Pitchbook Venture Monitor Report 2018 Q2

Jul 10, 2018 | Publisher: Techcelerate Ventures | Category: Business & Economics |  | Collection: Investments | Views: 2 | Likes: 1

2Q 2018 Massive $57.5B invested into US VC-backed companies through 1H Page 4 The definitive review of the US venture capital ecosystem IPOs riding back toward decade highs, as overall exit value remains elevated Pages 27 League tables for 2Q deals, investors, exits and more Pages 32 In partnership with Credits & Contact PitchBook Data, Inc. JOHN GABBERT Founder, CEO ADLEY BOWDEN Vice President, Research & Analysis Content KYLE STANFORD Analyst CAMERON STANFILL Analyst ALEX FREDERICK Analyst BRYAN HANSON Senior Data Analyst JENNIFER SAM Senior Graphic Designer RESEARCH reports@pitchbook.com National Venture Capital Association (NVCA) BOBBY FRANKLIN President & CEO MARYAM HAQUE Senior Vice President of Industry Advancement DEVIN MILLER Manager of Communications & Digital Strategy Contact NVCA nvca.org nvca@nvca.org Silicon Valley Bank GREG BECKER Chief Executive Officer MICHAEL DESCHENEAUX President DAVID M. SABOW Group Head of Life Sciences, Client Funds and Bank Products JIM MARSHALL Head of Emerging Manager Practice STEVEN PIPP, CFA Research Manager Contact Silicon Valley Bank svb.com venturemonitor@svb.com Perkins Coie BUDDY ARNHEIM Partner, Emerging Companies & Venture Capital FIONA BROPHY Partner, Emerging Companies & Venture Capital CHARLES E. TORRES Partner, Emerging Companies & Venture Capital Contact Perkins Coie perkinscoie.com startuppercolator.com Solium KEVIN SWAN VP Corporate Development JEREMY WRIGHT Head of Private Markets STEVE LIU Head of Solium Analytics JERON PAUL CEO, Capshare Contact Solium solium.com Executive summary 3 Overview 4 Angel/seed 8 First financings 9 Early-stage VC 10 Late-stage VC 11 SVB: Adapting to capital overload: Investors chart new paths 12 Activity by region 13 Activity by sector 15 Life sciences 16 Q&A: Research boom in life sciences benefitting patients and investors alike 17 Corporate VC 20 Perkins Coie: An evolving VC market needs evolving participants 22 Growth equity 24 SVB: Nontraditional investors, family offices seek earlier-stage deals 26 Exits 27 Fundraising 29 League tables 32 Methodology 35 Contents 2 2Q 2018 PITCHBOOK-NVCA VENTURE MONITOR Executive summary 3 2Q 2018 PITCHBOOK-NVCA VENTURE MONITOR At the halfway point of 2018, the US venture capital ecosystem continues to see the crystallization of a new normal where capital is concentrated into fewer, larger deals. At the same time, the improved access to the IPO market—particularly for enterprise tech companies—has been a welcome trend. The recently wider window of opportunity in the IPO market is certainly a positive development after several lackluster quarters in 2016 and early 2017, and many industry professionals have an optimistic outlook, although the longevity and level of openness remain to be seen. 2Q 2018 was the fifth consecutive quarter with 10+ venture-backed IPOs, which is good news despite not having reached the full potential predicted for well over a year. The strength of the venture-backed IPO market during this moderately successful run has been primarily driven by biotech companies, which continue to account for the majority of venture-backed IPOs. In comparison, the tech IPO market has remained relatively subdued, although enterprise tech IPOs have been strong in 2018 and have come to overshadow consumer tech IPOs in both number and post-IPO valuations. The rising success of enterprise tech IPOs has fueled public market optimism, but masks the longer-term issue of fewer public companies in the US. Today, the US has about half the number of total listed companies compared to 20 years ago, despite GDP more than doubling over that time. This major reduction in both IPOs and the number of public companies in the US is now coinciding with highly-valued venture-backed companies, i.e. unicorns, staying private longer. These trends bring to light two concerns: 1) the long-term health of the US public markets, and 2) public market investors losing out on investment gains during the high-growth phase when companies are still private. The decline in venture-backed IPOs and in the number of public companies in general can largely be traced to three major trends that have appeared since around 2000: 1) the increase in costs and complexity of being a public company; 2) the collapse of research coverage and liquidity for small capitalization companies; and 3) the market focus on short-termism that harms innovative companies with long- term time horizon projects. To address these complex issues, NVCA and the venture industry remain engaged with policymakers and regulators, and together with the Chamber of Commerce and other organizations last April, released the report titled “Expanding the On-Ramp: Recommendations to Help More Companies Go and Stay Public.” The report provides a blueprint for policymakers to address the challenges to both launching IPOs and remaining a public company, as well as policy recommendations for enhancements to the reforms put in place by the 2012 JOBS Act. Several of these proposals have already been passed out of the House Financial Services Committee. While the short-term outlook remains positive for the IPO market, M&As, which have typically been the dominant liquidity path for venture-backed companies, have had a slow year through the first half. Some venture investors, however, anticipate seeing an acceleration of M&A activity in tandem with a more active IPO window. Though the federal tax reform bill passed in late 2017 preserved key industry priorities and avoided other tax increase proposals, VCs in California have since been faced with a proposal to impose an additional 17% surtax on carried interest, which could do significant damage to the dominant hub of the world’s entrepreneurial ecosystem. Venture firms, NVCA and other groups jumped into a state advocacy campaign and fought against this surtax, including sending a VC sign-on letter with over 178 signatories opposing the proposed state legislation. While many states across the US