innovation economy outlook 2014 - u.s. report

Innovation EconomyOutlook U.S.

2014 Report

Letter from the CEOWelcome to Innovation Economy Outlook 2014, Silicon

Valley Bank’s annual study of executives’ perceptions in the innovation sector. Each year, we take the pulse of these companies to find out how they’re doing, from past performance to future prospects, and the challenges and opportunities they foresee.

This year we expanded our survey to include companies in innovation centers around the world and, in addition to startups, larger companies with revenues upward of $1 billion USD. With insights reflecting the more than 1,200 survey responses, I’m pleased to offer the most comprehensive look yet at the state of the global innovation economy.

Our prognosis is, in a word, momentum. We see abundant potential in the pace of new company formation, global expansion and availability of capital, and in the emergence of new products and solutions that will change the world.

Many of the executives surveyed are SVB clients, which should come as no surprise to those of you who know us. SVB is the bank for half of all venture capital-backed technology and life science companies in the United States, two-thirds of those companies that went public in 2013, and a majority of the investors who fund them. The makeup of our client base is growing increasingly global and has expanded over the years to serve companies of all sizes.

As the bank of the global innovation economy, we are committed to bringing clients the connections and tailored financial solutions they need to succeed, and we also consider ourselves champions for innovation. With studies like this one, we can build a better understanding of what it takes to disrupt an industry or launch a high-growth company. And with that knowledge we can help create a better environment in which all innovators can thrive.

Thanks for taking a look at this year’s report. Reading between the statistics, insights and observations, you’ll find stories of the phenomenal intelligence, courage and determination it takes to build a successful company.

Greg Becker President and Chief Executive Officer Silicon Valley Bank and SVB Financial Group

INNOVATION ECONOMY OUTLOOK U .S. REPORT 2014

CON

TEN

TS

3 Executive summary

4 Report at a glance

3Introduction

7 Surging forward: Upbeat mood pervades the innovation economy

8 2013 year in review

11 2014: A look ahead

13 Driving growth in 2014

14 The broader financial environment: Exits and IPOs

16 Growth means jobs

19 It’s all about skills and experience

7Surging forward

20 Meeting obstacles head-on

22 The first hurdle: Access to equity

25 The shifting landscape of innovation capital

28 The second hurdle: Access to talent

30 Keeping momentum

32 Establishing a global footprint

20Meeting obstacles

30Keeping momentum

34 About Silicon Valley Bank’s Innovation Economy Outlook 2014

36 A snapshot of survey respondents

34About this report


Today, the United States leads the race to capitalize on the global innovation economy. The nation is home to the largest concentration of innovation economy companies in the world.


Executive summaryFor the past five years, Silicon Valley Bank has taken the pulse

of the nation’s innovation economy. We ask entrepreneurs and executives what they are experiencing, how their companies are performing and how they view the future.

This year, a clear theme emerged. The innovation economy is big — and getting bigger. And it’s moving fast. It has momentum. It is a powerful force for job creation and economic growth across the United States, from early-stage startups to large, successful companies.

In the following pages, we explore the views of more than 1,000 U.S. executives from rapidly growing companies in the software, hardware, healthcare and cleantech sectors. Through their eyes, we see a picture of strength and optimism as they wrap up a very strong 2013 and look toward an even brighter future.

Yet alongside these positive results an equally compelling challenge emerges. Innovation economy companies are all about getting to scale — reaching the size, breadth and depth to be significant players in their markets. It takes scale to generate the financial returns and transformative breakthroughs that keep the innovation economy humming. For companies to achieve this scale, they must overcome a pair of limiting factors: securing access to capital and finding and keeping workers with the right skills.

INNOVATION ECONOMY OUTLOOK U .S. REPORT 2014 3

Experience and skills matter. Eight in 10 executives seek workers with experience, particularly in STEM disciplines. This illustrates the innovation economy’s role in creating the high-paying, high-quality jobs we need to maintain U.S. competitiveness in the global economy.

2013 was the best year yet. Two in 3 respondents met or beat 2013 revenue targets, the best performance in five years of surveys.

2014 could be even better. Even coming off a strong year, 82 percent of executives say business conditions will improve in the coming year.

Strong performance and a positive outlook mean jobs. Three in 4 executives say their company will grow its workforce in 2014 — a very bright spot in a broader U.S. economy still struggling to get people back to work.

Surging forward: Upbeat mood pervades the innovation economyExecutives offer generally positive reviews of sector performance in 2013 and a bright outlook for 2014:

Report at a glanceH

IGH

LIG

HTS 1

Most optimistic ever

2010 20122011 2013 2014

◻ Business conditions will improve

Growing in 2014? U.S. respondents◻ We will grow our workforce.◻ We will stay flat.◻ We will reduce our workforce.

