art of the deal workshop power your...

Art of the deal workshopPower your potentialDecember 3, 2018

Los Angeles Art of the Deal WorkshopCopyright © 2018 Deloitte Development LLC. All rights reserved. 2

WelcomeTrent BrownPartner, Los Angeles EGC Practice LeaderDeloitte & Touche [email protected]+1 213 996 5838

mailto:[email protected]


Time Topic Presenter

8:30-8:55 Registration and networking

8:55-9:00 Welcome Deloitte

9:00-9:50 IPO basics and alternative liquidity strategies Latham & Watkins LLP

9:50-10:35 IPO pitfalls, things to consider, and war stories Deloitte

10:35-10:45 Break

10:45-11:30 How to optimize value during the lifecycle of a tech company Deloitte

11:30-12:15 Panel discussion amongst CFOs and VCs Safire Partners

12:15-1:00 Lunch and networking

1:00-1:45 State of the markets: Southern California SVB

Agenda


About this presentation

This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation.

As used in this document, “Deloitte” means Deloitte & Touche LLP, which provides audit, assurance, non-attest accounting, and advisory services. This entity is a separate subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of our legal structure. Certain services may not be available to attest clients under the rules and regulations of public accounting.

http://www.deloitte.com/us/about

The IPO ProcessSteve Stokdyk, Latham & Watkins LLP

OVERVIEW

Pros and Cons of Going Public

Pros

■ Access to capital

■ IPO proceeds

■ Additional capital after IPO

■ Acquisition currency

■ Liquidity

■ Attracting and retaining personnel

■ Increased public awareness

■ Prestige

■ Potential for increased market

value

■ Less dilution compared to other

forms of equity financing

Cons

■ Costs (money and time)

■ Loss of control and privacy

■ Public disclosure requirements

■ Investor expectations

■ Volatility

■ Insider illiquidity

■ No turning back

2

OVERVIEW

IPO Planning Considerations

■ Assemble a Strong Team

> Strong board of directors, executive officers and key employees

> Review executive compensation

> Select external advisors: bankers, lawyers and accountants

■ Clean up Financial and Accounting Issues

> Back year audits

> GAAP and SEC reporting requirements

> Develop internal control systems; budget and forecasting

■ Developing Public Company Infrastructure

■ Anticipate Corporate Issues

> Revise organizational documents for public company environment

> Revisit past contracts such as shareholders’ agreements, buy-sell

agreements and registration rights agreements

> Intellectual property issues

> Be organized - assemble a “data room” of key documents

■ Determine size/participation by selling stockholder

3

OVERVIEW

IPO Timetable

Quiet Period

S-1 Drafting

Week 35Week 36

(~9 Months)Weeks 33-35

Week 24(6 Months)

Week 17

Underwriter Selection

Beginning of IPO

Process

SEC Review

Road Show

Pricing

Closing

Week 19

Organizational Meeting

Day 0

First Filing of Registration Statement

Weeks 24-32

Building Infrastructure

Underwriter Due Diligence Investigation

4

UNDERWRITER SELECTION

Underwriter’s Role

■ Lead manager

■ Co-manager

■ Syndicate members

■ Selling group

Factors To Consider In An Underwriter

■ Industry knowledge

■ Firm experience

■ Banking team and experience

■ Institutional and retail distribution

■ Post pricing stock performance

■ Research and analyst coverage

■ Post IPO investment banking

capabilities

5

UNDERWRITER SELECTION

Steps in the Underwriter Selection

■ Identify potential underwriters

■ Contact potential underwriters

■ Select underwriters to interview

■ Hold “bake-off”

■ Select the underwriter

■ Select lead and co-managers

6

ORGANIZATIONAL MEETING

■ Kick-off meeting of the IPO Team

> Company

> Bankers

> Auditors

> Counsel

■ Includes IPO presentation by each of functional groups

■ Enables the company to begin to take shape

■ Begins IPO “Quiet Period” (Publicity Restrictions)

7

S-1 DRAFTING

■ Form S-1 is an SEC filing which contains the basic business and financial

information on an issuer with respect to a specific securities offering

■ Bankers will also offer market perspective

■ 4 - 6 Week Process

■ Concurrently, counsel will be conducting due diligence and negotiating

underwriting agreement and other legal matters

8

S-1 FILING AND SEC REVIEW

■ Initial SEC review is typically 30 days (comments often are returned on

Friday)

■ Involves 3 -5 rounds of comments from the SEC after initial review (lasts 10-

12 weeks)

■ Also involves filing of material agreements, and attempts to keep economic

competitively sensitive terms confidential

■ May require the company to update financial information which will cause

delay

9

BUILDING PUBLIC COMPANY INFRASTRUCTURE

■ Concurrent with S-1 drafting and SEC Review

■ The Board, management and counsel work together to create the post IPO

public company infrastructure

■ Company will need to adopt numerous policies (e.g. insider trading and

equity incentive policies)

10

BUILDING PUBLIC COMPANY INFRASTRUCTURE

■ Will involve creation of multiple committees

> Audit

> Compensation

> Nominating

■ Must consider composition of committees (e.g. need for financial expert on

Audit Committee)