and countries around the world try to emulate California’s dominance in high-growth startup activity, if this surtax is put in place, the impact on the entrepreneurial ecosystem would be extremely disruptive to the California entrepreneurial economy. While the issue’s momentum has been blunted in 2018, it will be back in 2019. Looking ahead, two other public policy issues that could have a significant impact on VCs and startups are: 1) immigration, specifically the Department of Homeland Security’s delay and intention to rescind the International Entrepreneur Rule (IER); and 2) the ongoing movement in Washington to scrutinize foreign investment into the US—particularly from China. In late June, NVCA and the venture community’s defense of the IER continued through the filing of a comment letter and highlighting the impact that immigrant entrepreneurs and the companies they found have had on the US economy and innovation. Related to foreign investment, the proposed Foreign Investment Review Risk Modernization Act (FIRRMA) threatened to increase oversight over foreign LPs and co-investors by the Committee on Foreign Investment in the US. As FIRRMA was considered on Capitol Hill, NVCA improved the legislation through its advocacy efforts. The bill is highly likely to become law this year, and NVCA will continue to engage on this topic during the rulemaking process. Setting aside public policy curveballs, the resilience of the venture ecosystem and the drive toward innovation and investment returns forges on. Total capital invested into high-growth startups and total capital raised by venture funds show no signs of slowing down in 2H 2018, with full-year capital invested on track to reach another record high and capital raised on track to hit at least $30 billion for the fifth consecutive year. 4 2Q 2018 PITCHBOOK-NVCA VENTURE MONITOR $37.1$27.0$31.3$44.4$41.7$47.4$71.9$82.2$75.6$81.9$57.54,716 4,470 5,388 6,738 7,865 9,244 10,509 10,606 8,939 8,815 3,997 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018* Deal Value ($B) # of Deals Closed 0 500 1,000 1,500 2,000 2,500 3,000 3,500 $0 $5 $10 $15 $20 $25 $30 $35 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 2011 2012 2013 2014 2015 2016 2017 2018 Deal Value ($B) # of Deals Closed Angel/Seed Early VC Late VC Overview 2018 deal value has surpassed six of past 10 years US VC activity Past two quarters result in highest quarterly deal values in past decade US VC activity PitchBook-NVCA Venture Monitor *As of June 30, 2018 PitchBook-NVCA Venture Monitor For an industry that has been characterized by capital availability over recent years, the first half of 2018 has only exacerbated feelings of excess with more capital invested in a six-month timeframe than any time in recent memory. Through 2Q, $57.5 billion has been invested in US VC- backed companies, exceeding the full-year total for six of the past 10 years. Beyond basic measures of VC investment, 1H has also seen 94 financings completed of at least $100 million, 42 unicorn financings— including seeing Bird reach unicorn status in just 12 months—and the first close of the largest US VC fund ever. To say capital availability is high would be putting the true state of the US VC industry lightly. US VC deals have continued to grow in size, and not only at the top end of the market. Angel & seed deals this year have come in at a median size of $830,000 and $2.1 million, respectively, each a new decade- high figure for the time being. Together, those deals have come along with a median valuation of $7 million, which sits at roughly double the median valuation of the stage from 2012, and is $1 million higher than 2017’s figure. The upward shift in deal sizes has now persisted for almost the past decade across all stages. And while mega- deals continue to add an increasing bulk to overall figures, smaller deal size buckets are also gaining steam. For example, early- stage deals between $10 million and $25 million are on pace to surpass $10 billion in aggregate deal value this year, the first time we have seen that happen. The reasons for this growth are plentiful, but the number of 5 2Q 2018 PITCHBOOK-NVCA VENTURE MONITOR PE investors continue to join large rounds US VC activity with PE participation Unicorns set for record year US unicorn activity Companies aren’t entering VC lifecycle until later Median age (years) of companies by series $0.6$0.8$0.9$6.3$2.4$2.6$13.6$16.9$18.5$17.4$11.86 7 9 27 24 23 71 80 55 72 42 20082009201020112012201320142015201620172018*Deal Value ($B) # of Deals Closed $11.0$7.0$6.7$12.4$9.2$10.5$21.1$27.0$26.0$22.6$17.6680 465 433 532 566 655 787 780 660 646 368 20082009201020112012201320142015201620172018*Deal Value ($B) # of Deals Closed PitchBook-NVCA Venture Monitor *As of June 30, 2018 PitchBook-NVCA Venture Monitor *As of June 30, 2018 PitchBook-NVCA Venture Monitor *As of June 30, 2018 investors active within the US VC industry continues to be a major reason. That 2018 is pacing to see more than 300 new funds close this year only adds to the growing opportunities for founders to raise. Nontraditional investors continue to move into the market as well, with 2018 currently pacing to be the fifth consecutive year that more than 1,500 deals were completed with participation from these investors—PE firms alone have been involved in 368 VC deals already. These deals have combined for over $36 billion of invested capital, roughly 63% of the total capital invested in 1H. Nontraditional investors are both a partial cause—VC funds themselves have had more dry powder with which to work over the past few years than ever before—and a result of companies staying private longer. The likelihood is high that these firms continue to stay active within VC, given that companies continue to stay private longer while also needing capital infusions to continue growth. The average time to exit in 2018 is 6.1 years from the first VC financing the company has raised. This figure has risen nearly each year over the past decade, and, coupled with the high capital availability from VCs, is a reason for the high increase in unicorns and other high valuations. Unicorns themselves have had an active year in both dealmaking and exits. 