THE SHIFTING VC LANDSCAPE

Mark Suster - @msuster

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To read my full blog post about this presentation and watch the video see links in description below.

2014 appears to be the most active for LPs the since recession

Source: 2Q 2014 Pitchbook US Venture Industry Datasheet . Annualized 2014 fundraising based on 49 funds closed in Q1. PwC “Asset Management 2020” 3

$23

.1

$34

.6

$36

.0

$29

.5

$12

.6

$19

.5

$24

.7

$20

.3

$18

.4

$8.

8

159

183 164 171

102 121

97

132 147

~200

0

50

100

150

200

250

$-

$5

$10

$15

$20

$25

$30

$35

$40

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Est

Capital Raised ($B) # of Funds Closed

Q1

The Dot Com skepticism from LPs has finally thawed, but some things have changed…

Seed funds now a well accepted norm (67% of all funds). Starting to hear talk of “seed co-investment or opportunity funds”

*As of Q1 2014. Source; Q2 2014 PitchBook US Venture Industry Data Sheet 5

33% 40%

54% 67%

2008 2010 2012 2014*

Share of VC funds raised < $50M

Represents 6% of total $ raised

But overall LP capital has continued to concentrated in later-stage funds with 66% of all money in big funds

*As of Q1 2014. Source; Q2 2014 PitchBook US Venture Industry Data Sheet 6

39% 43%

59% 66%

2008 2010 2012 2014*

Share of VC $ funds raised > $500M

Traditional VC is what has been impacted the most decreased in dollars and funds

*As of Q1 2014. Source; Q2 2014 PitchBook US Venture Industry Data Sheet, Atelier Advisors 7

44%

33%

23% 18%

2008 2010 2012 2014*

# of Funds (%) $100M - $500M

53% 45%

32% 26%

2008 2010 2012 2014*

$ Funds Raised (%) $100M - $500M

Some obvious factors driving later stage LP investment

8

q  Pension funds & other large asset managers need to write big checks

q  FoFs need to show they have access to the top historical winners

q  Continued perception / narrative of “the best and the rest”

But this is too simplistic

9

The market is actually bifurcating

The structure of the startup / venture market has started to change

10

1.  Startups staying private longer prior to IPO

2.  More value captured by private investors

3.  VC funds thus raising more growth & opportunity funds to back pro-rata in winners

Companies are raising larger amounts of capital before going public

Source: Dow Jones Venture Source 2014 via EY 11

$49 $43

$72 $83 $78

$101

2008 2009 2010 2011 2012 2013

Median amount raised prior to IPO ($M)

•  Hedge funds •  Mutual funds

Capital sources for late-stage private companies up dramatically

Source: CB Insights 12

Traditional public investors

•  Growth funds

•  Opportunity funds

Traditional VC investors

Moving Later

Moving Earlier

•  Google •  Rakuten •  Alibaba

Corporate VC Entrants

New

IPOs are happening, they’re just being delayed

Source: NVCA 2014 Yearbook - Thomson Reuters 13

2 2 2 1 2 3

21 17

9 13

2008 2009 2010 2011 2012 2013

No. of IPOs with market cap > $1B

No. of IPOs with market cap > $10B

$0.2 $0.4 $0.8 $4.3

$18

$104 $150+

Cisco Amazon Microsoft LinkedIn Twitter FB Alibaba (est)

Market Capitalization at IPO ($B)

So private investors capture more value, encouraging greater pre-IPO funding. Early investors want to capture pro-rata

Source: Quigley Report 2011, FLAG Capital 14

Previous Tech Cycle New Tech Cycle

$125B+ Current market cap:

$150B+ $340B+

But this is not 2000.

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This is not 2000

The Kauffman Report was wrong. It’s morning in VC

Sources: U.S. Bureau of the Census, World Bank. As of Q2 June 2012. Akamai. 2014 Statista forecasts, : eMarketer, WSJ 16

50x more internet users: 2.4B in 2012, 44M in 1995 120x faster online speeds: 6.7 mbps US average today vs. 56k modems

People are mobile: Personal, location aware. US has 164M smartphone users & 119M tablet users in 2014. People are socially connected: 1.3B+ MAU on FB, 250M+ on TWTR, 300M+ on LNKD. Credit cards on file: 1B+ digital shoppers and $1.5T ecommerce spend globally. $35B Apple app store in 2014

Public company startups are significantly more mature than their 1.0 counterparts.

Source: Age from NVCA 2014 Yearbook – Thomson Retuers, Revenue & Multiples from Pitchbook Tech Valuations Presentation (June 2014) 17

3.1

7.4

IPO in '00 IPO in '13

Years to IPO (from 1st financing)

$35

$102

IPO in '00-01 IPO in '13-'14

Revenue ($M)

13.3x

5.3x

IPO in '00-01 IPO in '13-'14

Valuation/Revenue Multiple

But late-stage private financing still produces some lofty late-stage valuations When a concept works the competition is fierce

Source: Graphic from Bullpen Capital 18

Seed Stage Early Stage Later Stage

More seed rounds as costs decline & sources

of capital increase

Larger later stage

rounds after validation Traditional VC

Today’s VC

Thus late-stage valuations have risen fastest in past 4 years. That’s the trend to watch carefully

Source: Source; Q2 2014 PitchBook US Venture Industry Data Sheet, * As of Q1 2014 19

$3.2 $6.7

$19.9 $37.1

$66.1 $5.9

$11.3 $28.1

$62.3 $155.0

$1

$10

$100

$1,000

17% 14% 9%

14%

24%

Seed Series A Series B Series C Series D+

Median Pre-Money Valuation ($M)

2010 to 2014 CAGR

2014*

2010

THE SHIFTING VC LANDSCAPE

Mark Suster - @msuster