■ Will require several Board and committee meetings which must be planned

and coordinated with S-1 drafting and IPO process

11

ROAD SHOW

■ 2 week trip to meet with prospective investors in the US and potentially

Europe

■ Senior management presents and markets the company

■ Begins with a presentation to banking sales forces

■ Company must distribute prospectus to offerees

■ Senior management may receive presentation training

12

PRICING AND CLOSING

Pricing

■ Occurs on the last day of the road

show after bankers have assessed

the market demand for the stock

■ Range established in preliminary

prospectus

■ Pricing Committee of the Board

must approve the transaction

■ Closely coordination between

bankers and counsel if pricing

range changes or if the deal is

upsized or downsized

Closing

■ Typically 3 days after pricing

■ Post closing obligations

> Exchange act registration

> Periodic reports

■ Over allotment option exercise

■ Other post closing matters

> Registration of employee plan

shares

> Annual meetings of shareholders

13

AVOIDING CRITICAL MISTAKES

■ Do not wait to be perfect

■ Prepare an IPO strategy with your team

■ Prepare your financials

■ Do not announce plans before the legal cleanup has been completed

■ Carefully manage the process

> Too much management time - business suffers

> Not enough management time - offering suffers

■ Keep costs under control

■ Do not be loud during the quiet period

14

Alternative Financing StructuresChris Shoff, Latham & Watkins LLP

PROS AND CONS OF DIFFERENT TYPES OF FINANCING

Convertible Notes SAFE Preferred Stock

Pros • Allows company to defer

valuation

• No initial loss of

ownership – debt v.

equity

• Non-diluted

• Cheaper and less time

consuming than preferred

stock financings

• Same as Convertible

Notes

• Additional ‘pro’ = this is

not treated as ‘debt’

• Larger financing

• Value of VCs as advisors

• Successive participation

of VCs in later rounds

• Single or few professional

investors

Cons • Debt

• Difficulty of multiple

lenders (“herding cats”)

• Lenders less

sophisticated than VCs

• Investors are less

familiar/comfortable with

this newer structure

• Dilution will still occur

down the line when

lenders convert

• Difficulty of multiple

lenders (“herding cats”)

• Lenders less

sophisticated than VCs

• Founders lose some

control of the company

(and must respect rights

of preferred holders)

• Requires valuation of the

company

• More expensive and time

consuming

16

CONVERTIBLE NOTES – PROS AND CONS

Pros

■ Allows company to defer valuation

■ No initial loss of ownership – debt v. equity

■ Scaled raises of funds

■ Cheaper and less time consuming than preferred stock

financings

Cons

■ Drawbacks of debt instruments

■ Dilution may still occur if lenders convert

■ Difficulty of multiple lenders (“herding cats”)

■ Lenders less sophisticated than VCs

17

CRITICAL TERMS FOR CONVERTIBLE NOTES (CONT.)

• The date on which the debt is due or converted to equity

• Typically should not be more than a year

Maturity Date

• The rate at which the debt will accrue interest, typically on an

annual basis

• Usually 3-6%

Interest Rate

• The price at which the note (plus accrued interest) would

convert into shares of preferred stock

Conversion Price

18


• Mechanism for noteholders to convert the note (plus accrued

interest) at a reduced price (in percentage terms) to the

purchase price paid by the investors in the next equity

financing

Conversion Discount

• Capped = ceiling on the valuation at which investors’ notes

convert to equity (which protects the noteholders’ stake when

they convert to equity in the future equity round)

• Uncapped = noteholders get no guarantee of how much

equity their note purchases (more favorable for company)

Uncapped vs Capped

19


• Warrants to purchase additional shares in next equity

financing

• Not as common given more paperwork and higher legal fees

Warrant Coverage

• Timing

• Penalty

Pre-Payment

20


• Enforceable claim or lien that gives the beneficiary of the

security interest certain preferential rights in the disposition of

secured assets

• Convertible notes are typically unsecured by any assets of

the company

Security Interest

• Reflects the priorities in claims for ownership or interest in

various assets

• Convertible notes are typically subordinate to all other

company debt

Subordination

21

SAFE

Safe – stands for “simple agreement for future equity.”

Alternative to convertible note created by Y Combinator.

What is it?

22

SAFE FINANCING – PROS AND CONS

Pros

■ Allows company to defer valuation

■ No initial loss of ownership – debt v. equity

■ Non-diluted

■ Cheaper and less time consuming than preferred stock financings

■ Not treated as ‘debt’

Cons

■ Investors are less familiar/comfortable with this newer structure

■ Dilution will still occur down the line when lenders convert

■ Difficulty of multiple lenders (“herding cats”)

■ Lenders less sophisticated than VCs

23

PREFERRED STOCK

A class of equity ownership in a corporation that has a higher

claim on the assets and earning than common stock

What is it?

24

PREFERRED STOCK – PROS AND CONS

Pros

■ Larger financing

■ Value of VCs as advisors

■ Successive participation of VCs in later rounds

■ Single or few professional investors

Cons

■ Founders lose some control of the company (and must

respect rights of preferred holders)

■ Requires valuation of the company

■ More expensive and time consuming

25

CONSIDERATIONS FOR VC FINANCINGS

What do we (the founders) want from a VC?

■ Sophisticated guidance

■ Valuable sources of contacts and expertise

■ Potentially successive rounds of financing

■ But don’t forget the drawbacks:

> Loss of some control

> Potentially divergent visions for the company (e.g., timing of IPO or sale of

the business)

How can we gauge our valuation?

