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SVB State of the Markets Report Q1 2017

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What does 2017 hold for the Innovation Economy? In the latest State of the Markets report, SVB Analytics took a rear-view approach, identifying the factors that mattered most in 2016 and examining which trends and themes will play out in 2017.

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SVB State of the Markets Report Q1 2017

  1. 1. State of the Markets 2017 Inside views on the health and productivity of the innovation economy Written by SVB Analytics: Steve Allan, CFA Head of Analytics Sean Lawson Manager Steven Kakowski Associate Steven Pipp Associate Visit svb.com Follow @SVB_Financial Engage #SVBSOTM
  2. 2. State of the Markets: First Quarter 2017 State of the Markets 2 What does 2017 hold for the Innovation Economy? To find out, my team took a rear-view approach, identifying the factors that mattered most in 2016 and examining which trends and themes will impact 2017. For starters, it’s clear that the equity rounds that defined 2015 — private investments led by crossover mutual and hedge funds, often exceeding $100M — turned out to be an anomaly. As a result, the 2016 pace of new venture-backed companies reaching $1B+ valuations slowed to just one-third the velocity of 2015. In contrast, the VC ecosystem showed resilience in 2016: venture funds raised $42B, their highest total in over a decade. Looking forward, the exuberance of 2015 may yet be realized in 2017. With a class of internationally known unicorns (led by Snap, Airbnb and Uber) approaching IPO readiness, the public market presents opportunities for intriguing and lucrative exits. Steve Allan, CFA Head of SVB Analytics
  3. 3. State of the Markets: First Quarter 2017 State of the Markets 3 1 Market Dynamics 2 Recalibrated Venture Landscape 3 Primed Exit Conditions 4 Closing Thoughts
  4. 4. State of the Markets 4 Market Dynamics
  5. 5. Yields Rebound Sharply in Q4 2016 State of the Markets 5 WGBI Country Yields: 12/31/16 10-Year Bond Yields of G-7 Nations: 2015–2016 Country 1 2 5 7 10 15 30 Switzerland Germany Japan Netherlands Denmark Sweden France Spain Italy United Kingdom United States Australia Norway Canada + Flipped Positive Years to Maturity Sovereign bonds rebounded sharply into positive-yielding territory following the U.S. presidential election, elevating expectations of rising inflationary pressure and higher interest rates under the new administration. Negative Sources: S&P Capital IQ and Citi Research. -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Q2'16 Q3'16 Q4'16 United States France Italy Germany Canada Japan United Kingdom
  6. 6. Tech Equities Enter New Macro Environment State of the Markets 6 Nasdaq Composite Index: 2009–2016 The bull market sprint for U.S. equities has withstood global macroeconomic headwinds and geopolitical uncertainty since early 2014, reaching all-time highs in Q4 2016 following the U.S. election. 0 1000 2000 3000 4000 5000 6000 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 • Quantitative Easing • Recovery Post Financial Crisis • Low Volatility • Strong U.S. Dollar • Growth Concerns • Chinese Market / Currency Shocks • U.S. Investment Incentives • Business-Friendly Environment • Geopolitical Conflict • Reduced Trade and/or Immigration • Rising Rates Source: S&P Capital IQ.
  7. 7. Defining Q4: Post-Election Shakeout 7 -20% -10% 0% 10% 20% 30% 40% Mexican Peso Gold Clean Energy Emerging Markets Information Technology WTI Crude Oil Iron & Steel Banks Bitcoin Various market indicators reflect uncertainty surrounding the economic impact of an unexpected administration. Early movements suggest a retreat from emerging markets and expectations of increased infrastructure spending. 1. Based on indexes tracked by Dow Jones, S&P and MSCI. 2. In U.S. Dollars. Sources: S&P Capital IQ and CoinDesk. 2050 2100 2150 2200 2250 2300 Sep 16 Oct 16 Nov 16 Dec 16 S&P 500 Index: Sep 2016–Dec 2016 U.S. Election: 2139 +5% Market Movements: 11/7/16–12/31/16 State of the Markets Information Tech.1 +2% 1 1 1 1 2 2 2 2
  8. 8. State of the Markets 8 Recalibrated Venture Landscape
  9. 9. 0 5 10 15 20 25 30 IPOs Private IPOs Large Private Rounds Fall Out of Favor in 2016 State of the Markets 9Sources: CB Insights and S&P Capital IQ. IPO and PIPO Transactions for U.S. Technology Firms: 2013–2016 From 2013–2015, many late-stage companies opted to raise private capital rather than enter the public markets. There were four times as many Private IPOs (rounds of $100M+) as IPOs in 2015. However, that trend reversed in 2H 2016. As crossovers pulled back and IPO conditions improved, tech IPOs exceeded the number of PIPOs. Tech IPO Boom Tech PIPO Boom 4 11 5 27 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2013 2014 2015 2016
  10. 10. Crossovers Curtail Private Funding State of the Markets 10Source: CB Insights. Global Investments in Venture Rounds by Notable Crossover Investors: 2012–2016 Totalrounds Averageroundsize $35M $46M $139M $153M $109M $0M $20M $40M $60M $80M $100M $120M $140M $160M $180M 0 10 20 30 40 50 60 2012 2013 2014 2015 2016 Tiger Global Management Goldman Sachs Wellington Management Fidelity Investments Coatue Management T. Rowe Price BlackRock Average round size Some of the largest fund managers who took a primary role in financing large, late-stage private rounds were less active in 2016. The average round size remained above $100M, more than double that of 2013.
