENTURE CAPITAL IS A LOCAL BUSINESS; FOCUS YOUR VC SEARCH WHERE YOU WANT TO DO BUSINESS SOURCE: CB INSIGHTS, NVCA BUSINESS SWEDEN 13 JANUARY, 2015 8

A MAJORITY OF VC DEALS TAKE PLACE DURING THE EARLY STAGES SHARE OF VC BY STAGE IN NUMBER OF DEALS AND DOLLARS OF FUNDING In percentage of total VC market, 2013 Number of Deals 100% = 33.17 BUSD and 3,154 deals Dollars of Funding 48.26% 40.52% 30.29% 27.05% 19.88% 27.56% 4.82% 1.63% Seed Early Stage Expansion Later Stage INVESTORS ARE INTERESTED IN COMPANIES WITH STRONG GROWTH POTENTIAL SOURCE: NATIONAL VENTURE CAPITAL ASSOCIATION (NVCA) BUSINESS SWEDEN 13 JANUARY, 2015 9

ICT, HEALTHCARE, AND GREEN TECH ARE THE INDUSTRIES THAT GET THE MOST VC INVESTMENTS PERCENTAGE OF VC DEALS PER INDUSTRY, 2013 Non- Software Commer IT cial 6% Services 13% Energy 3% Software 38% Overview of VC market trends In 2013 there were 3,154 deals in the U.S. VC market, where the ICT sector had a dominant position with over 50% of them The Internet sector attracts the VC s attention the most, mostly due to the relatively low funds needed for these companies to grow, but also the great potential they have as investments in a short period of time Healthca re 19% Other 21% Looking ahead at the next decade I am excited by what I believe will be viewed as one of the best and most rational investment periods for Venture Capital Mark Suster, General Partner GRP Partners THERE ARE MANY OPPORTUNITIES FOR VC, ESPECIALLY IN ICT, HEALTHCARE AND GREEN TECH SECTORS SOURCE: CB INSIGHTS, PEHUB, NVCA BUSINESS SWEDEN 13 JANUARY, 2015 10

VC FUNDING IN THE ICT SECTOR IS CHARACTERIZED BY A HIGH NUMBER OF DEALS IN THE EARLY STAGES INTERNET IS THE KEY SEGMENT IN THE ICT INDUSTRY FOR VC INVESTMENTS PERCENTAGE OF DEALS WITHIN ICT, 2013 Overview of the ICT sector Two-third of all investments in the ICT sector were invested during the early stages: seed and series A Software 49% Mobile & Telecom 17% Internet 34% California (50%), New York (15%), and Massachusetts (9%) were the three main States where the ICT VC deals were made Some of the areas with highest investment rates within the Internet sector are health and wellness, conferencing, advertising, business analytics and video, while gaming and security got increased attention in the mobile sector. Open data and cloud computing attracts the most VC s attention in the software industry Internet-specific companies received 7.1 BUSD in 2013, the highest level of Internet investment since 2001 VC S ARE HIGHLY INTERESTED IN THE GROWTH POTENTIAL OF START-UP COMPANIES IN THE ICT SECTOR SOURCE: CB INSIGHTS, OECD BUSINESS SWEDEN 13 JANUARY, 2015 11

THE HEALTH CARE SECTOR IS THE SECOND LARGEST MARKET FOR VC DEALS IN THE U.S. VC FUNDING IN THE HEALTHCARE SECTOR ARE USUALLY MADE IN THE STAGES A-C PERCENTAGE OF DEALS WITHIN HEALTHCARE, 2012 Technolo gy Systems 12% Services 8% Devices 46% Other 1% Pharma & Biotech 33% Overview of the Healthcare sector Venture investment in healthcare reached 6.7 BUSD, yet as a percentage, investment declined in 2013 Two-third of all investments in the healthcare sector were invested in the seed through expansion stage startups The research triangle in North Carolina together with California and Massachusetts continue their dominance in the Healthcare sector, taking up more than half of the deals made in this sector Biopharma is the most attractive segment, receiving 35% of healthcare Series A dollars in 2013. Drug development and especially Biotech have a strong growth in start-ups and a continued interest from VC s MAJOR HUBS CAN BE FOUND IN NORTH CAROLINA, CALIFORNIA AND MASSACHUSETTS SOURCE: CB INSIGHTS, NCBIOTECH BUSINESS SWEDEN 13 JANUARY, 2015 12