What terms should we be concerned with?■ Contractual Dilution

■ Board Composition

■ Liquidation Preference

■ Protective Provisions

26

THE TERM SHEET

27

THE TERM SHEET

Terms of the initial round tend to stick in future rounds – think

carefully about the critical terms and work with your counsel to

negotiate them■ The “engagement ring” of the financing process

■ Summarizes the principal legal and business terms of the financing

Details are found in the Charter and financing agreements■ Typically non-binding

■ You should be aware of what terms are important to negotiate

28

CRITICAL TERMS FOR PREFERRED STOCK

■ Pre-money = estimated value of company prior to accepting funding

■ Post-money = pre-money valuation + new funding amount

■ Don’t forget the option pool, equity reserved for future distribution to hires, which is often included in the pre-money valuation and thus will directly affect the founders’ equity stake

Valuation

29

SAMPLE VALUATION MODEL – THE FOUNDERS

+ OPTION PLAN + FIRST ROUND OF PREFERRED FUNDING

The company successfully completes a $4,000,000 Series A Preferred Stock

Financing at a purchase price of $1.00 per share. The pre-money valuation is $1.00 x

10,000,000 = $10,000,000. The post-money valuation is pre-money valuation +

amount invested = $10,000,000 + $4,000,000 = $14,000,000. Pretty typical for option

pool to be 20% of the fully diluted capitalization.

Entity Pre-Series A #

of Shares

Pre-Series A %

of Shares

Post-Series A

% of Shares

Post-Series A

Value

Post-Series A

# of Shares

Katniss 4,000,000 40% 28.6% $4,000,000 4,000,000

Peeta 4,000,000 40% 28.6% $4,000,000 4,000,000

Option Plan 2,000,000 20% 20% $2,000,000 2,000,000

Series A

Investors

0 0% 28.6% $4,000,000 4,000,000

Total 10,000,000 100% 100% $14,000,000 14,000,000

30

SAMPLE VALUATION MODEL – THE FOUNDERS

+ OPTION PLAN + FIRST ROUND OF PREFERRED FUNDING

The company successfully completes a $4,000,000 Series A Preferred Stock Financing at a purchase price of $2.00 per share. The pre-money valuation is $2.00 x 10,000,000 = $20,000,000. The post-money valuation is pre-money valuation + amount invested = $20,000,000 + $4,000,000 = $24,000,000. Pretty typical for option pool to be 20% of the fully diluted capitalization.

Entity Pre-Series A #

of Shares

Pre-Series A %

of Shares

Post-Series A

% of Shares

Post-Series A

Value

Post-Series A

# of Shares

Katniss 4,000,000 40% 33.3% $8,000,000 4,000,000

Peeta 4,000,000 40% 33.3% $8,000,000 4,000,000

Option Plan 2,000,000 20% 20% $4,000,000 2,000,000

Series A

Investors

0 0% 14.4% $4,000,000 2,000,000

Total 10,000,000 100% 100% $24,000,000 12,000,000

31

CRITICAL TERMS FOR PREFERRED STOCK

■ The terms that determine the order in which creditors/shareholders are paid in the event of a liquidation event (IPO, sale or bankruptcy)

■ Creditors Preferred Stockholders Common Stockholders

■ Usually a multiplier (such as 1x)

■ Non-participating vs Fully participating (more on next slide)

Liquidation Preference

32

CRITICAL TERMS FOR PREFERRED STOCK (CONT.)

■ Fully participating means that the preferred stockholder with this right receives full liquidation preference amount first and are then entitled to share with the holders of common stock in the remaining amount

■ Non-participating means there is no additional amount after the full liquidation preference amount

■ Capped participation means the preferred stockholder with this right stops participating after it has received back a pre-determined dollar amount

■ See examples on next slide

Non-Participating vs Fully Participating vs Capped Participation

33

CRITICAL TERMS FOR PREFERRED STOCK:

LIQUIDATION PREFERENCE – PARTICIPATION

Katniss and Peeta sell the company for $500,000,000

Series A investors has a liquidation preference of $4,000,000

Series A preferred stock representing 40% of the outstanding shares

Participation Preferred before

Participation

Preferred after

Participation

Common

Non-Participating $4 million $4 million $496 million

Fully Participating $4 million $4 million + 40% of

($500 million - $4

million) = $202.4 million

$297.6 million

Capped Participation

(for example, 3x)

$4 million $4 million + $12 million

= $16 million

$484 million

34


■ Board seats

■ General matters v. Special matters

■ Drag along

Voting Rights

35


■ Consent of preferred class required for certain actions/events

> Altering rights of preferred

> Increasing/decreasing amount of common or preferred stock

> Creating senior or pari passu classes of stock

> Merger or sale of the company

> Increasing/decreasing the size of the board

Protective Provisions

36


■ Adjustment to conversion price of preferred

■ Types

> Broad-based weighted average

> Narrow-based weighted average

> Full ratchet

■ Carve outs of certain types of issuances

Anti-Dilution Provisions

37


• Right to participate in future issuances

Pre-Emptive Right

• Right to purchase shares before transferred to third party

Right of First Refusal

• Investors may sell portion of stock if founders sell their stock

Co-Sale

38

THANK YOU

+1.213.891.7421

[email protected]

STEVEN STOKDYK

Partner, Century City

# 1Band 1 for Capital Markets

California and Nationwide by

Chambers USA 2018

US$8.4

Billion

Advised on 36 US IPOs in 2017 worth US$8.4billion – more than any other law firm

2,600 Lawyers around the globe

Law360 selected Latham

as a 2017 “Capital Markets

Practice Group of the

Year,” highlighting the

practice’s execution of

landmark, high-stakes

deals and regulatory

prowess, and noting that

the firm “served as counsel

on more initial public

offerings than any of its

peers.”

Capital Markets Practice Group of the Year

Law360 2017

For the eighth year in a

row, Latham ranked first as

counsel to both issuers and

underwriters, helping US

and foreign companies

raise more than US$8.4

billion through 36 US IPOs

– more IPOs than any other

firm in 2017.