76% 22%

8 in 10 executives seek workers with experience

Greatest opportunity in 2014

Greatest opportunity in 2014◻ New products or markets◻ Scaling operations◻ Business conditions in existing markets◻ Access to equity financing◻ Mergers and acquisitions◻ Other

11%

7%

24%

11%

36%

11%


1. Scaling operations Most young companies struggle to get to scale — to grow in size, expand their line of products and services, continue to innovate, add employees and locations, bring in revenue and, of course, earn profits.

2. Getting funded Access to equity is difficult even for those who successfully raised capital in 2013. The challenge is most acute in cleantech and healthcare and for companies with less than $5 million in revenue, where more than 90 percent of executives who raised capital say the fundraising environment is somewhat or extremely challenging.

Meeting obstacles head-onExecutives cite three major hurdles as their companies seek to realize their potential:

Keeping momentumWinners and losers in the innovation economy will be defined by regions that connect companies with talent and capital. The opportunity lies in converting these challenges into strengths:

3. Finding skilled employees Similarly, 91 percent of executives — a higher percentage than last year — say it is hard to find employees with the experience, skills and education they seek. And while executives say they look first to hire in the United States, many will look farther afield if necessary.

Grow a strong workforce. Regions with well-educated youth and a well-trained workforce can become destinations of choice for growing companies.

Connect capital to companies. Smoothing the path between capital providers and high-growth companies that need equity to grow can foster a region’s long-term economic success.

Report at a glanceHIGHLIGHTS

2 3

View of the 2014 fundraising environment:

Getting the right people: Tough and getting tougher◻ Extremely challenging◻ Somewhat challenging◻ Not very challenging

9%

61%

30%

BY THOSE WHO SUCCESSFULLY RAISED CAPITAL IN 2013

Software Hardware Healthcare Cleantech

◻ Somewhat challenging

◻ Extremely challenging

38%

15%

36%42%

52%54%

59%

53%


The spoils will go to the sectors, regions and nations that figure out how to keep

the innovation funnel packed with young startups

and provide companies with the people and capital

needed to grow.


Today, the United States leads the race to capitalize on the global innovation economy. The nation is home to the largest concentration of innovation economy companies in the world and is a focal point for entrepreneurs in the software, hardware, cleantech and healthcare sectors worldwide.

Yet nothing is static — least of all innovation — because the impulse to invent and transform

is universal.

Over the past decade, entrepreneurs and investors have come together to create increasingly vibrant ecosystems in places such as the United Kingdom, Israel, China and India. Clusters of young companies and sophisticated investors continue to emerge in markets across the globe. Governments are working to strengthen these emerging networks because they recognize the innovation economy’s capacity to drive economic growth.

Today’s innovation economy is more than a series of isolated regional clusters. It’s an interconnected global ecosystem, in which rapidly growing companies look both within and beyond their borders to find the growth opportunities, people and capital that breakout companies need.

In the following pages, we explore the views of 1,004 U.S. executives about the opportunities and challenges faced by their companies and, by extension, our economy. Together, they paint a picture of how executives at the epicenter of the global innovation economy are thinking. In our other Innovation Economy Outlook reports, we bring in the views of another 214 executives worldwide to give us an unprecedented perspective on how today’s innovation companies look to achieve scale.

The decisions being made by these executives will shape the future of global innovation. It’s a race to the top, where huge rewards await. The spoils will go to the sectors, regions and nations that figure out how to keep the innovation funnel packed with young startups and provide companies with the people and capital needed to grow.

8 2 0 1 3 Y E A R I N R E V I E W

1 1 2 0 1 4 : A L O O K A H E A D

1 3 D R I V I N G G R O W T H I N 2 0 1 4

1 4 T H E B R O A D E R F I N A N C I A L E N V I R O N M E N T : E X I T S A N D I P O S

1 6 G R O W T H M E A N S J O B S

1 9 I T ’ S A L L A B O U T S K I L L S A N D E X P E R I E N C E

Surging forward: Upbeat mood pervades the innovation economy

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1 Silicon Valley Bank’sInnovation Economy Outlook 2014 U.S. Report


Although executives in last year’s survey expressed mixed feelings about 2012, they were hopeful about 2013. And their hope proved justified. For innovation economy companies, 2013 was a very good year, with 65 percent of U.S. executives saying their company met or beat their revenue goals. That’s up from 54 percent in 2012 and higher than in any of the past five surveys.

Most of the companies that beat targets over-performed, usually in the range of 1 to

20 percent.

Across sectors, the pattern was generally consistent. Interestingly, the strongest performance was in cleantech, a sector that has faced significant headwinds in recent years. Executives at cleantech companies were the most likely to say they beat targets (29 percent), and, at the median, cleantech companies that beat targets did so by 30 percent — much more than was reported for any other sector.

