State of the Markets Views on Venture Investing in the Global Innovation Economy June 25, 2019 Tech Rises to the Top Following the hype and subsequent collapse of the dot-com era, tech companies have proven their importance (and value) to the US economy. Nearly one-third of the S&P 500 Index is represented by tech companies – the largest of any industry. S&P 500 Tech Industry1 Weighting: 1999—2019 Largest S&P 500 Companies by Market Cap 35% 2000 31% 30% 2005 25% 2010 20% 15% 2015 10% Q1’19 5% 0% 1999 2003 2007 2011 2015 2019 Tech Other Note: 1) Technology industry includes Amazon as well as companies that were previously classified as Technology prior to the GICS industry reclassification in September 2018. Source: PitchBook, S&P Capital IQ and SVB analysis. 2 SVB Public Series C Valuations are on the Rise MEDIAN POST- MONEY VALUATION BY STAGE Series B Series A $30.0M $16.7M Data as of 12/31/18 Sources: SVB Capital Proprietary Database 2014 2015 2016 2017 2018 3 SVB Public New Funds Move to Institutionalize Early Rounds At the earliest stages, venture capital available to emerging innovation companies helped push round sizes for seed rounds well beyond their historical average, which had been in line with angel rounds. The return of capital from upcoming IPOs could push both round sizes higher. Early-Stage US Tech Median Round Size: 2010— US VC Fundraising: First-Time Funds 2018 $5.0B 50 $2.0M Angel Seed $4.0B 40 $1.5M $3.0B 30 $1.0M $2.0B 20 $0.5M $1.0B 10 $0.0B 0 $0.0M 2010 2012 2014 2016 2018 2010 2012 2014 2016 2018 Source: PitchBook and SVB analysis. 4 SVB Public $13.5M C A is the New B $6.5M B is the New C $5.7M MEDIAN REVENUE AT FINANCING B $2.5M $2.4M $672K A 2014 2015 2016 2017 2018 Data as of 12/31/18. Revenue is annualized based on the latest quarter of revenue at the time of financing. Sources: SVB Capital Proprietary Database 5 SVB Public Startups Are Better Capitalized Than Ever Thanks to risk-incentivized investors and their buckets of cash, capital raises at every stage have more than doubled since the beginning of this decade. In fact, in order to make the top 100 deals of 2018, a startup would need to have raised a nine-figure round. US Tech Venture: Median Round Size by Series US Tech Venture: 100th Largest Deal $100M $30M Series C: 3.0x Series B: 2.5x Series A: 3.2x $74M Seed: 4.0x $63M $18M $70M $60M $10M $40M $8M $7M $32M $25M $3M $2M $0.5M 2010 2012 2014 2016 2018 2010 2012 2014 2016 2018 Sources: PitchBook and SVB analysis. 6 SVB Public Diverse Pools of Capital Chase Innovation Returns Traditional venture firms are no longer the only game in town. Newly professionalized family office and capital-rich private equity investors are participating in venture rounds at an increasing pace, nearing the highs from 2015 in deal level and keeps surpassing those capital marks. Notable Family Offices Investors in Tech Venture1 Notable Private Equity Investors in Tech Venture1 VC Deals: VC Deals: VC Deals: VC Deals: VC Deals: VC Deals: VC Deals: VC Deals: VC Deals: VC Deals: 79 63 59 42 28 42 31 31 26 22 Family Offices’ Venture Investment in US Tech2 Private Equity Firms’ Venture Investment in US Tech2 $15B 300 $40B 1,200 Capital Invested Deal Count Capital Invested Deal Count $35B $12B 240 $30B 900 $9B 180 $25B $20B 600 $6B 120 $15B $10B 300 $3B 60 $5B $0B 0 $0B 0 2010 2012 2014 2016 2018 2010 2012 2014 2016 2018 Note: 1) Deal count based on participation in US tech venture rounds from 2010–2018. 2) Investment dollars include full rounds that received participation from at least one investor from the class. Source: PitchBook and SVB analysis. 7 SVB Public VCs Raising More Capital with Each Trip Back to LPs Top firms are attracting more capital for each successive fund, climbing to almost 50% more than their prior fundraise. This trend helped contribute to records in 2018, including the most $500M+ funds and the first year with double-digit $1B+ funds. US VC Fundraising: Median Step-Up US VC Fundraising: $500M+ and $1B+ Funds in Fund Size for Same Family of Funds 1.50x+50% 25 $1B+ $500M+ 20 1.25x+25% 15 1.00x0% 10 0.75x-25% 5 0.50x-50% 0 2010 2012 2014 2016 2018 2010 2012 2014 2016 2018 Source: PitchBook and SVB analysis. 