Top Ranked IPO Firm

IPO Vital Signs YE 2017

+1.424.653.5505

[email protected]

CHRISTOPHER SHOFF

Partner, Century City

Latham Contacts

39


Preparing for an IPOReady to unlock your potential?Barrett DanielsPartner, IPO Center of Excellence LeaderAccounting & Reporting AdvisoryDeloitte & Touche [email protected]+1 415 783 7897



Preparing for an IPO

IPO readiness

IPO execution

• IPO audits

• F-pages

• S-1

• Preparation for quarterly reporting

• SEC filings, timeline

Life as a public company

Topics


IPO readiness

IPO readiness is not just a finance thing. It involves tax, investor relations, human resources, corporate governance, etc.

IPO readiness is a luxury.

IPO reality is often a chaotic scramble.

IPO timelines can be impossibly bad. The goal is to be ready when the call comes.


IPO readiness

Inc.’s expected IPOs for 2015

Four years later, half are still private.

US News most anticipated IPOs of 2017

Two years later, seven of 10 are still private.

Anticipated 2017 IPOsAnticipated 2015 IPOs Actual IPO


IPO readinessSEC filings and comments: Timeline examples

Example 1

• Initially filed in 2015

• Completed in August 2018

Example 2

• Initially filed in June 2018

• Completed in September 2018

Timing can vary dramatically.


IPO readiness

“IPO windows are fickle. Be ready when the call comes.”

IPO windows

• Point – you never really know

• IPO windows are fickle

• Right now – the IPO window is very open

• Tomorrow – maybe not

• Be ready – whenever the call comes, it will feel like a surprise


IPO readiness

Finance

Put together a strong team

Streamline the close

Get your audits in order

Clean up your cap table

Start thinking about Qs

Collaborate with the right advisors

Assume the current timeline is wrong, because it isValuations and forecasts


IPO execution

S-1

SEC filings and commentsIPO audits

Preparation for quarterly reporting

F-pages

IPO execution


IPO executionAudits

• IPO audits are generally significantly more diligent

− Risk profile dramatically increases

− AICPA vs. PCAOB

− Be prepared for more:

◦ Auditors

◦ Questions

◦ Memos

◦ Tie-outs

◦ Checklists

• Better financials (see F-page discussion)

• Additional valuation (409a) and tax analyses


IPO executionF-pages

• SEC-ready F-pages

− No more cutting corners

− Stock compensation, business combinations, debt, derivatives, equity, etc.

• EPS and segment disclosures

− These can be challenging for private companies

• Interim stub periods

• Rule 3-05 financials for significant acquisitions

• Stock (reverse) splits and conversions – eventually


IPO executionF-pages

• Emerging growth company (EGC)

− Created by JOBS Act in 2012

− Less than:

◦ $1B in revenue

◦ $1B in non-convertible debt

◦ $700M public float

• EGC benefits

− Reduced financial statement requirements

◦ FAST Act

− Delayed compliance for new GAAP pronouncements


IPO executionS-1

• F-pages, discussed previously

• MD&A

− Components of income statement

− Results of operations

− Critical accounting policies

− Cash flow, contractual obligations, etc.

− Quarters

• S-1 front – summary and selected data, dilution, capitalization

• EGC – confidential filings and reduced CD&A


IPO executionPreparation for quarterly reporting

• Quarters are not required, but often requested

− A lot of work – always underestimated

− Less for biotechs, etc., but prior year quarters will be needed as public company and stub periods could be required depending on IPO timing

• Preparation

− SAS 100 reviews – different than management reports

− Information required

◦ SAS 100

◦ Financials


IPO executionSEC filings and comments

• Ensure F-pages and S-1 are SEC-ready (see F-page and S-1 discussions)

• Staying on schedule is hard, especially for finance

• Drafting and printer sessions

• Navigating SEC comment letter process

− Revenue recognition

− Stock compensation (cheap stock)

− EPS

− Contingencies

− Derivatives

− Fair value

− MD&A and more


IPO executionSEC filings and comments: Sample timeline under JOBS Act

IPO PREP SEC REVIEW PRICE, ROAD, IPO

Address final SEC comments, cheap stock update, stock split, public

company readiness, pricing, trading

15 days required between 1st public filing and road show

Assumes eight-day road showAssumes three days to price and close

SEP 15First

public filing

OCT 1Road show

OCT 11InitialPublic

Offering

Close audit, F-pages, MD&A, revenue recognition, segment analysis, EPS, non-GAAP / key metrics, prep for quarterly reporting, and cheap stock

Drafting sessions

Approx. 1-2 months between org. meeting and initial confidential submission

MAY 6Org.

meeting

JUN10Initial

submission

Approx. 30 days to receive initial comments from SEC (best case, 25 days)Approx. 2 weeks to respond to initial comments from SEC (best case, 1 week)Subsequent comments received approx. 2 weeks (best case, 10 days)Common to have 3 rounds with SEC (best case, 2 rounds) with each getting progressively quicker (i.e. 1st round 30 days, 2nd round 2 weeks, 3rd round 1 week, etc.)

Finalize quarters, update numbers, cheap stock update, address SEC comments

Q1 number update (FAST Act)

Test the waters


Life as a public companyS-1

• Life as a public company can be hard

• 10-Qs and 10-Ks, related reviews and audits

• Rigid calendar can feel like the process never stops

• Legal and market pressures

• SOX

− EGC deferral

− Eliminate attestation report on internal controls

Questions?


Break


For inquiries related to how to optimize value during the lifecycle of a tech company please contact: [email protected].