The strong performance by cleantech companies could be the result of relatively conservative expectations for those companies. Expectations may have been higher for the software and hardware sectors, and, if so, that would explain why those sectors beat targets by a smaller margin.

Among executives who report that they missed 2013 revenue targets, at the median, cleantech and hardware executives report the biggest misses at 25 percent, while software and healthcare come in at 20 percent.

2013 year in review

2013 REVENUE PERFORMANCE

◻ Above target◻ On target◻ Below target

65%

of U.S. companies met or beat their

revenue goals

35%

44%

21%


2013 year in reviewCHAPTER 1

2009 20112010 2012

50% 50%

37%

63%

40%

60%

46%

54%

35%

2013

2013: THE BEST YEAR YET

◻ Met or beat revenue targets◻ Missed revenue targets

Beating 2013 revenue targetsPERCENTAGE ABOVE TARGET FOR THOSE EXCEEDING 2013 REVENUE GOAL

◻ 1%–20%◻ 21%–50%◻ More than 50%

Missing 2013 revenue targetsPERCENTAGE BELOW TARGET FOR THOSE MISSING 2013 REVENUE GOAL

◻ 1%–20%◻ 21%–50%◻ More than 50%

65%

67%

70%

60%

50%

40%

30%

20%

10%

0%

9%

24%

56%

9%

35%


Four-fifths of respondents believe that business

conditions in 2014 will be better than in 2013.


Optimism among executives heading into 2014 is unparalleled. The number of executives who believe that business conditions for their company in 2014 will be better than in 2013 is particularly surprising given the strength of 2013.

Across stages, sectors and regions the level of optimism is high. Even among those executives

who are relatively less optimistic — the leaders of healthcare, pre-revenue and New England-based companies — at least three-quarters believe that business conditions for their company in 2014 will be better than in 2013.

PricewaterhouseCoopers (PwC) recently released its 17th annual Global CEO Survey, which helps to put this level of optimism in context. PwC asked CEOs of major companies in 68 countries (including 162 U.S. CEOs) whether they were confident the global economy would improve in the coming year and whether they plan to hire. Confidence in growth and hiring were both up dramatically from a year ago, but were still far below the level we see in the innovation economy. Only 40 percent of those U.S. CEOs surveyed said they are confident the global economy will improve, and only 62 percent expect to hire this year.

Although the questions were not identical to those in our survey, the magnitude of the different levels of optimism highlights the strength and growth potential in the U.S. innovation economy as compared with the overall global economy in the eyes of executives on the front lines.

2014: A look ahead

Most optimistic ever

75%

2010

71%

2012

78%

2011

74%

2013

82%

2014

85%

80%

75%

70%

65%

60%

55%

of executives believe that business conditions for their company in 2014 will be better than in 2013


The overall focus on new products,

new markets, scaling operations,

equity and business conditions is true

across sectors and company sizes.


Executives in this year’s survey intend to drive growth in 2014 primarily by finding new markets for their products and scaling their business operations. To a lesser extent, companies plan to capitalize on business conditions in their existing markets and tap equity capital.

While the overall focus on new products, new markets, scaling operations, equity and business

conditions is true across sectors and company sizes, executives with larger companies (those with more than $50 million in revenue) and healthcare companies also cite mergers and acquisitions as a top opportunity.

Healthcare executives are more likely to see access to equity as their top opportunity, while hardware executives are more likely to look to new products and markets.

Conversely, executives with companies earning more than $5 million in revenue are less likely to cite access to equity as a top opportunity, and executives with pre-revenue companies are less likely to see business conditions in their existing market as a top opportunity.

Driving growth in 2014

Greatest opportunity in 2014◻ New products or markets◻ Scaling operations◻ Business conditions in

existing markets◻ Access to equity financing◻ Mergers and acquisitions◻ Other

36%Greatest opportunity in 2014

11%

7%

24%

11%

11%


The survey paints a positive picture — a strong 2013, expectations for an even better 2014 and compelling organic growth opportunities — that translates into meaningful job creation. This picture fits with what we know about innovation economy companies based on the work we do with them across the nation and around the world.

One cause for optimism among executives is the rebound in the number of initial public offerings

(IPOs) during 2013. IPOs are important for a number of reasons. For entrepreneurs and investors, they can serve as a sought-after “exit strategy,” allowing those who build successful companies to begin to reap the financial rewards of what they have created. For the companies themselves, tapping public equity markets can provide the capital needed to keep growing. And for the U.S. economy, IPOs mean jobs, since historically the greatest job creation in venture-backed companies occurs after having gone public.