RENEWABLES IS THE MOST ATTRACTIVE GREEN TECH SEGMENT FOR VENTURE CAPITALISTS THE ECONOMICAL DOWNTURN HAD A NEGATIVE IMPACT ON THE SECTOR BUT THERE IS STILL INTEREST IN PERCENTAGE OF TOTAL MARKET, Q1-Q3 12 Other Green Tech 21% Energy Efficienc y 5% Agricultu re & Bioprodu cts 1% Smart Grid & Energy Storage 30% Overview of the Green tech sector Companies in seed, stage A, and stage C had together 75% of all the deals in the Green tech sector California has a strong position with 36% of all the deals made in this sector. Other interesting states for Green tech investments include: New York, Massachusetts and Illinois Water & Waste Manage ment 27% Solar Energy 16% Renewables which saw a relatively low number of deals made in Q2 bounced back to take 43% of overall Green tech deals in Q3 Compared to Q1 2013, Q1 2014 Green tech saw a 38% increase in VC funding dollars and a 9% rise in deals THE MAJOR HUBS CAN BE FOUND IN CALIFORNIA, NEW YORK, MASSACHUSETTS AND ILLINOIS SOURCE: CB INSIGHTS, VB/RESEARCH BUSINESS SWEDEN 13 JANUARY, 2015 13

AN ACTIVE PRESENCE IN THE U.S. IS KEY IN ATTRACTING U.S. VC FUNDING SOME U.S. VENTURE CAPITALISTS HAVE KEY REQUIREMENTS IN INVESTING IN FOREIGN COMPANIES Be prepared to establish yourself in the U.S., at least with a subsidiary. U.S. investors expect you to ultimately be in compliance with local corporate and financial structures, to facilitate working together, stock offerings, and of course, the exit Randy Mitchell, Senior Strategist Private Equity & Venture Capital US Department of Commerce We only invest in serial entrepreneurs who have a clear plan to take their company from Europe to for example the US market. However, they can kick off in their local country and especially make sure that they have enough engineering talent locally since this is very scarce in the US. Dusan Stojanovic, Founder True Global Ventures It's essential to provide the financial transparency that comes with being part of the U.S. system. If you are serious about growing on the U.S. market you need to know your customer, and for that you also need to be here. Brian Cohen, Chairman New York Angels Be serious about the U.S. from the beginning. We don't entertain amateurs. Some foreign companies think once they get an investment, they don t have to do any work anymore. That should never be the case. Michael Goguen, Managing Partner and Venture Capitalist Sequoia Capital OVERALL PROFESSIONALISM AND STRONG COMMITMENT TO THE U.S. MARKET ARE IMPORTANT FACTORS FOR U.S. VCS SOURCE: BUSINESS SWEDEN INTERVIEWS BUSINESS SWEDEN 13 JANUARY, 2015 15

TO RECEIVE VC THE COMPANY NEEDS TRACTION IN THE MARKET AND A STRONG INDUSTRY NETWORK 4 STEPS FOR SUCCESSFUL VC PARTNERSHIP WHAT LOCAL EXPERTS SAY ABOUT U.S. VC 1 2 Prepare: Prove your business Initial contact: Get introduced 3 The first meeting: Be prepared, and listen 4 Long term relationship: Nurture with care Traction in the market place Proven track record as an entrepreneur Network, network, network Local incubators Solid sales pitch Listen well and be prepared to answer many questions Decide on what do you want out of your VC besides funding Depending on which stage a company is in, I would recommend them to start with investments from private investors and angels, and from there go to local incubators to meet and interact with the right people. When you have a strong local network who can introduce you to the right VC, the upside is that it goes so much faster to grow a company Marcus Anzengruber, CEO Campanja Since it s a very local business it would be highly unusual for us to invest in a foreign company, unless they have a local subsidiary John Backus, Founder New Atlantic Ventures APPROACH TARGETED VC S, BE WELL PREPARED AND KNOW WHAT TYPE OF VC YOU ARE LOOKING FOR SOURCE: STC INTERVIEWS, STC ANALYSIS BUSINESS SWEDEN 13 JANUARY, 2015 16