Todd GitlinManaging Partner & FounderSafire Partners

Dan MurrayCEOCreatorIQ

David WaxmanPartner & FounderTenOneTen Ventures

PanelCFO and VC perspectives


Lunch

State of the MarketsInside Views on the Health and Productivity of the Global Innovation Economy

Fourth Quarter 2018

SPECIALREPORT:Venture in SouthernCalifornia

2

State of the Markets: Fourth Quarter 2018

Predictions: Grading Our 2018Outlook

Public Markets: Tech Stumbles at the Top

Fundraising: AbundantCapital, RisingValuations

SouthernCalifornia:CapitalandValuationTrends

ExitConditions:Dual-TracksOpen

State of the Markets: Fourth Quarter2018

3

Grading Our 2018 Outlook

2018 Predictions1

SVB anticipates the deal count to remain flat interms of deal count, but investment will remainstrongwith

an uptick in capital committed perdeal.

GradeEarly Stage

2018 Reality2018 could well break records for early stage capital flow with deal counts in line with prior years. However, there are signs of a slowdown in angel and seedfinancings.

With an abundance of capital searching forgrowth andnew workarounds to satisfy liquidity, valuations at thelate-stageclimbhigherwithsteadycapital investment.

Late Stage Three quarters into the year, we’ve already witnessed143$100M+ rounds —flying past the 2015 record by 35. Secondary transactions are now the talk of thetown.

Market conditions and early filings signal astrongyear for IPOs. Liquidity demands spur a stream oflistings and

acquisitions, but many will still opt for privatecapital.

Exits While there has been an upswing in listings this year, it’s clear capital from the private markets is preferred. In fact, the largest U.S. listing of 2018 arrived from Europe (p.22).

LPs remain interested, particularly fromforeign sources of capital. As opportunity fundsbecomemore

prevalent, we predict another year above$30B.

Fundraising Venture fundraising has already surpassed $30B for theyear—it took just ninemonths.However,foreign capitalhasbeensubduedbycurrentgeopoliticaltension.

With earnings growth across industries andgeographies, firms can bet on the next big thing, throughacquisitions

and investments. Expect strong CVCinvolvement.

Corporates Corporates around the world continued pressing into thefuture through partnerships, venture and acquisitions —withhigh-profileM&Aatpremiumstoprivatevaluations.

Innovation has thrived through the first three quarters of 2018. Investment across stages remains elevated, marquee venture firms and newcomers alike have been actively fundraising and startups have enjoyed a healthy exit environment —both through IPO andacquisition.

Note: 1) Predictions made by SVB in the State of the Markets Q1 2018 distributed January 2018. Sources: PitchBook, S&P Capital IQ and SVBanalysis. State of the Markets: Fourth Quarter2018

4

Public Markets:Tech Stumbles at the Top


40%

50%

60%

70%

80%

90%

100%

Jan2018 Apr2018 Jul2018 Oct2018

Salesforce Netflix Facebook Tesla Tencent

5

Double-Digit Drops After MassiveRun-UpsSeveral high-profiletech companieshit arough patch leading into the fourth quarter. However, these declines comeonthe heels of record highs reachedearlier this yearafter years of sustainedgrowth.

Market Cap Relative to All-TimeHigh: 1/1/18–10/15/18 Stock Performance as of10/15/18

Company Decline fromPeak

Three-Year Returns1

-12% +134%

-20% +230%

-30% +75%

-32% +37%

-40% +120%

State of the Markets: Fourth Quarter2018Note: 1) Three-year returns based on market cap performance from Oct. 15, 2015 to Oct. 15, 2018. Sources: S&P Capital IQ and SVB analysis.

State of the Markets:Q3’18 6

Could Market Turmoil Spoil the Party forVenture?

50%40%30%20%10%0%

-10%-20%-30%-40%-50%

50%40%30%20%10%0%

-10%-20%-30%-40%-50%

1 57

50%40%30%20%10%0%

-10%-20%-30%-40%-50%

$35B

$30B

$25B

$20B

$15B

$10B

$5B

$0B

$14B

$12B

$10B

$8B

$6B

$4B

$2B

$0B

S&P500IndexReturns S&P500IndexReturns S&P500IndexReturns

U.S.VentureInvestment U.S.VentureInvestment U.S.VentureInvestment$35B

$30B

$25B

$20B

$15B

$10B

$5B

$0B

Venture capital by its very nature is a riskier asset. The last two bouts of U.S. market turmoil had a marked effect on investment flows into emerging tech and life sciencescompanies.

Dot-com Era: Q2’98–Q1’02 Financial Crisis: Q4’05–Q3’09 Current Bull Run:Q3’16–Q2’18

Source:PwC/CBInsightsMoneyTree,PitchBook/NVCA,S&PCapital IQandSVBanalysis.

7

Fundraising: Abundant Capital, Rising Valuations


8

2018 Venture Fundraising on Pace for Decade High

U.S. Venture Firm Fundraising:2010–Q3’181

In just nine months, U.S. venture firms have already raised more than $30B for afifth consecutiveyear—bolstered in large part bymega-funds.Even better news for startups: For each$1 raised byfunds, another$1.50 is invested in startups from the likes of corporateVCsandsovereign wealth.

Ratio of U.S. Venture Investment to Capital Raised byU.S.VentureFirms2


Notes: 1) Fourth quarter extrapolated from Q1–Q3 2018. 2) Amount of venture capital invested into startups divided by capital raised by venture capital funds.Sources: PitchBook and SVBanalysis.