  11. 11. Traditional Investors Replenish Capital State of the Markets 11 While crossovers have drastically cut back on venture investments, the ecosystem as a whole has shown resilience. In 2016, venture capital commitments hit their highest level in more than a decade. 1. Corporate venture capital. 2. Crossovers include hedge funds, mutual funds, and wealth management firms. Sources: Pitchbook, National Venture Capital Association, and SVBA estimates. $0B $10B $20B $30B $40B $50B $60B $70B $80B $90B 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 VC Fundraising VC Investments CVC Investments Crossover Investments U.S. Venture Capital Investments and Fundraising: 2007–2016 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Crossover Investment - 50% YoY Venture Capital Fundraising + 18% YoY 1 2
  12. 12. Time to Exit — Before and After IPO State of the Markets 12Sources: Dr. Jay Ritter, University of Florida; Wall Street Journal; Crunchbase and S&P Capital IQ. Access to funding from traditional and nontraditional sources allowed tech companies to delay the scrutiny and transparency of public markets. Even after an IPO, it may take years to unwind positions. 0 2 4 6 8 10 12 14 16 1999 2003 2007 2011 2015 Years from Founding to IPO for U.S. Tech: 1999–2016 (Median) U.S. Unicorns Post-2000 Dotcom Crash Post-2008 Financial Crisis 90 10 Median 25 75 Deciles Share Float Trajectory for U.S. Tech: Float % by IPO Year (Median) 0% 25% 50% 75% 100% 2012 2013 2014 2015 2016 Closely Held IPOs IPOs IPOs IPOs IPOs At IPO +6 mos. +12 mos. +18 mos. +24 mos. +36 mos. +48 mos.
  13. 13. Net Change in Global Unicorns by Year: 2014–2016 Unicorn Exits Stabilize with New Entrants State of the Markets 13 Total Market Values2 All Unicorns $599B 1. Exits include IPOs, M&A and revaluations below $1B. 2. As of 12/31/16. 3. Sum of market caps for unicorns at the close of their respective first day of trading. Sources: Wall Street Journal and S&P Capital IQ. Apple $618B Google $539B Facebook $332B Unicorns at IPO3 $96B The number of new companies reaching $1B+ valuations still exceeded the number of exits,1 but the ratio steadied in 2016. However, the current backlog of unicorns — with a combined market value of nearly $600B — could take years to be absorbed by the public market. 0 20 40 60 80 100 120 140 160 -11 +76 -15 +49 154 144 79 45 -14 +24 Year-end Unicorns 2013 Exits Entrants Year-end Unicorns 2015 Year-end Unicorns 2014 Exits Entrants Exits Entrants Year-end Unicorns 2016 Ratio: 3.3x Ratio: 6.9x Ratio: 1.7x
  14. 14. Introducing SVB’s Interactive Unicorn Navigator State of the Markets 14 Use our Unicorn Navigator to explore the connections between the preceding concepts and follow the journeys of the billion-dollar club as they traverse the venture landscape toward an eventual exit. Sources: Wall Street Journal, Pitchbook and S&P Capital IQ. • Three-quarters of unicorns that have gone public since 2014 raised from a crossover investor, compared to one third of those that have been acquired. • Only 73% of the 2016 unicorn class raised a PIPO, compared to 84% of 2014 and 2015 classes. • Just 36% of the 2016 unicorn class raised from a crossover. • Nearly 90% of unicorns with a crossover raised a $100M+ round. • 81% of unicorns remain privately held, including all 22 unicorns in the 2016 class.https://www.svb.com/state-of-the-markets-report/
  15. 15. State of the Markets 15 Primed Exit Conditions
  16. 16. Public M&As Restore Valuation Confidence 0.0x 2.0x 4.0x 6.0x 8.0x 10.0x State of the Markets 16 Notes: NTM Revenue Multiples for IPOs based on earliest estimates, adjusted to IPO date. Multiples above 10x at IPO are represented with an arrow. Sources: S&P Capital IQ and Bessemer Venture Partners. TEAM: 12x Restored Confidence “Good Times” 6-Month Gap Between IPOs When valuations for cloud software companies plummeted in early 2016, acquirers jumped at the opportunity to buy at discounted valuations. This activity allowed for a second wave of IPOs in late 2016 by restoring investor confidence in high-growth software valuations. NTM Revenue Multiples: 2015–2016 TWLO: 14xSHOP: 14x Q2/Q3 Cloud M&A BOX APPT INST XTLY Cloud IPOs BVP Cloud Index Constituent Median DWRE LNKD N OPWR Jan ’15 April ’15 July ’15 Oct ’15 Jan ’16 April ’16 July ’16 Oct ’16