42 companies have closed deals with a valuation of at least $1 billion, pacing the year to reach the previous high from 2015. Bird, an electric scooter transportation company, became the fastest company to reach the coveted unicorn valuation after it raised its fourth round in less than 12 months—the company has since raised another round at a valuation of $2 billion. As the number of unicorns continues to grow, so do the paper gains and the unrealized value still illiquid from investors and LPs. For unicorn rounds raised in 2018, the average time between the new funding and the company’s first VC round has stayed above six years, nearly as long as the average time to exit. Though six US unicorns have completed an exit this year, and several others are waiting in IPO registration, the extended risk profiles will likely claim several victims. Domo, once valued at $2.3 billion, has seen its value 3.1 3.9 5.2 6.8 8.2 0 1 2 3 4 5 6 7 8 9 10 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018* Angel/Seed Series A Series B Series C Series D+ 6 2Q 2018 PITCHBOOK-NVCA VENTURE MONITOR drop below $600 million after completing its IPO. This is something that we have expected to happen, especially as unicorns have continued to raise further rounds and grow in the private market. Though exits overall have stayed low relative to the 2014 and 2015 highs, more exits have been completed this year than had been at the same time period last year. The median exit size has reached $105 million, and the average has surpassed $225 million, each representing the highest exit value figure we have tracked. The average post-valuation of 2018 exits sits at $581 million after 1H, more than double the value seen in full-year 2016, and more than $150 million higher than even 2017’s average value. Despite a lower number of completed exits than has been seen in the past, it’s undeniable that capital is being returned to investors, even if it may be taking longer. The fundraising environment, which has stayed hot, may indicate that exit timelines will continue to lengthen and companies will continue growth in the private market. Eight funds have been closed on at least $500 million, including two larger than $1.3 billion. But still in the market is Sequoia’s record-setting fund that has targeted a reported $8 billion in size—the firm has held a first close on $6 billion. The global fund is seemingly the first domino to fall as a result of SoftBank’s activity, offering some companies an alternative investor when seeking massive late-stage financings, especially if the company isn’t looking to raise the minimum $100 million the Vision Fund seeks to invest. Sequoia’s fund is undoubtedly an outlier within the industry, but the median fund size continues to creep upward, hitting $65 million through 2Q. Though larger funds don’t necessarily need a longer lifecycle, the flexibility that is available because of the extra capital allows these investors to stay with private companies and invest further into the lifecycle of winners. With the year pacing to see 320 new US VC funds entering the market this year, we don’t believe that current trends will subside in the near term. This year will likely become the fifth straight year to record more than $30 billion in new commitments, adding dry powder to a market already awash with capital. 6.3 6.1 5.3 5.0 4.0 4.5 5.0 5.5 6.0 6.5 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018* Average Median Exit times lower slightly in 2018 Median and average time (years) to exit $0 $10 $20 $30 $40 $50 $60 $70 $80 $90 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018* Deal Value ($B) VC Fund Capital Raised ($B) VC capital raised has tracked well with overall deal value Capital raised vs. capital invested ($B) PitchBook-NVCA Venture Monitor *As of June 30, 2018 PitchBook-NVCA Venture Monitor *As of June 30, 2018 7 2Q 2018 PITCHBOOK-NVCA VENTURE MONITOR Success is doing what you want. And letting someone else worry about the rest. Solve your cap table Comply with 409A Love your numbers Stop by and ask us how. solium.com © Solium Capital LLC. All rights reserved. 8 2Q 2018 PITCHBOOK-NVCA VENTURE MONITOR $682.3$591.7$531.7$754.3$852.8$1,134.5$1,253.1$870.0$1,573.7$1,088.0$1,379.1$1,585.4$1,279.8$1,418.1$2,171.0$1,903.4$2,092.2$2,176.2$2,160.2$1,918.8$1,698.5$1,714.0$1,725.4$1,544.0$1,625.5$1,684.0$1,931.7$1,736.1$1,918.6$1,839.30 200 400 600 800 1,000 1,200 1,400 1,600 $0 $500 $1,000 $1,500 $2,000 $2,500 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 2011 2012 2013 2014 2015 2016 2017 2018 Deal Value ($M) # of Deals Closed Angel & seed deal value has slowly crept back toward highs of 2015 US angel & seed activity Angel & seed PitchBook-NVCA Venture Monitor *As of June 30, 2018 PitchBook-NVCA Venture Monitor $0.56 $0.83 $1.68 $2.12 $0.0 $0.5 $1.0 $1.5 $2.0 $2.5 2010 2011 2012 2013 2014 2015 2016 2017 2018* Angel Seed Deal sizes continue to grow Median US angel & seed deal size ($M) Despite predictions of a continuing decline, the angel & seed market has remained exceptionally steady in the first half of 2018, especially in terms of capital investment. While still on a downward trajectory, deal counts are falling at a slower rate than in 2015 and 2016. Capital invested has been more resilient, with angel & seed activity closely matching the broader VC market’s trend of fewer but larger deals. In 2Q 2018, capital invested came in only slightly below the previous quarter with $1.8 billion invested across 792 deals. While the angel & seed deal count has declined over the last three years, it is key to view the data over a longer time horizon. For instance, even after falling two consecutive years from a peak in 2015, the current average quarterly investment level is still four times higher than the most active quarter in 2008. The initial run-up in angel & seed activity that began in the early 2010s came on the back of a number of sizable VC exits (the largest of which was Facebook), which minted a large group of newly wealthy individuals who wanted to invest in the next