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

2010 2012 2014 2016 2018$0B

$10B

$20B

$30B

$40B

$50B

2010 2012 2014 2016 2018YTD’18 YTD’18

Extra

polat

ed

$14B

$12B

$10B

$8B

$6B

$4B

$2B

$0B

$16B

$18B

9

Early Capital Steady Underneath Mega-Round FrothSteady venture fundraising bodes well for sustained investment in early and growth stages. Although later-stage investment flows have ebbed and flowed over the last five years, this year has been the most active for $100M+ rounds.

VentureCapital Investedin U.S.Tech Startups: 2014–Q3’18SplitbyRoundSize:

$100M+$25M–$99.9M$0–$24.9M

State of the Markets: Fourth Quarter2018Sources: PitchBook and SVBanalysis.

Q1 Q2 Q3

2014

Q4 Q1 Q2 Q3

2015

Q4 Q1 Q2 Q3

2016

Q4 Q1 Q2 Q3

2017

Q4 Q1 Q2

2018

Q3

2.0x

4.0x

10.0x

10

Public Multiples Point PositiveThe abundance of private capital, especially for later-stage companies, has pushed valuations to parity with public company multiples. For example, the strong showing by cloud software companies bodes well for the most promising growth stories in venture.

Enterprise SoftwareValuations: Revenue RunRate Multiple1

Notes: 1) Revenue run rate = Most Recent Quarter’s Revenue x 41. Valuations based on pre-money for private transactions and enterprise value for public companies. 2) More info on BVP Cloud Index athttps://www.bvp.com/strategy/cloud-computing/index.3) Data from SVB’s observations of ~175 transaction multiples of venture-backed companies with $25M+ runrate.Sources: PitchBook, S&P Capital IQ, Bessemer Venture Partners and SVB proprietary dataand analysis. State of the Markets: Fourth Quarter2018

2014 2015 2016 2017

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

2018

Median of BVP Cloud Index2

Public CompanyConstituents

Median of Next20 Private Enterprise SoftwareTransactions3

8.0x

Prediction

6.0x

http://www.bvp.com/strategy/cloud-computing/index


State of the Markets: Fourth Quarter2018 11

Southern California: Equity Trends

12

Late-Stage Capital Looks Beyond the BayWhile still the epicenter for venture, the Bay Area is no longer alone in accessing growth capital. Sizable funding rounds are not uncommon for startups across thecountry.

Bay AreaVentureInvestment1 East Coast VentureInvestment2

$50B

$40B

$30B

$20B

$10B

2018

$25B

$20B

$15B

$10B

$5B

2018

$0B

$5B

$10B

$15B

2009 2018

$5B

$10B

$15B

2015 2018

39%

29%

32%

28%

Split by RoundSize:$50M+<$50M





$0B2012 2015 YTD’18 2009 2012

Notes: 1) Includes startups headquartered in the San Francisco Bay Area. 2) Includes startups headquartered in ME, VT, NH, MA, CT, NY, DE, PA, MD and VA. 3) Includes startups headquartered in WA, OR, and CA (ex. Bay Area).4) Includes startups headquartered in states not covered in the above definitions. Sources: PitchBook and SVBanalysis.

YTD’18

$0B2009 2012 2015 YTD’18

WestCoast (Ex. Bay Area) VentureInvestment3

$0B2009 2012 2015 YTD’18

Mid-Regions (Ex.Coasts) Venture Investment4

20%

40%

60%

80%

100%

140%

120%

2014 2016 2018

13

Valuations Climb Nationwide, EspeciallyLate-Stage

Series A: Pre-MoneyValuations Relative to BayArea (100%)

As access to capital spreads nationwide, valuations are climbing — particularly in later stages. Increasingly, Silicon Valley–based investors are sourcing deals outside the Bay Area. Median valuations in hubs like Los Angeles and Seattle surpassed the Bay Area throughQ3.

Series C: Pre-MoneyValuations Relative to BayArea (100%)


20%

40%

60%

80%

100%

2012 2018

BayArea1

140%

YTD’182014 2016 YTD’18 2012

Notes: 1) Includes startups headquartered in the San Francisco Bay region. 2) Includes startups headquartered in ME, VT, NH, MA, CT, NY, DE, PA, MD and VA. 3) Includes startups headquartered in WA, OR, and CA (ex-Bay Area).4) Includes startups headquartered in states not covered in the above definitions. Sources: PitchBook and SVBanalysis.

WestCoast3

EastCoast2

Mid-Regions4

WestCoast3

BayArea1

EastCoast2

Mid-Regions4

SVB Equity Trends 2018 14

Series BDeal Count and Capital Invested

*DatathroughOct.31,2018 Source:PitchBook.

2018Projection

$888M$857M

$545M$678M

$755M

37

46

27

3336

27

0

10

20

30

40

50

60

$0M

$200M

$400M

$600M

$800M

$1,000M

SoCalTechnology– DealCountand Capital Invested: 2013–2018*Capital Invested ($) # ofDeals 2018Projection

$1,200M

YTD201820172016201520142013

$310M

SVB Equity Trends 2018

Series BPre-Money Valuations & InvestedCapital

SoCal Technology – CapitalInvested Middle 50%: 2013–2018*

SoCal Technology – Pre-MoneyValuations Middle 50%: 2013–2018*

15*DatathroughOct.31,2018 Source:PitchBook.