  17. 17. As Exit Conditions Improve, IPO Window Opens State of the Markets 17Sources: S&P Capital IQ and Yahoo! Finance. Companies look for a sustained period of low volatility before going public. Twelve tech IPO candidates took advantage of a calm period between late summer 2016 and the November election. 0 10 20 30 40 50 Jan '12 Jul '12 Jan '13 Jul '13 Jan '14 Jul '14 Jan '15 Jul '15 Jan '16 Jul '16 0 5 10 15 20 25 1H '12 2H '12 1H '13 2H '13 1H '14 2H '14 1H '15 2H '15 1H '16 2H '16 U.S. Tech IPO Count: 2012–2016 ^VIX: 2012–2016 2016 Election VIX of 20+: 4 Days VIX of 20+: 75 Days
  18. 18. Public Unicorns Grow into Their Private Values State of the Markets 18 -400% -300% -200% -100% 0% 100% 200% 300% 400% 500% 600% 1. As of 12/31/16. Of the three U.S.-listed companies, only Twilio has passed its six-month lock-up period. 2. Ucar listed on NEEQ; valuation as of IPO in July 2016. Sources: Wall Street Journal and S&P Capital IQ. Total Returns as of Year-End 2016 Compared to Tech Unicorns’ Last Private Round 0% -20% -40% -60% -80% IPO Date: 2014 2015 2016 Companies look to the performance of their peers as an indication of market reception. The unicorns are evenly divided between those trading above and those trading below their last private valuations. Half Above Half Below 2016 Unicorn IPOs All Trade Above Last Private Valuation1
  19. 19. Wave of M&A Leaves Cash-Flush Investors State of the Markets 19 1. Based on U.S. software M&A proceeds to public investment managers. 2. Based on first-day closing price. Sources: S&P Capital IQ and Renaissance Capital. Cash Returned to Public Investment Managers1 vs. Gross Public Offerings (Cumulative) 8.6% 11.8% 37.0% 0% 10% 20% 30% 40% Total Returns: 2016 From Q2 2015 to Q4 2016, capital returned to public investment managers (i.e., capital that must be reinvested) from software M&A in the U.S. reached $63 billion while IPOs and follow-on offerings only hit $5 billion. This dynamic has left investors flush with cash and seeking reinvestment opportunities. $10B $15B $23B $24B $32B $59B $63B $1.3B $2.0B $2.7B $2.8B $3.5B $4.4B $5.0B $0 $10 $20 $30 $40 $50 $60 $70 Q2 '15 Q3 '15 Q4 '15 Q1 '16 Q2 '16 Q3 '16 Q4 '16 Closed M&A Announced M&A IPO and Follow On Offerings $58BGap S&P 500 Software & Services S&P 500 Median U.S. Tech IPO Pop2
  20. 20. Q3 Crowded Field of $1B+ IPO Candidates State of the Markets 20 U.S. Tech IPOs with Market Caps >$1B, Sized by First Day Market Cap or Last Private Valuation: 2012–2016 Sources: S&P Capital IQ and Wall Street Journal. In the last five years, only three U.S. tech companies went public at valuations greater than $10 billion; now seven more have attained that valuation through private financing, with another 77 above $1 billion. 2017 and Beyond2012 2013 2014 2015 2016 Q1 Q4 x10 x31 x33
  21. 21. State of the Markets 21 Closing Thoughts
  22. 22. Tech Drives Overall Economic Growth State of the Markets 22 Since the hype and collapse the dot-com era, technology has steadily increased in importance (and value) for the U.S. economy. Technology companies in the S&P 500 index now make up nearly one- quarter of the entire index value, the largest of any sector. Source: Siblis Research. S&P 500 Technology Sector1 Weighting: 1995 - 2016 2016 2011 2006 2001 Tech Other 1. Amazon.com has been included in Technology. 0% 5% 10% 15% 20% 25% 30% 35% 1995 1998 2001 2004 2007 2010 2013 2016 Technology Trigger Peak of Inflated Expectations Trough of Disillusionment Slope of Enlightenment 23% Largest S&P 500 Companies by Market Cap: 2001–2016
