3. In 2013-2015,
the VC market overheated,
driving irrational behavior
Valuations up 3x
3
Capital invested up 2x
$6.2B to $16.7B
A) Median pre-money valuation for VC-backed tech startups rose from $17M in 1Q’13 to $68M in 3Q’15, where 4Q’15 dropped to $28M, Dow Jones VentureSource Venture Capital Report 4Q’15
B) Total dollars raised by startups from 1Q’13-3Q’15 grew from $6.2B to $16.7B, where 4Q’15 dropped to $12.3B, PWC National MoneyTree Report 3Q’16
$17M to $68M
4. 4
…and we ushered in
the age of
“the unicorn”*
Illustration by Goran Factory for Fortune
* Credit to Aileen Lee! :)
8. 8
Twice as many VCs did cut investment pace in 2016.
Winter was real
Made fewer investments Made more investments
16%
31%
Q. What was your deal activity like in 2016 vs. 2015? Excluding follow ons. Excluded 53% of respondents that answered “about the same pace”
Source: Upfront Ventures survey of VCs (N=114), Jan 2017
9. 9
And 76% of VCs reported valuations declined in 2016
Valuations decreased Valuations increased
8%
76%
Q. Would you say valuations in 2016 were higher, lower or remained about the same vs. 2015? Excluded 16% of respondents that answered “about the same.”
Source: Upfront Ventures survey of VCs (N=114), Jan 2017
10. 10
2016 was the year our industry took cost-cutting seriously and
most say this work is behind them
25%
12%
63%
Q. Which statement best describes the spending behavior at most of the more mature companies in which you are on the board or observe (i.e. not super early stage)?
Source: Upfront Ventures survey of VCs (N=114), Jan 2017
Cut costs in 2016
Planning to cut costs in 2017
No change
Just 12%
cutting in
2017
12. 12
“Global” warming—part 1: China, Japan, Asia more broadly
“Global” warming —
Influx of foreign capital into US startups
1
13. 13
2009 2010 2011 2012 2013 2014 2015 2016
$29B
$10B$9B
$12B
$7B
$4B$4B
$1B
Note: Includes all FDI in all states and industries excluding real estate
Source: Rhodium Group China Investment Monitor
Chinese Foreign Direct Investment (FDI) has poured into the US.
Tech sector has clearly benefitted
14. 14
The US has FANG, China has BAT: Baidu, Alibaba & Tencent.
All very aggressive in US investments.
15. 15
Baidu launched two major funds in 2016 —
increasing investment pace to match its peers
Baidu Venture
Early-stage fund
AI, AR / VR, next-gen tech
Baidu Capital
Late-stage tech fund
$50-100M checks
$200M
$3B
16. 16
led $800M Series C in
(Feb 2016)
This is like 20
seed funds in just
one deal!
17. 17
But there are a huge number of other Chinese funds now moving into venture
that you’ve never heard of with a mandate to bring innovation back to China
Government-backed funds Cross-Border Funds
Private Corporations
23. 23
93% of VCs have seen an increase in interest from an
international LP base*
Q. In the last fund you raised, did you see increased interest from international sources of capital to invest as LPs in your fund? *Excluded those that answered “Didn’t reach out, so don’t know”