8 SVB Public Sizeable Cash Piles as Bull Run Breaks Records A decade of prosperity following the recovery from the Global Financial Crisis has left both traditional and emerging investors flush with cash for venture investing. Longest S&P 500 Bull Market Runs Since Accumulated Net Cash: 12/31/2018 1945 450% Likely to be Invested in June 1949 - Aug 1956 Potential to be Invested in Tech Dot-Com $125B Tech Oct 1974 - Nov 1980 400% $123B Aug 1982 - Aug 1987 $115B Oct 1990 - Mar 2000 350% Oct 2002 - Oct 2007 $100B Mar 2009 - Present 300% 250% Current $75B $80B 200% $64B $50B $55B 150% $44B $41B 100% $25B 50% Duration of Bull Market (Years) 0% $0B $6B US VC1 US PE1 SB VF2 0 1 2 3 4 5 6 7 8 9 Dry Powder Net Cash3 Notes: 1) VC and PE dry powder as of 3/31/2018 with SVB estimates for amount expected for tech investment. 2) Vision Fund dry powder remaining as of year-end. 3) Cash includes cash and ST and LT investments, net ST and LT debt. Sources: LPL Research, Yahoo, S&P Capital IQ, PitchBook and SVB analysis. 9 SVB Public Opting for Growth Capital vs. an Early Exit With the abundance of available capital, firms are increasingly choosing growth rounds – even mega- growth rounds – over similar-sized exits. This could signal that companies want to mature before securing an even bigger exit. Or are these firms simply shying away from public market scrutiny? US Tech Mega-Rounds vs. Mega-Exits: 2010— US Tech Growth Rounds vs. Exits: 2010–2018 2018 150 150 Growth Rounds: $50M–$100M Mega-Rounds: $100M+ Exits: $250M–$1B Mega-Exits: $1B+ 125 125 100 100 75 75 50 50 25 25 0 0 2010 2012 2014 2016 2018 2010 2012 2014 2016 2018 Source: PitchBook and SVB analysis. 10 SVB Public Expect IPOs to Continue Their Capital Climb Before the flurry of private capital began in 2015, the average venture-backed tech company would raise $100M in private capital ahead of their $100M public offering. Looking at the current crop of US unicorns, more than 90% have already raised at least $100M in a single private financing. Median Equity Raised Prior to IPO and via IPO by Percentage That Raised a Private Venture Round US Venture-Backed Tech Companies of $50M+ and $100M+ Prior to IPO $400M 100% Capital Raised Prior to IPO $50M+ Round Capital Raised at IPO $100M+ Round $300M 75% $200M 50% $100M 25% $0M 0% Current US Current US 2010 2012 2014 2016 2018 2019 2010 2012 2014 2016 2018 2019 Unicorns Unicorns Sources: CBInsights, PitchBook and SVB analysis. 11 SVB Public The Bar for an IPO is $ Market Cap Higher Than Ever 1.9B at IPO 2018/19 $ Revenue Before 226M at IPO MEDIAN STATISTICS OF VC- BACKED TECH IPOS BY YEAR $ Market Cap 639M at IPO 2014 $ Revenue 91M at IPO Data as of 5/1/19 Source: Capital IQ 12 SVB Public Unicorns are Fundamentally Healthy MEDIAN STATISTICS $116M 75% 65% $65M Revenue Annual Revenue Gross Margins Cash Balance Growth Data as of 12/31/18 Sources: SVB Capital Proprietary Database 13 SVB Public Public and Private Investors Seeing Eye-to-Eye Public and private investors have largely agreed on unicorn valuations, as the vast majority of the top billion-dollar debuts in 2018 and 2019 priced and remained above their last private round. That said, the IPO is just the beginning, as evidenced by Snap and Square’s reversal over the last couple years. Valuation Relative to Last Private Valuation1: ’18—’19 US $1B+ Tech Market Cap: Square and Snap IPOs +2,690% 1000% $40B 2019 IPO: Value at 6/19/2019 900% 2018 IPO: Value at 6/19/2019 $35B 800% Value at IPO 700% $30B 600% $25B 500% $20B 400% Snap LPV1 300% $15B 200% $10B 100% 0% $5B Square LPV1 -100% $0B 2017 2018 2019 Note: 1) LPV is last private valuation from a priced venture equity round prior to IPO. Sources: S&P Capital IQ, PitchBook and SVB analysis. 14 SVB Public Innovation is Global SELECT $1B+ EXITS IN 2018 & 2019 = SVB Office Select companies with $1B+ exit between 1/1/18 and 6/3/19. SVB Capital does not have exposure to all of the listed 15 companies SVB Public US Tech Looks To International Opportunities The innovation economy’s best and brightest are putting their abundant capital to work abroad, with 20% of their acquisitions taking place outside of the US. On the back of a strong dollar, their capital is going even further for expansion overseas. International Acquisitions by US Tech Unicorns Notable Int’l Acquisitions by US Tech Decacorns 25 Rest of World Asia Europe UAE United Kingdom $3.1B Acquisition $72M Acquisition 20 March 2019 Oct.2018 15 United Canada Demark France Kingdom $300M Acq. Acquisition Acquisition Acquisition Feb. 2017 Jan. 2019 Dec. 2018 Nov.