  23. 23. The Year Ahead — Predicting 2017 State of the Markets 23 Many of the themes from 2016 provide insight into what 2017 holds for the venture ecosystem. But the risk remains: Unexpected world, political or economic events could shock the innovation ecosystem. Themes Predictions Valuations in 2016 saw a healthy recalibration after the high-flying years of 2014 and 2015. Valuations With plenty of capital in VC war chests, valuations remain stable across early stages but fall in later stages without crossover participation. 2016 was the slowest year for tech IPOs since the financial crisis as a result of valuation declines and an increase in volatility early in the year. IPOs With public company valuation confidence restored and a stable of maturing unicorns, 2017 sees 2–3 times the number of IPOs as 2016. Many of the mega-deals of 2016 were of public companies hit by valuation drops. This was also a banner year for tech M&A by non-tech acquirers. M&A Tech giants’ spending spree reaches the VC-backed ecosystem but with mixed success compared to the most recent private valuation. Venture firms raised their highest total commitments in over a decade — $41.6B. Fundraising With full coffers, fundraising in 2017 falls from the 2016 high, but interest from LPs stays high. The sharp pullback in 2016 (down 50% from 2015 levels) was a return to normal. Crossovers With rates rising, asset managers look for growth elsewhere. This helps deflate the overheated market for late-stage capital.
  24. 24. Report Authors State of the Markets 24 Steven Pipp Associate, SVB Analytics spipp@svb.com Steve Allan, CFA Head of SVB Analytics sallan@svb.com Sean Lawson Manager, SVB Analytics selawson@svb.com Steven Kakowski Associate, SVB Analytics skakowski@svb.com Steve Allan, CFA is the Head of SVB Analytics and SVB Securities Strategic Advisory, responsible for the three areas of information services provided to the innovation economy, Strategic Advisory Services, Compliance Valuations, and Insights. Strategic Advisory Services provides consultative guidance around valuations, benchmarking and inorganic growth strategies. Sean Lawson is a Manager with SVB Analytics and SVB Securities, responsible for leading research and insights spanning early and growth stage venture- backed technology companies. Steven Kakowski is an Associate with SVB Analytics, responsible for valuation engagements for venture-backed technology companies. Steven Pipp is an Associate with SVB Analytics and SVB Securities, responsible for valuation and strategic advisory engagements for venture-backed technology companies.
  25. 25. About Silicon Valley Bank For more than 30 years, Silicon Valley Bank has helped innovative companies and their investors move bold ideas forward, fast. SVB provides targeted financial services and expertise through its offices in innovation centers around the world. With commercial, international and private banking services, SVB helps address the unique needs of innovators. State of the Markets 25 This material, including without limitation to the statistical information herein, is provided for informational purposes only. The material is based in part on information from third-party sources that we believe to be reliable, but which have not been independently verified by us and for this reason we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decision. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation, offer or recommendation to acquire or dispose of any investment or to engage in any other transaction. SVB Analytics is a member of SVB Financial Group and a non-bank affiliate of Silicon Valley Bank. Products and services offered by SVB Analytics are not FDIC insured and are not deposits or other obligations of Silicon Valley Bank. SVB Analytics does not provide investment, tax, or legal advice. Please consult your investment, tax, or legal advisors for such guidance. ©2017 SVB Financial Group. All rights reserved. Silicon Valley Bank is a member of FDIC and Federal Reserve System. SVB>, SVB Financial Group, and Silicon Valley Bank are registered trademarks. CompID – 256 About SVB Analytics SVB Analytics, a non-bank affiliate of Silicon Valley Bank, serves the strategic business needs of entrepreneurs, corporates and investors in the global innovation economy. For more than a decade, SVB Analytics has helped global business leaders make informed decisions by providing market intelligence, research, and consulting services. Powered by proprietary data, SVB Analytics has a unique view into the technology and life science sectors.