$7M$8M

$5M$5M

$3M

$20M

$15M

$12M$11M

$6M

$26M$26M$28M

$20M

$16M

$0M

$5M

$10M $9M

$15M

$20M

$25M

$30M

2013 2014 2015 2016 2017 YTD2018

$30M$28M$28M

$17M$16M$18M

$50M$53M

$24M$29M$25M

$100M$97M

$82M

$54M

$90M

$62M$57M

$M

$20M

$40M

$60M

$80M

$100M

$120M

2013 2014 2015 2016 2017 YTD2018

$15M

$12M

SVB Equity Trends 2018

Series BPre-Money Valuations & InvestedCapital

Tech Deals in SoCal vs. Bay AreaCapital Invested: Middle 50%: 2014–2018*

Tech Deals in SoCal vs. Bay AreaPre-Money Valuations: Middle 50%: 2014–2018*

16*DatathroughOct.31,2018 Source:PitchBook.

$0M

$6M

$12M

$18M

$24M

$30M

$36M

$0M

$20M

$40M

$60M

$80M

$100M

$120M

2014 2015 2016 2017 YTD’18 2014 2015 2016 2017 YTD’18


Exit Conditions: Dual-Tracks Open

0

10

20

30

40

50


IPOs Look More Attractive in 2018

Notes: 1) More information on BVP Cloud Index at: https://www.bvp.com/strategy/cloud-computing/index.2) Revenue run rate = Most Recent Quarter’s Revenue x 4. Valuations based on total enterprise value. Source: Bessemmer Venture Partners, S&P Capital IQand SVB analysis.

20

2.0x

3.0x

4.0x

5.0x

6.0x

7.0x

8.0x

9.0x

10.0x

The backlog of companies looking to access liquidity and capital with an IPO found low valuations to start 2016 and high volatility to start 2018. However, heading into the summer of 2018 both indications appear ripe for public debuts. IPOs are likely to follow.

U.S. Equity Volatility Index(^VIX): 2H’15–1H’18 BVPCloudIndex1: Rev.RunRate Multiple (Median)2

LowVolatility

July Jan.2015 2016

July Jan. 2017

July Jan. 2018

July Jan.2015 2016

July Jan. 2017

July Jan. 2018


$0.0B

$8.0B

$7.0B

$6.0B

$5.0B

$4.0B

$3.0B

$2.0B

$1.0B


IPOs Provide Price Discovery forAcquisitions

Notes: 1) AppDynamics was reportedly pricing IPO below last privateround.2) Mobike was acquired at a 10% discount to their last privateround.Source: PitchBook, S&P Capital IQ, The Wall Street Journal, CNBC and SVBanalysis.

Privately HeldPublic In IPORegistration

Mar.2018 Jan. 20171 May 2018 June 2018 June2018 June2018 Apr. 20182 June2018 Apr.2018 Dec. 2017 June2018

Valuationat Acquisition

LastPublic Valuation

IPOValuation

LastPrivate Valuation

Target

Acquirer

DealDate

Legend

Strategics have been willing to pay up in 2018. Acquirers are so hungry for tech assets that several companies in IPO registration have been acquired for healthy premiums before hitting themarket.

Notable $1B+ TechAcquisitions: 2017–1H’18


Continued M&A for Scaled Mid-MarketCompanies

Note: 1) For acquisitions with the same criteria as the chart. Source: PitchBook and SVBanalysis.

Cisco 8 $3.1B

Oracle 6 $3.5BThomaBravo

VistaEquity5

4

$2.4B

$2.4B

Salesforce 4 $2.3B

GTCR 3 $1.7B

Intel 3 $1.1B

U.S. Tech GiantsAlphabet 2 $0.9B

Microsoft 2 $0.8B

Amazon 1 $0.5B

Facebook 1 $0.5B

Apple 0 $0.0B0

10

20

30

$0.0B

$1.0B

$2.0B

$3.0B

$4.0B

$5.0B

$6.0B

$7.0B

$8.0B 40

1 Q 2 Q

1H'184 Q 2 Q 3 Q

20171 Q 4 Q 2 Q 3 Q

20161 Q 4 Q 2 Q 3 Q

20151 Q 4 Q 2 Q 3 Q

20141 Q 3 Q 4 Q

2H’13

Most Active Deals Capital

Beneath the megadeals, financial buyers continue to offer another exit path for companies at <$1B. Private equity deals accounted for more than one-third of 1H’18 transaction value in this range.

U.S. Venture-Backed Tech Acquisitions$250M–999M: Q3’13–Q2’18 Most Active Acquirers1

FinancialBuyers DealCountStrategicBuyers


Appendix

2 00 7

2 00 8

2 00 9

2 01 0

2 01 1$0B

$100B

$200B

$300B

$400B

$500B

2 01

$0B

$3B

$6B

$9B

$12B

2 00 7

2 00 8

2 00 9

2 01 0

2 01 1


Fundamentals Lift Tech ThroughDownturns

Sources: S&P Capital IQ and SVBanalysis.

Let history beour guide.During theGlobalFinancial Crisis, eachof these tech companieslost half of their market cap.But those ableto provegrowth (while remainingat break-evenor better) despiteeconomic woes emerged even morevaluable.