Source: Upfront Ventures survey of VCs (N=114), Jan 2017
93%
7%
More international LPs
No increase
24. 24 Designed by Freepik
Global warming —
Rise of the corporate VC
2
25. 25
Increasing number of corporates have active venture investing arms
2012 2013 2014 2015 2016
61
131
US Active CVC Investors By Quarter
Source: CBInsights
26. 26
Of course there are the usual suspects…
Source: CBInsights
80-90
deals/year
70-90 50-70 30-50 20-30
31. 31
Unlike VCs, in 2016 twice as many Corporates made more
investments than cut back. They filled in the gap
Made fewer investments Made more investments
34%
18%
Q. What was your deal activity like in 2016 vs. 2015? Excluding follow ons.
Source: Upfront Ventures + CBInsights survey of CVCs (N=40), Jan 2017
33. 33
acquired for $5.8B
acquired for $3.3B
acquired for $1.2B
for $3.5Bacquired
for $1.4Bacquired
New, traditionally non-tech buyers entered the
M&A market, seeking innovation and technology
…
Source: Dow Jones VentureSource
acquired for $1.4B
acquired for $1.0B
is acquiring for $3.7B
34. 34 Source: Aberdeen Assets
Middle-market PE also entered, seeking growth
acquired
35. 35
There is certainly a backlog of scaling companies looking for liquidity
Source: CB Insights
39. 39
2016 saw many megafunds raised. Many back in market in 2018
$1B$1B$1.1B$1.2B$1.2B$1.2B$1.3B
$1.6B
$2B
$2.5B
$3.2B
11 firms raised $1B+
12 firms
raised $500M+
Source: DowJones Venture Source 1Q’16, 2Q’16, 3Q’16; Pitchbook data; represented aggregate sums over funds raised that invest in US tech ecosystem by each VC
40. 40
…and 300+ more!
Source: CBInsights
Microfunds are
now a well-
established market,
with many scaling
fund sizes
41. 41
Low interest rate environment encourages more capital to chase venture
capital yields (cited by 77% of LPs as large driver of VC industry increases)
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Q: In 2016 many investors warned “Winter is Coming” referring to a slowdown in venture markets. That slowdown happened but was very short lived. Which of the following are relevant?
Source: Upfront Ventures survey of LPs (N=78), Jan 2017; Federal Reserve
Federal Funds Rate, 2007 to 20165.25%
.25%
.75%
42. 42
Repatriation of offshore capital may fuel more M&A and
investments
$49B
$52B
$62B
$113B
$230B
Note: Cash figures include cash, cash equivalents and liquid marketable securities held offshore
Source: Moody’s Investor Service, as of end of 2016
Top 5 Companies by Offshore Cash
Top 5 alone have
$500+ billion in
offshore cash
44. 44
Foreign capital
Corporate investors
Increased LP distributions
New VC funds, bigger funds
Repatriation of capital
Likely robust M&A and IPO markets
Good prognosis for venture and
tech market funding 2018
↑
+ ↑
+ ↑
+ ↑
+ ↑
+ ↑
=
45. 45
Unsurprisingly VCs are very bullish about the markets in 2017
Optimistic & bullish Innovations, but uncertainty Concerned
11%
28%
61%
Q. Which of the following statements best describes your personal mood heading into 2017?
Source: Upfront Ventures survey of VCs (N=114), Jan 2017
46. 46
The current category VCs are most interested in funding is
AI / Machine Learning
85% rates it more
interesting than other areas
AI / ML
AR / VR
IoT
Blockchain
Bots-based
commerce
58% rates it the most
important area in next 5-10 years
Q. How do you feel about the following investment areas?
Source: Upfront Ventures survey of VCs (N=114), Jan 2017
47. 47
Of the major emerging venture categories, VCs are most
skeptical about bots-based commerce and blockchain
53% thinks it’s too hyped
Bots-based
commerce
Blockchain
AR / VR
IoT
AI / ML
13% is deeply
skeptical
Q. How do you feel about the following investment areas?
Source: Upfront Ventures survey of VCs (N=114), Jan 2017
48. 48
IC … Whoa!
Largely driven by crypto-gains / diversification / tax avoidance
234
$3.7B
ICOs in 2017
Total raised in 2017
Project Total Raised
Filecoin $257M
Tezos $232M
EOS Stage 1 $185M
Paragon $183M
Bancor $153M
Top Five ICOs of 2017
Source: https://www.coinschedule.com/stats.php
$16m Average
51. Global is likely here to stay
Warming is the forecast for funding the next 2 years
Returns are ultimately what matter.
Over-funding creates new & different challenges.
I suspect we’ll debate over-funding in 2018-2022
I predict ICO backlash
51