generation of private technology firms. As competition increased at the earliest stages of investment, many of these entrepreneurs and high-net-worth individuals have been spurred to launch their own VC firm or join angel groups to access larger deals. This increasing institutionalization of the angel & seed space is a huge driver of the shift we’re seeing in the ecosystem. Deal sizes are expanding to unforeseen levels, but this has coincided with complementary step-ups in the median percentage acquired, which has crept up to 26.7% from 20% just five years ago. This shift has occurred as investors need to reconcile the need to offer more capital to nascent startups while reconciling the economics and overall risk/return characteristics of their fund, which calls for taking an increased percentage of ownership. Investors have also responded by becoming more selective in the companies they back, requiring companies to be more mature than they have been historically. Especially with the high failure rates in the initial stages of a company’s life, investing in fewer companies goes against the traditional seed strategy and creates more concentration risk in the portfolio, necessitating increased scrutiny of investments. 9 2Q 2018 PITCHBOOK-NVCA VENTURE MONITOR First financings $5.8$4.0$4.5$6.0$7.1$7.2$7.7$8.8$7.0$7.3$5.41,720 1,626 2,034 2,736 3,213 3,456 3,676 3,427 2,667 2,545 947 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018* Deal Value ($B) # of Deals Closed 1H pacing year for new record US first financing VC activity Slight uptick in first financing deal value US first-financing as % of total US VC activity 0 2,000 4,000 6,000 8,000 10,000 12,000 20082009201020112012201320142015201620172018*First VC Follow-on VC First-time deals pacing for down year US first-financing VC rounds vs. follow-on VC rounds 8.9% 9.3% 28.9% 23.7% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018* Deal Value Deal Count PitchBook-NVCA Venture Monitor *As of June 30, 2018 PitchBook-NVCA Venture Monitor *As of June 30, 2018 PitchBook-NVCA Venture Monitor *As of June 30, 2018 PitchBook-NVCA Venture Monitor *As of June 30, 2018 $1.1 $1.5 $3.2 $6.3 0 1 2 3 4 5 6 7 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018* Median Average First financings sizes on upward swing Median and average US VC first financing size ($M) Since 1999, Solium has been simplifying the complexities of equity plans through smarter software, remarkable service and trusting relationships. 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Visit us at solium.com. 10 2Q 2018 PITCHBOOK-NVCA VENTURE MONITOR Early-stage VC $4.6$5.2$4.9$5.6$4.9$7.2$6.3$6.3$6.1$6.2$6.2$5.0$5.6$6.8$7.5$9.5$9.6$10.50 100 200 300 400 500 600 700 800 900 $0 $2 $4 $6 $8 $10 $12 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 2014 2015 2016 2017 2018 Deal Value ($B) # of Deals Closed 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 20082009201020112012201320142015201620172018*$25M+ $10M- $25M $5M- $10M $1M- $5M $500K- $1M Under $500K $8.7 $11.3 $24.3 $29.3 $0 $5 $10 $15 $20 $25 $30 $35 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018* Series A Series B Companies raising more early US early-stage activity (#) by size Deal sizes growing rapidly Median amount raised ($M) at time of funding by series As large investors move in, early-stage capital grows US early-stage VC activity PitchBook-NVCA Venture Monitor *As of June 30, 2018 PitchBook-NVCA Venture Monitor *As of June 30, 2018 Early-stage investing continues to climb higher, recording a seventh straight quarterly increase in capital invested. In the second quarter, we recorded $11.5 billion invested into early-stage companies with the average deal size growing to a decade high of $18 million. Outlier deals drove the investment total even higher, as the capital availability for giant funding rounds moves into earlier stages of the market. This is manifested through 24 $100+ million funding rounds, including the $100 million Series A raised by machine-learning drug discovery company Insitro, led by Foresite Capital Management, Andreessen Horowitz and ARCH Venture Partners. While these deals are obviously not representative of the entire early-stage market, they are indicative of the massive amount of capital being put to work in the asset class regardless of stage. Indeed, deals over $25 million now make up more than 50% of 2018 early-stage deal value. Furthermore, the median amount of capital raised by companies at the Series A and B level has shown a steady uptrend over the past decade. This has pushed the median at Series A to $11.3 million and Series B to $29.3 million, representing a greater than twofold increase from 10 years ago, further illustrating the extreme shifts even at the early stage. At the sector level, fintech has received considerable attention from early-stage investors, representing 11% of deal count in 2Q 2018. Startups that utilize blockchain technology to innovate on financial processes have become more prevalent over the past quarter, with three of the five largest fintech rounds raised by companies boasting a blockchain focus. This list includes enterprise blockchain provider R3, settlement platform Paxos and home equity lender Figure. Financial services is one of the more clear applications for blockchain technology, as the transactional aspect meshes with blockchain’s primary benefits such as immutability and security. PitchBook-NVCA Venture Monitor *As of June 30, 2018 $9.5$6.6$7.2$5.0$5.8$6.6$6.3$6.0$6.2$6.7$7.1$6.8$9.3$13.4$9.8$12.2$13.1$11.2$13.9$10.9$11.8$15.5$10.0$8.1$8.7$12.4$15.2$9.3$18.7$14.90 100 200 300 400 500 600 $0 $2 $4 $6 $8 $10 $12 $14 $16 $18 $20 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 2011 2012 2013 2014 2015 2016 2017 2018 Deal Value ($B) # of Deals Closed 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 20082009201020112012201320142015201620172018*$50M+ $25- $50M $10M- $25M $5M- $10M $1M- $5M Under $1M Investment into the late stage continues at a strong clip, as the definition of what constitutes as the “late stage” is stretched by a steady feed of new unicorns and aging decacorns