Innovation Economy Outlook 2016

U.S. STARTUP OUTLOOK 2016

New reality prompts

U.S. startups to focus
on fundamentals

Innovation Economy Outlook 2016 1

 Letter from SVB’s CEO
We are pleased to present Startup Outlook 2016, Silicon Valley Valuations were high, now they are coming back to earth.
Bank’s annual report on the health of the innovation economy. Growth at any cost is being replaced with a focus on
For each of the past seven years, we have taken a survey of profitability. Companies were priced for perfection, and
companies to learn what entrepreneurs are thinking about we may see some stumble or even go out of business.
business conditions, access to capital and talent, and the policy
issues that help or hinder their success. Entrepreneurs we speak with, while remaining naturally
optimistic, are adopting a new attitude: Be prepared. They are
This year, we are drawing on responses from more than 900 pulling the reins tighter on operations and retooling strategies.
technology and life science executives, and for the first time They are anticipating a more balanced funding environment.
we expanded the survey to China. SVB conducted the survey They are considering M&A an even more viable exit strategy.
portion of the report in December 2015, just as significant In 2016, access to capital will get harder. But it’s not supposed
market volatility was taking hold. They say timing is everything, to be easy, and there will be opportunities for good companies
and in the past several weeks it has become apparent that with good ideas. That’s healthy.
entrepreneurs’ perceptions at the end of 2015 had already
shifted by mid-January. Thank you for taking a look at this report. We hope the findings
can be useful as you chart your own path or follow this sector.
The public conversation about 2016 is filled with doom and Looking globally, the opportunities for innovation are abundant.
gloom about the innovation sector, with exaggerated predictions Entrepreneurs are strong-willed men and women who want to
of the death of unicorns, a funding crisis and lackluster results have a positive impact on the world. That’s never going to change.
all around.

At Silicon Valley Bank, we see it differently. We think it’s a

healthy recalibration but it doesn’t mean it’s going to be easy
for entrepreneurs. Greg Becker
President and CEO, Silicon Valley Bank

Innovation Economy Outlook 2016 2

 In 2016, the byword is prepare. The economic outlook
is shifting, according to U.S. technology and life science
startup executives surveyed in late 2015 for Silicon
Valley Bank’s annual outlook. Capital is tightening and
inflated valuations are declining, prompting companies
to adjust to a more balanced funding environment and
focus on fundamentals. Executives said they expected
M&A to maintain its importance as an exit strategy,
venture capital to be a vital funding source and attracting
top talent to be a critical challenge. And, while the
bottom line may be taking a hit short term, optimism
about the long-term future of innovation is not.

Innovation Economy Outlook 2016 3

 BUSINESS CONDITIONS

Startups temper their positive outlook

Sixty-four percent say business conditions will be better than 2015. That said, it represents an 18 percentage
point drop over the last two years. Unbridled optimism has been replaced with rational restraint.

Describe your outlook

on business conditions
for your company this
64%
year compared to last. 82% 77% Will be better
Will stay the same
“The innovation economy will Will be worse
always thrive in the long run.
There will be bumps along 29%
the way.” 14% 19%
4% 4% 7%
– Northern California consumer
Internet executive 2014 2015 2016

Innovation Economy Outlook 2016 4

 FUNDING

Raising money continues to be challenging

Most executives said the fundraising environment was extremely or somewhat challenging, and 21 percent
named access to financing as their single biggest challenge in running their businesses. Raising money is always
challenging, and tightening capital requirements often lead to healthier, more sustainable companies.

Extremely 24% 24% 19%

challenging What is your view of
the current fundraising
environment?
Somewhat
challenging 57% 57% 63%
A full 82% of leaders surveyed said
that fundraising is challenging,
which is consistent with responses
Not over the last three years.
challenging 19% 19% 18%

2014 2015 2016

Innovation Economy Outlook 2016 5

 FUNDING

Startups say venture capital is critical to grow

At the end of 2015, survey respondents said they planned to seek venture capital more than other funding
sources. Forty-two percent of executives expected venture capital to be their next source of funding, with angel
investment a distant second. We expect that venture fundraising will become more challenging in 2016, but that
VC investment activity will remain healthy.

What do you expect your

company’s next source
of funding will be? Venture capital 42%

“My sense is that VC fundraising Angel/Micro VC 11%

may be more difficult. But I think that
Private equity 9%
good companies will still be able to
Corporate 9%
find funding.”
Organic growth 8%
– Georgia consumer Internet and digital
Other 21%
media executive executive

Innovation Economy Outlook 2016 6

 Half of startups say their goal is an M&A exit
Acquisition continues to eclipse IPOs as the realistic long-term exit strategy of U.S. entrepreneurs. More than

56+17+198
half of innovators set their sights on an acquisition, and nearly 20 percent aspired to stay private.

8%
Don’t
know What is the realistic
19% long-term goal for
Stay
private
your company?
56%
Acquisition Among the startup executives
surveyed, 56% said their long-term
goal is to be acquired. Just 17% said
17%
IPO they are aiming for an IPO.

Innovation Economy Outlook 2016 7

 M&A expected to be robust for 2016
Most startups said they expected acquisitions would increase or stay the same in 2016. Many tech IPOs faltered
in 2015, making M&A a more viable exit option. Also, reduced valuations make acquisitions more attractive for top
acquirers that have plenty of cash on hand to make significant purchases.

How do you think the

43% More M&A market will change
acquisitions
over the next 12 months?
Of the leaders surveyed, 82%
39% No change said they expect as many or more
acquisitions than 2015.