Microsoft Google Yahoo! Salesforce

$0B

$5B

$15B

$10B

$0M

$200M

$400M

$600M

$800M

2 00 7

2 00 8

2 00 9

2 01 0

2 01 1

Revenue andEBITDA

2 00 9 2 01 1

’07 ’08 ’09 ’10 ’11’07

2 00 8 2 01 0

’07 ’08 ’09 ’10 ’11

Revenue

’07 ’08 ’09

andEB

’10 ’11

ITDAReve

’09 ’10 ’11

ndEBITDA

$0.0B

$0.5B

$1.0B

$1.5B

$2.0B

2 00 7

2 00 8

2 00 9

2 01 0

2 01 1

$0B $0B

$150B $30B

$100B $20B

$50B $10B

2 00 8

’08

nuea

2 2 01 0 2

$0B

$6B

$12B

$18B

$24B

2 00 7

2 00 8 2 00 9

2 01 0

2 01 1

MarketCap $250B MarketCap $50B MarketCap $25B MarketCap

$200B $40B $20B

Revenue andEBITDA

$0.0T

$0.5T

$1.0T

$1.5T

$2.0T


Ample Cash at the Ready for TechM&A

Notes: 1) Net cash for strategic acquirers includes cash and ST & LT investments, net ST & LT debt. No consideration was given to domicile of holdings. 2) Based on constituents of the S&P 500 as of June 30, 2018. 3) Based on dry powder for private equity as of September 30, 2017, multiplied by SVB estimate of amount invested in technology deals.Source: PitchBook and SVBanalysis.

$107B $109B

$51B$44B

$1B

$20B

$40B

$60B

$80B

$100B

$120B

$0BU.S. PETechDryPowder3

Capital remains plentiful for traditional acquirers: Private equity firms are nearing all-time highs for dry powder, and strategics are cash-and equity-rich. As tech moves to disrupt all industries, note that current S&P 500 constituents have doubled their cash over the last decade.

Net Cash: Financial andStrategic Buyers1 S&P 5002: Cash and Cash Equivalents:2008–1H’18$145B

$140B $2.5T

2008 2010 2012 2014 2016 2018

24

Authors


Steven Pipp,CFAVice President,[email protected]

Bob [email protected]

Erin PlattsHeadof RelationshipBanking, [email protected]

Steven Pippis aVice President basedinSan Francisco responsible for capitalmarkets research and data-drivenanalysis of the innovationeconomies that SVBserves globally. In this role, he has led research efforts exploring investment, fundraising and exit dynamics between the venture ecosystems of the U.S., China, Southeast Asia and Europe.

Prior to his research role, Steven managed strategicadvisory and valuation engagements for venture-backedtechnology companies as part of SVBAnalytics. Before joining SVB, Steven workedin Minneapolisas a consultant and entrepreneurwitha focusoncleanenergy technology.

Steven earned a Master of Science in Finance fromBoston College and a Bachelor of Science in Business fromthe University of Minnesota. In addition, he holds the CharteredFinancial Analyst (CFA)designation.

Bob Blee heads Silicon Valley Bank’s Corporate Finance Group, which leads SVB’s relationshipswith publicand late-stageprivate companiesin the Innovationsector throughout NorthAmerica,providing a fullsuite of lending and banking products,as well asguidance asa trusted partner, helping our clients succeed and quicklyscale.

Previously, Bob held a variety of rolesinSVB’s California and Midwest regions, including heading seed, earlyand mid-stage Infrastructure, Hardware, Consumer Internet and Fintech banking in the Bay Area and Southern California and was responsible for SVB’s Mezzanine Lending and Loan Syndicationspractices.

Bob sits on the nonprofit boardof the Network for Teaching Entrepreneurship(NFTE)and the Silicon Valley Advisory Council of the CommonwealthClub.He is alsoactive withhis almamater,the University of Illinois.

Erin Platts is the Head of Relationship Banking for Europe atSilicon Valley Bank. She hasbeenwith Silicon Valley Bankfor 14 years, beginning hercareerat its Bostonoffice.

Erin providesstrategic input into the bank’s business, including potentialproducts and services as well as expansion into new markets.

Erin and her teams are dedicatedto providing debt financing toearly, growth,and late stage innovation businesses of all lifestages in the UK, Ireland and Germany.Erin is responsible for developing new relationships and overseeing the continuedgrowth of the Europeanteamand client base.

Erin wasfeaturedonManagementToday’stop 35 Women Under 35 list and was included in the Innotribe’s Power Women in FinTech report.




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This material including,without limitation, to the statistical informationherein, is providedfor informationalpurposesonly. The material is based in part on information from third-party sources that we believe to be reliable but which have not been independently verified by us, and for this reason, we do not represent that the information is accurate or complete. The information should not be viewedas tax,investment, legalor otheradvice,nor is it to berelied on in making an investment or otherdecision. Youshould obtainrelevant andspecific 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 othertransaction.

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Silicon Valley Bank, apublic corporation with limited liability (Aktiengesellschaft) underthelaws of the U.S. federal stateof California, with registeredofficeinSantaClara,California,U.S.A.is registeredwiththeCaliforniaSecretaryofStateunderNo.C1175907,ChiefExecutiveOfficer (Vorstand):GregoryW.Becker,ChairmanoftheBoardofDirectors(Aufsichtsratsvorsitzender):RogerFDunbar.

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SiliconValleyBankisnotauthorizedtoundertakeregulatedactivityinCanadaand providesbankingservicesfromitsregulatedentitiesin theUnited StatesandtheUnitedKingdom.

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See complete disclaimers on previouspage.©2018SVBFinancial Group.All rights reserved.SVB,SVBFINANCIALGROUP,SILICONVALLEYBANK,MAKENEXTHAPPENNOWand thechevrondeviceare trademarksofSVBFinancial Group,usedunder license.Silicon ValleyBankis amemberoftheFDICandtheFederalReserveSystem.SiliconValleyBankis theCalifornia banksubsidiaryof SVBFinancial Group (Nasdaq:SIVB).

About SiliconValley BankFor more than 35 years, Silicon Valley Bank 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.

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