that are delaying liquidity events. This past quarter, $15 billion was invested into 475 late-stage deals. With essentially no change in deal count from the first quarter, this represents a remarkably steady volume of deals at the late stage, as investors sustain their demand for developed businesses in the private markets. This demand was evident in valuations at the late stage in 2Q 2018, which extended to $278 million—24% higher than 2017’s already lofty valuations. Selling smaller ownership stakes for larger sums of capital is common as a company gains traction, but this has become a necessity to retain the performance incentive for founders and vested employees of VC-backed companies. As the age of companies seeking late-stage rounds has extended to unprecedented levels, though, a knock- on effect of raising more venture rounds is a lack of room on the cap table. With each subsequent round, the company must weigh the tradeoffs of diluting the employees’ and founder’s ownership stakes against fulfilling the company’s increasing appetite for cash to sustain growth. Another impetus for raising additional rounds is that holding large current cash balances or having the ability to raise huge sums has become a key competitive advantage in many business models. For instance, Airbnb’s extensive fundraising history and ability to raise billions of dollars represent huge barriers to entry for other firms in the short-term hospitality rental market. On a similar note, secondary selling into late-stage financings has become more common as a means of providing liquidity to earlier investors or employees while making space on the cap table. The most extreme example was the $8 billion secondary sale of Uber in January, but these deals have been occurring with more frequency over the last few years. This is a logical progression as companies raise increasingly more capital and retain private status longer. It allows early investors to achieve some liquidity and close out their funds without forcing an exit, plus employees can realize some gains and take some risk off the table. Since the drivers of the “private for longer” trend don’t seem to be going anywhere, we expect secondary sales to become an increasingly integral part of the VC environment. 11 2Q 2018 PITCHBOOK-NVCA VENTURE MONITOR Late-stage VC Quarterly late-stage deal values rising US late-stage activity PitchBook-NVCA Venture Monitor 60% of deals over $10M US late-stage activity (#) by size PitchBook-NVCA Venture Monitor *As of June 30, 2018 12 2Q 2018 PITCHBOOK-NVCA VENTURE MONITOR Adapting to capital overload: Investors chart new paths Welcome to the era of mega-funds. Triggering a capital arms race never before seen, nontraditional investors are pushing private capital in the innovation economy to dizzying levels. Is this good for the VC ecosystem? It depends on where you operate in the innovation landscape. We are beginning to see indications of how these super-sized funds, with capital sourced from across the globe, are impacting companies—from the seed and early stages to the late stage, and even public assets. Private markets dominate led by SoftBank Mega-rounds of $100 million+—aka PIPOs— have outpaced US tech IPOs in every quarter over the past four years. Under the surface, the source of those private investments has changed dramatically. Mutual funds and hedge funds have scaled back their fervor since 2013–2015, and PE seemingly awaits more favorable valuations. Still, in 1H 2018, we saw 93 PIPOs—nearly matching previous annual totals (see chart). This is partly due to SoftBank’s insatiable appetite for innovative tech assets, which appears to only be growing. In 1H 2018, SoftBank led five $100 million+ rounds in the US. And in May, Masayoshi Son announced that he is planning a second mega-fund in the near future. Even as more companies seek IPOs in 2018, it appears the PIPO will continue to dominate, allowing today’s best performers to stay private much longer than their predecessors. With this pattern established, how are investors reacting? Extended horizons at the early stage Venture firms are not ceding their territory. In fact, the immense global investor interest in innovation has allowed the upper echelon of VCs to restock their war chests with significant capital to ensure continued participation, even as their portfolio companies raise multiple late-stage rounds. Such abundant capital will result in upward pricing pressure across the ecosystem, impacting classic VC models. Elevated valuations make it harder for investors to obtain the returns expected from an alternative asset class. Indeed, the behemoths have created a bifurcated market, with the perceived “better” companies getting significant attention and the rest struggling to raise meaningful capital. This environment is leading some market observers to speculate that the “growth at all cost” mantra of 2014–2015 could return if top-tier companies accept bigger cash infusions than may be necessary. Competition across the late stage It’s likely competition for late-stage deals will intensify. The size and scale of these funds often limit their ability to invest in early-stage companies, which could drive even more capital to chase existing or near- unicorns. The money is flowing from many sources: Venture-backed companies raised 2.5x the amount that their venture firm counterparts received in commitments in 2017. The threat of disruption and mounting piles of cash are driving corporate venture activity. Despite rate hikes, mutual fund and hedge fund managers are reaching for growth once again. And now even sovereign wealth funds, some of which are doing direct investments, see the potential for extended time horizon. Impact on the public markets These mega-rounds often arrive at the stage when a company would consider an IPO to raise cash—but now they can delay it. Many of these mega-rounds provide secondary liquidity in addition to primary growth capital. The companies that are eyeing the public markets in most cases are more mature. Public asset managers should even be mindful of an adverse selection for companies choosing public