YOU NEED TO HAVE A SOLID CASE BEFORE APPROACHING A VENTURE CAPITAL FIRM TRACTION IN THE MARKET OR A PROVEN TRACK RECORD AS AN ENTREPRENEUR ARE ESSENTIAL QUALITIES 1 Prepare: Prove your business Traction in the market place Proven track record as an entrepreneur 98% of all companies are not suitable for VC funding. The VC has the exit in mind from the start, and therefore the company should be very scalable and have a fast growth 2 Initial contact: Get introduced 3 The first meeting: Be prepared, and listen 4 Long term relationship: Nurture with care The best way to loose any chance of funding is to blast away emails to a bunch of investors and not doing your research properly. The most basic qualities to receive VC is to either have a traction in the market place or a solid track record as an entrepreneur John Backus, Founder New Atlantic Ventures Magnus Aronsson, CEO ESBRI Start with family and friends, and then with private investors and angels, before approaching VC s Fredrik Carlström, CEO C&CO To receive U.S. funding you have to demonstrate full commitment by taking personal risks, working full-time and a willingness to move to the U.S. Andrew Farquharson, Managing Director InCube Ventures APPROACHING VC S TOO EARLY ENTAILS THE RISK OF BEING TURNED DOWN OR TO GIVE TOO MUCH STAKE SOURCE: STC INTERVIEWS, STC ANALYSIS BUSINESS SWEDEN 13 JANUARY, 2015 17

THE INITIAL CONTACT VIA AN INTRODUCTION IS A WAY OF SHOWING THAT OTHERS SEE YOU AS INTERESTING NETWORKING IS THE KEY TO GET INTRODUCED AND MEET VC FIRMS 1 Prepare: Prove your business If you don t have a U.S. network yet there are several ways to start; through organizations, clubs, events or incubators. Examples to look into include: Y Combinator Demo day, NYC SeedStart Enterprise Demo day, and Churchill Club 2 Initial contact: Get introduced 3 The first meeting: Be prepared, and listen 4 Long term relationship: Nurture with care Network, network, network Local incubators I think having a strong relationship is key. Investments in foreign companies don't happen overnight. We lay the ground work over months beforehand. Find out a way to get to know us Austin Westerling, Partner Charles River Ventures Most of our pipeline come from recommendations through angel investors, law firms, headhunters or PR firms that we know. Proposals via emails will get a 10 second glance. John Backus, Founder New Atlantic Ventures Networking is the key to getting introduced. If you don t have a network in the U.S. yet, local incubators and universities could provide opportunities Fredrik Carlström, CEO C&CO VC IS A LOCAL BUSINESS THE EASIEST WAY OF BUILDING A NETWORK IS BY BEING PRESENT SOURCE: STC INTERVIEWS, STC ANALYSIS BUSINESS SWEDEN 13 JANUARY, 2015 18

THERE SHOULD BE A MUTUAL BENEFIT BETWEEN THE COMPANY AND THE VC S INVESTMENT STRATEGY SOLID STORY TELLING IS THE KEY IN GETTING THE VC S INTERESTED 1 Prepare: Prove your business 2 Initial contact: Get introduced 3 The first meeting: Be prepared, and listen 4 Long term relationship: Nurture with care A common mistake is to come to the first meeting and try to sell the technology at first hand. They should focus whole-heartedly in selling the investment opportunity instead, since that s what I, as an investor, am interested about Andrew Farquharson, Managing Director InCube Ventures Solid sales pitch Listen well and be prepared to answer many questions The first meeting is usually 1h where the PPT should be not more than 10-15 slides, and they should expect to answer questions half of the time. My recommendation is to prepare well and listen carefully so you can answer all the questions we have as solid as possible John Backus, Founder New Atlantic Ventures Pitches need to have some vision. I don't like hearing about pitches that are only revenue focused. If you want to solve a problem and do your part to change the world, show me how you can do it. Michael Goguen, Managing Partner and Venture Capitalist Sequoia Capital BE WELL PREPARED FOR THE FIRST MEETING, KEEP TO 10-15 SLIDES AND DO NOT FORGET TO LISTEN SOURCE: STC INTERVIEWS, STC ANALYSIS BUSINESS SWEDEN 13 JANUARY, 2015 19