18% Fewer
acquisitions

Innovation Economy Outlook 2016 8

 HIRING & TALENT

It’s hard to find the right talent

A full 95 percent of executives said it was challenging to find people with the skills necessary to help grow their
businesses—an increase of 8 percentage points since 2013. After years of increasing difficulty finding the right
talent, it’s possible that the talent crunch has reached its peak and the very tight labor market may loosen. Even
so, finding employees with the right skills will remain difficult in an overall environment of low unemployment rates.

How challenging is it 95%

to find workers with 92%
91%
Respondents
the skills necessary who say
to grow your business? 87% finding talent
is challenging
95% of entrepreneurs said it’s
challenging, compared with 87%
just three years ago. 2013 2014 2015 2016

Innovation Economy Outlook 2016 9

 Lack of skilled workers hurts the bottom line
Of the leaders surveyed, 17 percent said recruiting was their biggest challenge. Half of the respondents said they
were looking for engineering and technical skills. Sales, product development and marketing skills are also critical
needs this year. The lack of skilled workers creates measurable business impacts, such as inhibiting product
development, making it harder to scale operations and inhibiting revenue growth.

How has the lack

of access to talent
46% affected your
35% 30% company?
Innovation executives said the
Inhibited Made it more Inhibited lack of skilled workers inhibited
product difficult to scale revenue product development and made
development operations growth it difficult to scale operations.

Note: Respondents were given the opportunity to select multiple responses.

Innovation Economy Outlook 2016 10

 WOMEN IN TECH

Startups have few women in leadership positions

It’s well documented that women are underrepresented in startup leadership positions: 66 percent of startups
have no women on their boards, and nearly half (46 percent) have no women in executive positions. About
a quarter of respondents (26 percent) said they have programs in place to increase the number of women in
leadership roles. Creating more diversity in the top ranks of all companies is an imperative, and the dialogue
on how to make it happen needs to continue.

66+3446+54
How many women
34% are in leadership
At least one 54% 46% positions within
woman
66% At least one
your company?
No women
No women woman

Among the startups surveyed,

66% don’t have any women
on their boards, and 46% have
Women on the Women in no women in executive positions.
board executive positions

Innovation Economy Outlook 2016 11

 PUBLIC POLICY

Access to talent is the No. 1 policy

issue for startups
Half of the survey respondents said access to talent was the most important public policy issue on their minds.
Cybersecurity was also a key concern. Entrepreneurs typically don’t embrace government action but do believe
the federal level should play a role by funding research to combat cyberattacks, creating uniform rules for data
breaches and sharing best practices for preventing and responding to them.

What are the most

important public
policy issues affecting
companies like yours?
1. Access to talent 50%
Half of the startups surveyed 2. Cybersecurity 36%
said access to talent is the most 3. Healthcare costs 33%
important policy issue, followed by 4. Consumer privacy regulation 23%
cybersecurity and healthcare costs. 5. Patent litigation 23%

Note: Respondents were given the opportunity to select multiple responses.

Innovation Economy Outlook 2016 12

 Some startups say regulations are driving
operations offshore
One in four respondents said regulations were prompting them to locate facilities or move non-sales operations
outside the U.S. Startups on a shoestring budget are sometimes motivated to set up shop where it costs less
to do business and it’s easier to find skilled workers.

23+77
Here’s why:
Have U.S. laws and
regulations materially
36% affected your company’s
23% tax policy

27%
decision to locate facilities
regulatory or hire employees for
environment
operational non-sales
37%
immigration
activities outside the U.S.?
policy
Half of the startups surveyed said
regulations are growing and
Hired or moved 23% said they had hired or moved
operations offshore. operations offshore.

Innovation Economy Outlook 2016 13

 About the Startup Outlook 2016 survey
Our seventh annual survey of technology and healthcare executives offers insight into what’s on the minds of innovation
leaders today. For this year’s survey, we received more than 900 responses, covering such topics as how innovation
companies are faring, hiring projections and how government policies are affecting business growth.

Total Industry sector Profitable

48+52+x
respondents

929
68% 15% 17% 45% Yes
Technology Healthcare Other
(net) (net) 55% No

Primary place of business Ownership Revenue stage

92%
Private 35% Pre-revenue

Up to $25 million
50% in revenue

70% 8% 15% 7% 8%
More than
15 $25 million
%
U.S. U.K. China Other in revenue
Public

Innovation Economy Outlook 2016 14

 About Silicon Valley Bank
For more than 30 years, Silicon Valley Bank (SVB) has helped innovative companies and their investors move bold ideas forward, fast. Silicon Valley
Bank is the California bank subsidiary of SVB Financial Group (Nasdaq: SIVB). With commercial, international and private banking services, SVB helps
address the unique needs of innovators. Forbes named SVB one of America’s best banks (2015) and one of America’s best-managed companies (2014).
Silicon Valley Bank is the California bank subsidiary and commercial banking operation of SVB Financial Group (Nasdaq: SIVB) and a Member
of the FDIC. Silicon Valley Bank and SVB Financial Group are members of the Federal Reserve System.

Learn more at
svb.com/ieo

© 2016 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.
A third-party firm, Peerless Insights Survey, conducted the Innovation Economy Outlook 2016 survey online on Silicon Valley Bank’s behalf from November 12, 2015, to January 6, 2016.
This material, including without limitation to the statistical information herein, is provided for informational purposes only and is compiled from the survey that we worked on with Peerless Insights, a third-party
source. 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.