Venture Capital Outlook 2016

1

Mark Suster & Kevin Zhang @msuster & @kevinyzhang

Some of our industry’s smartest thinkers have a different world view.

So who’s right?

2

One thing I’m certain of - we’re in a bubble

Trade in an asset at a price that

strongly deviates from

asset's intrinsic value

A surge in prices, more than warranted by fundamentals &

usually in a particular sector. Followed by a drastic drop in prices

as a selloff occurs

Widescreen Template - Aug. 2015

So will 2016 be the year

the craziness finally ends?

Who the fuck knows.

I’ve been calling the peak for 2

years

While many great companies are being created, I call BS on 50 new billion-dollar US companies in just 18 months

6

Number of startups valued at $1B+ in the US

0

25

50

75

100

Jan 2014 Jan 2015 Sep 2015

80

51

30

Source: WSJ and DowJones VentureSource

Late stage valuations (D round non-VC) are frothy, driven by demand from outsiders (vs. C round led by VCs). We see similar trends now happening in Seed & A rounds driven by crowdfunding.

7

Late stage private company median valuations ($M)

Public markets are more reasonable (iShares US Tech ETF, 7/1/12 to 6/30/15

40

80

120

160

200

2012 2013 2014 1H 2015

88100

136

184

5057

7083

Series C Series D+

Source: Pitchbook 2H 2015 VC Valuations & Trends Report, iShares US Tech ETF

CAGR

CAGR: 15%

18%

28%

And valuations for the ‘most funded’ club continue to grow while the rest of the market has started to show discipline.

8

Global unicorn valuation ($B)

0

1.5

3

4.5

Jan 2014 Jul 2014 Jan 2015 Jun 2015

4.13.8

3.12.8

1.91.61.7

1.5

MedianAverage

Source: Goldman Sachs - Views from the Valley – Volume 2 – 100 unicorns and counting, Jul 2015

Median revenue multiples very high relative to history

9 Source: CBInsights, April 2015, based on press report estimates and SEC filings of private company valuations and sales

Median11x+

While public multiples reverting to historical mean (i.e. SaaS now at 4-6x)

10 Source: Scale Venture Partners SaaS Index - EV divided by most recent quarterly revenue multiplied by 4, Jul 8 2015

Public SaaS EV/revenue median multiples

Late-stage private eCommerce multiples more than double that of public comps

11Source: GCA Savvian Internet Commerce multiples, CBInsights, press report estimates and SEC filings of private eCommerce company valuations and sales These companies are real companies but we masked them to avoid the company-by-company debate.

Public eCommerce EV/CY revenue median multiples

0

1

2

3

4

Dec '13 Mar '14 Jun '14 Sep '14 Dec '14 Mar '15 Jun '15 Sep '15

2.3 2.2

3.12.8

2.1 2.1

2.72.4

Late-stage private eCommerce EV/CY revenue median multiples

0

2

4

6

8

10

12

14

0 5 10 15 20 25

Company 6 2.5

Company 5 12.9

Company 4 12.0

Company 3 4.4

Company 3 5.3

Company 2 6.8Company 1

5.7

Median: 5.6x

Dec ‘13 Jun ‘14 Dec ‘14 Jun ‘15 Dec ‘15

Median: 2.4x

Companies are increasingly exiting at or below last private valuation

12 Source: Goldman Sachs - Views from the Valley – Volume 2 – 100 unicorns and counting, Jul 2015

Dec 2014 Jun 2015Jan 2014

3 <= last private valuation

5 <= last private valuation

12 total billion+ exits in 2014 7 total billion+ exits in 1H 2015

Are we smarter than the public

markets?

Meanwhile, at the other end of our market - crowdfunding exploded the last 2 years, growing at 153% CAGR

14

Global equity crowdfunding amount ($B)

0

1

2

3

2013 2014 2015E

2.6

1.1

0.4

Source: 2015CF - The Crowdfunding Industry Report by Massolution

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Many syndicates have deal-level carry. This has

led some to become super promoters.

Some behavior in the less reputable

crowdfunding platforms bordering on criminal.

P.T. Barnum

16

Ambitious technologies Superior monetization

Despite hype, valuations and froth - amazing companies are being created. Perhaps more than we’ve ever seen

What is driving some of the craziness?

17

18

Everyone wants in on the

action

Non-VC investors doubled participation in mid & late stage investments, now in nearly 2/3rd of deals

19 Source: CBInsights 1/1/09-4/20/15 VC-backed, US startups that have raised $15M+ total, ex. life sciences

Non-VC participation in mid & late stage startups

0%

15%

30%

45%

60%

2009 2010 2011 2012 2013 2014 Apr 2015

59%

48%46%39%37%33%31%

CAGR ’09-’14

9%

20

Corporates make up the largest source of Non-VC investors and are less valuation sensitive

CAGR ’09-’14

0%

13%

25%

38%

50%

2009 2010 2011 2012 2013 2014 2015

44%

35%35%

31%28%28%

25%27%

20%17%

11%13%

8%9%

Asset Mgmt Family Office Hedge Fund Mutual FundCorporate

Asst Mgmt Family Office Hedge Fund Mutual Fund

Corporate / Corporate VC

18%

7%

Source: CBInsights 1/1/09-4/20/15 VC-backed, US startups that have raised $15M+ total, ex. life sciences

Non-VC participation in mid & late stage startups

21

Other growing sources of Non-VC money include LP co-investments, hedge funds & mutual funds

0

25

50

75

100

2009 2010 2011 2012 2013 2014 2015P

Asset MgmtFamily OfficeHedge FundMutual Fund

CAGR ’09-’14

44%

73%

66%

45%

74

3846

32

42

26

40

10

34

14

8

31

15

19

8

14

79

2

12

3

5

100

57

90

47

Source: CBInsights 1/1/09-4/20/15 VC-backed, US startups that have raised $15M+ total, ex. life sciences. 2015P based on YTD data

Number of mid & late stage startups by investor type

22

Round sizes have exploded and are highly correlated with lack of price discipline

0

30

60

90

120

2012 2013 2014

Asset mgmt Corporate / Corporate VC

Family office Hedge fund Mutual fund PE VC

103

35

60

48

35

20

71

20-25

Source: CBInsights 1/1/09-4/20/15 VC-backed, US startups that have raised $15M+ total, ex. life sciences

Median round size for mid & late stage startup rounds by investor type

78% of billion+ financings are led by non-VCs so far in 2015, up from 60% last year

23

0

25

50

75

100

Jan 2014 Jan 2015 Sep 2015

80

51

30

Source: WSJ and DowJones VentureSource, Fenwick & West

60% led by non-VCs

78% led by non-VCs

Number of startups valued at $1B+ in the US

Conclusion

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• Let there be no doubt: private tech markets are over-valued

• Driver is influx of new capital sources with less discipline

• Fund markups for some might be filled with Quirky surprises

• Many VCs walking portfolio through private RIP Good Times speeches

• Yet tech innovation will continue to grow as proportion of economy, leading to continued returns for best VCs in industry