capital in an environment of abundant private cash. In the long run, it is challenging for public investors when private markets capture the majority of company value. Between 2013 and 2015, we saw funds reach for growth with mixed results and longer-than- anticipated holding periods. Perhaps this time we’ll see patience on the part of these investors. We live in interesting times, and it is still unclear how significantly the mega-funds will impact traditional investment patterns. Investors who have been investing in disruption may be disrupted themselves. Steven Pipp, CFA, Research Manager, Silicon Valley Bank US VC mega-deal activity PitchBook-NVCA Venture Monitor *As of June 30, 2018 $18.8$24.6$23.1$25.1$22.285 110 74 106 93 2014 2015 2016 2017 2018* Deal Value ($B) # of Deals Closed West Coast nears $17B in 2Q value 2Q US VC deal activity by region Deal value remains concentrated on coasts 2Q 2018 US VC deal activity by region PitchBook-NVCA Venture Monitor New York sees growing share of deals Percentage of total US VC deal count for select MSAs PitchBook-NVCA Venture Monitor PitchBook-NVCA Venture Monitor *As of June 30, 2018 West Coast 40.4% of 2Q Deals 62.0% of 2Q Deal Value Mountain 6.2% of 2Q Deals 3.0% of 2Q Deal Value Midwest 1.4% of 2Q Deals 0.3% of 2Q Deal Value Great Lakes 7.9%of 2Q Deals 3.4% of 2Q Deal Value Mid-Atlantic 20.6% of 2Q Deals 13.3% of 2Q Deal Value New England 9.8% of 2Q Deals 12.3% of 2Q Deal Value Southeast 6.5% of 2Q Deals 3.2% of 2Q Deal Value South 7.0% of 2Q Deals 2.5% of 2Q Deal Value 17.5% 18.7% 11.4% 12.8% 7.1% 8.3% 5.9% 6.6% 7.2% 6.0% 0% 5% 10% 15% 20% 25% 2014 2015 2016 2017 2018* San Francisco New York Boston San Jose Los Angeles Region Deal Count Deal Value ($M) Great Lakes 146 918.2 Mid-Atlantic 383 3,617.5 Midwest 26 72.7 Mountain 116 807.5 New England 182 3,361.3 South 130 694.3 Southeast 121 886.5 West Coast 751 16,912.8 13 2Q 2018 PITCHBOOK-NVCA VENTURE MONITOR Activity by region Shape the future of the venture industry with NVCA ADVOCACY COMMUNITY & EDUCATION RESEARCH JOIN US! Please contact NVCA with your membership queries membership@nvca.org 202.864.5918 15 2Q 2018 PITCHBOOK-NVCA VENTURE MONITOR Activity by sector 0 2,000 4,000 6,000 8,000 10,000 12,000 20082009201020112012201320142015201620172018*Commercial Services Consumer Goods & Recreation Energy HC Devices & Supplies HC Services & Systems IT Hardware Media Other Pharma & Biotech Software Software has dominated deal count US VC activity (#) by sector $0 $10 $20 $30 $40 $50 $60 $70 $80 $90 20082009201020112012201320142015201620172018*Commercial Services Consumer Goods & Recreation Energy HC Devices & Supplies HC Services & Systems IT Hardware Media Other Pharma & Biotech Software Pharma & biotech seeing growth in value US VC activity ($B) by sector 1,6731,4471,8652,6183,1913,8444,4454,2053,5903,4461,6640% 5% 10% 15% 20% 25% 30% 35% 40% 45% 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 20082009201020112012201320142015201620172018*Software Deal Count Software as % of Total US VC (#) Software mirrors overall VC trends Software as % of total VC (#) $9.9$7.3$8.3$15.1$13.5$16.2$31.2$31.8$36.5$30.0$23.70% 10% 20% 30% 40% 50% 60% $0 $5 $10 $15 $20 $25 $30 $35 $40 20082009201020112012201320142015201620172018*Software Deal Value ($B) Software as % of Total US VC ($) Over 40% of deal value goes to software Software as % of total VC ($) PitchBook-NVCA Venture Monitor *As of June 30, 2018 PitchBook-NVCA Venture Monitor *As of June 30, 2018 PitchBook-NVCA Venture Monitor *As of June 30, 2018 PitchBook-NVCA Venture Monitor *As of June 30, 2018 16 2Q 2018 PITCHBOOK-NVCA VENTURE MONITOR Life sciences Activity in life sciences sees strong growth US VC activity in life sciences 13.3% 14.3% 0% 5% 10% 15% 20% 25% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018* Sector capturing larger share of deals US VC activity (#) in life sciences as percent of total VC Deal count split between the two sectors US VC activity in life sciences (#) by sector 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 20082009201020112012201320142015201620172018*$50M+ $25M- $50M $10M- $25M $5M- $10M $1M- $5M Under $1M Following trend, deal sizes getting larger US VC activity in life sciences (#) by size PitchBook-NVCA Venture Monitor *As of June 30, 2018 PitchBook-NVCA Venture Monitor *As of June 30, 2018 PitchBook-NVCA Venture Monitor *As of June 30, 2018 0 200 400 600 800 1,000 1,200 1,400 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018* Pharma & Biotech HC Devices & Supplies PitchBook-NVCA Venture Monitor *As of June 30, 2018 $9.3$7.9$7.7$8.6$8.7$9.7$12.4$14.7$12.5$17.2$12.60 200 400 600 800 1,000 1,200 1,400 $0 $2 $4 $6 $8 $10 $12 $14 $16 $18 $20 20082009201020112012201320142015201620172018*Deal Value ($B) # of Deals Closed 17 2Q 2018 PITCHBOOK-NVCA VENTURE MONITOR Life science investing is through the stratosphere. Why now? We have the privilege of living through a renaissance in the life science sector—a time where the word “cure” will increasingly replace the word “treatment” in a number of indications. There is no single factor driving the current momentum, and what is often forgotten is that some of the most transformative innovations (whether CRISPR or CAR-T) leveraged decades of advances across the landscape and relied on largely uncelebrated research quietly conducted in both academia and industry. What is unique today is that we increasingly have new research tools and analytical capabilities, including the nascent entry of artificial intelligence (AI) and machine learning (ML) to help us understand the true biology behind disease. Sequencing has certainly played a big role, as the cost per gigabyte of data has plummeted over the past decade. But sequencing is not the whole story—it may tell us where to go, but other innovations are giving us something to do once we get there. Clinical breakthroughs are benefiting patients and investors alike, leading to increased capital in the sector and more entrepreneurs willing to challenge the realm of the possible. The torrid pace of investing and company formation in 2017 resulted in $9.1 billion raised by venture