THE PITCH DECK SHOULD AWAKE THE INTEREST OF THE INVESTORS BY BEING SHORT AND TO THE POINT 1 2 3 4 Cover page Intro Team Problem - Company logo, business name and tagline - Tagline should give insight into your company and be easy to remember - Get your audience interested - E.g. company s mission statement, important mile stones, customer testimonials etc. - Introduce key members/advisors - Highlight any of your team's successful exits, and signs that you can and like to work together - Describe the problem your concept is going to solve - Explain why investors should care about solving it with your company 8 Capital & valuation 7 Competition 6 Sales strategy 5 Solution - Current valuation and investors - List how much you're looking to raise and how you intend to use the funds SOURCE: SOURCE: MASHABLE, VENTUREHACKS - List your competition and explain what makes your product unique - If your competitors have been acquired, list the prices and who acquired them - Market size, growth, and future revenue - Be prepared to answer questions e.g. cost of acquiring customers - If you have a demo of your product, this is the time to show it - Make it entertaining and memorable BUSINESS SWEDEN 13 JANUARY, 2015 20

AN AVERAGE VC RELATION IS LONGER THAN THE AVERAGE MARRIAGE NURTURE IT WITH CARE IT S IMPORTANT TO NEGOTIATE AND BE UPFRONT ABOUT THE OWNERSHIP OF THE COMPANY 1 Prepare: Prove your business 2 Initial contact: Get introduced 3 The first meeting: Be prepared, and listen 4 Long term relationship: Nurture with care The relationship between a VC and a company usually lasts longer than an average American marriage. You need to find the right firm to partner up with John Backus, Founder New Atlantic Ventures Decide on what do you want out of your VC besides funding There are various ownership set-ups depending on each case, that you have to be prepared to discuss and negotiate. The important aspect is to be very clear and upfront in what you want and expect out of your VC relationship Nicolai Wadström, CEO BootstrapLabs If you have the opportunity to choose between several VC firms, you should be extremely picky on who you want to team up with, since the VC s will want to sit in the board and make decisions that will have a lasting impact on your company Magnus Aronsson, CEO ESBRI TO PARTNER UP WITH THE RIGHT VC YOU HAVE TO BE PICKY AND CLEAR ON THE EXPECTATIONS SOURCE: STC INTERVIEWS, STC ANALYSIS BUSINESS SWEDEN 13 JANUARY, 2015 21

Ex. support WHAT BUSINESS SWEDEN CAN SUPPORT ESTABLISHMENT AND GROWTH IN THE U.S. MARKET BUSINESS SWEDEN S MISSION IS TO MAKE IT EASIER FOR SWEDISH COMPANIES TO GROW INTERNATIONALLY This support can include preparing for your first VC meeting with assessment of market potential, finding potential partners, evaluating market entry scenarios and practical support with establishing a local presence EVALUATE U.S. MARKET ENTRY PREPARE U.S. ENTRY STRATEGY ESTABLISH U.S. PRESENCE DEVELOP U.S. BUSINESS Evaluate if the U.S. is the right market to enter for your business. Answer the questions that a VC will ask in the first meeting. Outsource administration to enable full focus on your business. Examine opportunities to develop and grow your U.S. business. - Analyze top markets of interest - Evaluate U.S. market potential - Decide corp. structure and create U.S. Inc. - Analyze U.S. growth scenarios - Initial U.S. market analysis - Build network through a meeting program - Set up business support functions - Merger and acquisition support TALK TO OUR U.S. OFFICES, IN CHICAGO, NEW YORK, AND SAN FRANCISCO, ABOUT HOW TO GET STARTED BUSINESS SWEDEN 13 JANUARY, 2015 22

CONTACT US BUSINESS SWEDEN IN USA CHICAGO Business Sweden 150 North Michigan Ave, Suite 1950 Chicago, IL 60601-7550, USA T +1 312 781 6222 usa@business-sweden.se www.business-sweden.se/usa NEW YORK Business Sweden The News Building, 220 E 42nd Street, Suite 409A New York, NY 10017, USA T +1 212 507 9001 usa@business-sweden.se www.business-sweden.se/usa SAN FRANCISCO Business Sweden 100 Montgomery Street, Suite 1780 San Francisco, CA 94104, USA T +1 415 835 3000 usa@business-sweden.se www.business-sweden.se/usa