capitalists and $17.3 billion in VC investment across the healthcare sector. Healthcare venture fundraising in 2018 is on pace to closely match 2017, and investments likely will surpass last year’s total. This activity combined with a collaborative FDA environment (2017 marked a 21-year high for novel drug approvals at 46, and another 16 have won approval in the first half of 2018) is making for a very favorable climate for innovation and continuing to draw capital into the sector. What is driving the wave of biopharma IPOs? Beginning in 2014, we saw a pronounced increase in buy-side institutional appetite for life science companies in the public markets, with the number of venture- backed biopharma IPOs more than doubling. A number of life science and healthcare venture firms realized portfolio returns, helping establish the foundation for strong fundraising in the years that followed. Drawn to healthy returns, crossover investors (public investors investing in the last private round before an IPO) have played an increasingly dominant role in the public market story. Already, 30 biopharma IPOs have priced in the first half of 2018. How long will it last? Without question, the economy will have its ups and downs, IPO windows will open and close, and there will be no shortage of factors that could lead to exogenous shocks to the market. If you step back, though, you realize that the innovations taking place today go well beyond short-term markets; they are going to change how disease is treated for generations to come. In the history of humanity, we are the first generation to understand the structure of DNA. Just 15 years ago, we sequenced the genome; and just five years ago, we learned how to rewrite it. We are living through the first generation of gene/cell therapy drugs (Biogen’s Spinraza, Sarepta’s Exondys 51, Novartis’ and Gilead’s CAR-T therapies and Spark’s Luxturna, to name a few). These new therapeutic platforms may bring with them a resilience that over the longer term will be less susceptible to yield curves and market volatility. Give us a preview of the most exciting advancements across the sector. Areas like AI and ML are early in their healthcare journey. Their promise of amplifying the crowd’s wisdom will have profound applications in drug discovery, in delivery of care and eventually in creating a more sustainable health economic model. Research boom in life sciences benefiting patients and investors alike Q&A with David M. Sabow, Group Head of Life Sciences, Client Funds and Bank Products, Silicon Valley Bank The life sciences sector has grown immensely in the US, with deal value topping $17 billion during 2017, with more than $12.5 billion invested already this year (21.4% of total US VC deal value). Not only has this investment helped these companies reach private valuations never before seen in this industry, but research capabilities have been greatly increased. New technologies, especially those common among other VC-heavy industries (artificial intelligence, machine learning, etc.) are helping researchers and academics make ground-breaking discoveries at breakneck speed. In this edition, we talked to David M. Sabow, Group Head of Life Sciences, Client Funds and Bank Products at Silicon Valley Bank about how he sees investment in life sciences playing out, and what’s next for the industry. For 35 years, Silicon Valley Bank (SVB) 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. Learn more at svb.com. ©2018 SVB Financial Group. All rights reserved. SVB, SVB FINANCIAL GROUP, SILICON VALLEY BANK, MAKE NEXT HAPPEN NOW and the chevron device are trademarks of SVB Financial Group, used under license. Silicon Valley Bank is a member of the FDIC and the Federal Reserve System. Silicon Valley Bank is the California bank subsidiary of SVB Financial Group (Nasdaq: SIVB). 18 2Q 2018 PITCHBOOK-NVCA VENTURE MONITOR On the biopharma side, we will see off- the-shelf cell therapies replace the current autologous first generation CAR-T. We will also see new treatments in the incredibly difficult neurodegenerative space— expanding our understanding of these indications and using novel approaches that lead to synaptic regeneration. Profound advances in data analytics, biomarker discovery, remote patient monitoring, diagnostics for earlier intervention and the delivery of care are just a handful of the factors converging to drive the industry forward. On the investing side, increasingly we will see novel corporate structures designed to build a portfolio of assets with low-correlation risk in early-stage drug development. With incredible advances in understanding the specific mechanisms behind disease, there is a higher probability of clinical success and by extension a more predictable return for investors. Imagine a time when each 401(k) had a portion allocated to early-stage drug development— that may be exactly where we are headed. Which life science subsectors are getting a lot of interest, and which are underfunded? Oncology is advancing faster than ever, driven by cellular therapies, immuno- oncology and a focus on the heterogeneity of disease, leading to more-effective personalized treatment. In 2016 and 2017, oncology received twice as much investment compared with the next closest indication. And this may not correct anytime soon, as these investors have been well-rewarded, with oncology providing a large share of life science big exits. A key opportunity for the industry is to apply the lessons and advances of the oncology revolution to other challenging areas such as neurodegenerative diseases. Diagnostics and tools companies continue to see a flood of capital, notably from technology investors, with a plethora of private $100 million+ equity rounds since 2015. There are some exciting advancements, including new tools for synthetic biology, AI and ML for diagnostics and clinical decision-making and, of course, the promise of liquid biopsy for earlier intervention and better monitoring. The device sector has been nearly absent from the IPO bonanza and is receiving significantly less than half of the venture investment we are seeing in biopharma. Despite this, the sector has experienced a stable M&A market over the past several years. Truly innovative device companies (De Novo 510(k) and premarket approval pathways) have realized upfront M&A returns on par with biopharma and three neuro-focused companies went public in the first half of 2018. Longer term, the device subsector will benefit from the convergence of technology, leveraging microelectronics, digital health platforms and patient engagement tools to eliminate the use of drugs in a number of chronic conditions. SVB co-hosts a China healthcare summit each September in Shanghai. Tell us how the life science climate is changing there. Healthcare executives on both sides of the Pacific now recognize that being conversant in the Sino/US opportunity is a strategic imperative rather than merely good cocktail fodder. There are several drivers behind this trend. At the highest level, the vastly different healthcare challenges facing the US and China pose a unique opportunity for collaboration. While the US is focused on reducing healthcare costs from the whopping 17.5% of gross domestic product, China is poised to significantly increase its healthcare spending from current levels of 6.2% of GDP. Getting the health economics model wrong would be magnified exponentially across China’s huge population. By focusing on consumer engagement in wellness for disease prevention, investing in early disease detection and closely monitoring the cost of treatments and medical devices, the Chinese government seems determined not to follow the same path that led to the economic challenges of the US healthcare system. China is also at the front end of a market transition, evolving from “Made in China” to “Created in China.” Economic (a growing middle class) and demographic (a surge in aging population) drivers are fueling the demand for innovative healthcare products and solutions to address the increased incidence of disease, including cancer, hypertension, diabetes, and cardiovascular and respiratory diseases. Lastly, Chinese corporates are increasingly using innovation and deal-making to make up for the legacy innovation gap. Domestic Chinese pharma companies spend a mere approximate 2% to 4% of their total sales on research and development, compared with closer to 15% for multinational companies. This gap is poised to narrow as select corporates move from lower- margin generics in favor of higher-margin innovative therapies. David Sabow serves as the head of Silicon Valley Bank’s life science and healthcare practice, as well as the group head for the Bank’s client funds and products businesses. David manages life science and healthcare deal teams across the country, is responsible for the Bank’s on and off balance sheet deposit strategy and is the executive lead for the Bank’s products. David frequently presents at global industry conferences, has been a guest lecturer at Northeastern University’s Nanomedicine Graduate program, and has been published in Forbes for his insight on trends impacting China’s life science and healthcare market. Prior to joining SVB, David spent nine years in the life science investment banking practice at Canaccord Genuity, where he participated in public financings and M&A transactions. While at Canaccord, David worked on both domestic and international transactions across the spectrum of life science and healthcare. Outside of work David is the co-chair of the Kelly Brush Foundation’s Inspire!Boston event, and is a member of the Board of Advisors for Beth Israel Deaconess Hospital—Needham. David completed the executive program at Dartmouth’s Tuck School, focusing on Leadership and Strategic Impact. He graduated with distinction from Santa Clara University and lives in Needham, Massachusetts. ©2018 SVB Financial Group. All rights reserved. Silicon Valley Bank is a member of the FDIC and the Federal Reserve System. SVB, SVB FINANCIAL GROUP, SILICON VALLEY BANK, MAKE NEXT HAPPEN NOW and the chevron device are trademarks of SVB Financial Group, used under license. 06.22.18 For 35 years, Silicon Valley Bank has been at the intersection of innovation and capital. We provide unique access to insights and strategies for companies of all sizes in innovation centers around the world — all designed to help you find what’s next. svb.com Helping life science and healthcare innovators move bold ideas forward, fast. CVC participation in venture deals has continued at a brisk pace in 2Q, with total deal value topping $13.5 billion, only slowing slightly from the pace in 1Q. CVC activity is in line with the broader VC trend of capital concentration exhibited through declining deal count and increasing deal size. Although total deal value is up 104% YoY, deal count is down 4%. For the past five years, CVCs have steadily invested in fewer deals smaller than $5 million and shifted toward larger check sizes, increasing participation in deals sized over $25 million. Additionally, nearly 20% of CVC deals (by count) are invested in rounds sized $50 million or greater. As corporations have adapted to increasing competition from agile startups, they have become more willing to engage with those startups directly, whether through partnerships, acquisitions or CVC investments. As corporations become more comfortable using VC as

At the halfway point of 2018, the US venture capital ecosystem continues to see the crystallization of a new normal where capital is concentrated into fewer, larger deals. At the same time, the improved access to the IPO market—particularly for enterprise tech companies—has been a welcome trend. The recently wider window of opportunity in the IPO market is certainly a positive development after several lackluster quarters in 2016 and early 2017, and many industry professionals have an optimistic outlook, although the longevity and level of openness remain to be seen.

About Techcelerate Ventures

Tech Investment and Growth Advisory for Series A in the UK, operating in £150k to £5m investment market, working with #SaaS #FinTech #HealthTech #MarketPlaces and #PropTech companies.

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