This past year was the best for the U.S. IPO market since 2000. A total of 222 companies went public in 2013, raising $55 billion. Eighty-one of these offerings were by venture-backed companies, and another 70 were by private equity-backed companies. In both cases, these numbers represent a sharp increase over 2012, when 46 venture-backed companies and 45 private equity-backed companies went public.

In addition to the sheer number of offerings, the market was much more reliable in 2013. The window for U.S. IPOs remained consistently open, rather than opening and closing in fits and starts as had occurred during the previous several years. This provided a more stable and predictable foundation for executives considering a public offering. 1

IPO momentum continues in 2014. According to Bloomberg, by mid-February, 42 Internet and other technology-related companies had announced plans to go public, with aspirations to raise more than $2 billion.2 That is more than half the number of all venture-backed IPOs in 2013.

U.S. mergers and acquisitions — the other source of successful “exits” for high-growth companies — were also up in 2013. Last year, U.S.-targeted M&A deals totaled $1.3 billion, up 23 percent from 2012 and the

The broader financial environment: Exits and IPOs

2007 2008 2009 2010 2011 2012 20130

50

100

150

200

250

Number of U.S. IPOs

222


CONTINUED ON 15

strongest showing in at least five years. In another five-year high, U.S. M&A activity in 2013 reached 48 percent of worldwide M&A activity.3

Strong performance in 2013 on the IPO front was driven in significant part by the strength of the stock market. In the words of CNNMoney, “2013 is one for the record books.” The S&P 500 gained 29.6 percent, its biggest jump since 1997. The Dow Jones industrial average had its best year since 1998, gaining 26.5 percent and hitting 52 all-time highs during the year. And the Nasdaq gained 38 percent, its best year since 2009.4

The “IPO On-Ramp,” enacted by Congress in 2012 as part of the JOBS Act,5 also likely contributed to 2013’s strong IPO showing. This new law lets smaller companies explore their prospects for a successful IPO by letting them keep their early submissions to the Securities and Exchange Commission confidential (until they actually decide to go public) and letting them test the waters with potential investors. This change on the regulatory front seemed to help reinvigorate the small-cap IPO market and increase executives’ ability to make good decisions grounded in good information. It also gave investors access to some of the most interesting companies out there.

In short, the engine is humming. The number of newly formed startups continues to rise. Companies are performing well. The stock market is up. Investors and entrepreneurs see good exits, including some spectacular ones such as WhatsApp, FireEye and Zillow. As a result, the flow of capital into companies with great ideas, the transformation of great ideas into great companies, and the return of capital to investors are alive and well and fueling the innovation economy.

1 Renaissance Capital, “U.S. IPO Market 2013 Annual Review: Best Year for U.S. IPO Market in Over a Decade,” www.renaissancecapital.com/ipohome/news/renaissance-capitals-2013-us-ipo-annual-review-17213.html.

2 Bloomberg News, “Goldman No. 1 in Equities Ranking as IPO Pipeline Grows in 2014”, March 4, 2014, www.bloomberg.com/news/2014-03-05/goldman-no-1-in-equities-ranking-as-ipo-pipeline-grows-in-2014.html.

3 Thomson Reuters, “U.S. Accounts for Highest Percentage of M&A Since 2001; European Merger Activity Falls to 10-Year Low,” blog.thomsonreuters.com/index.php/preliminary-mergers-acquisitions-review-fy-2013/.

4 CNNMoney, “Stocks: 2013 Is One for the Record Books,” Dec. 31, 2013, buzz.money.cnn.com/2013/12/31/stocks-record-bull-market/.

5 U.S. Securities and Exchange Commission, “Jumpstart Our Business Startups (JOBS) Act,” www.sec.gov/spotlight/jobs-act.shtml.

The broader financial environment: Exits and IPOs

CHAPTER 1

◻ PE-backed deals◻ VC-backed deals

Number of U.S. venture-backed and private equity-backed IPOs

2009 2010 2011 2012 20130

20

40

60

80

100

120

140

160

70

81

46

51

61

12

22

37

35

45


CONTINUED FROM 14

http://www.bloomberg.com/news/2014-03-05/goldman-no-1-in-equities-ranking-as-ipo-pipeline-grows-in-2014.html

http://blog.thomsonreuters.com/index.php/preliminary-mergers-acquisitions-review-fy-2013/

http://buzz.money.cnn.com/2013/12/31/stocks-record-bull-market/

http://www.sec.gov/spotlight/jobs-act.shtml

Strong performance, high optimism and growth from within a company’s core business translate into new jobs. Three-quarters of this year’s respondents plan to grow in 2014, and virtually all survey participants think that, at minimum, their company will stay the same size.

Across the country, across sectors and across organizations of all sizes, companies plan to hire.

About 7 in 10 hardware and healthcare executives say they plan to grow. In software and cleantech, 8 in 10 say they will grow. And while executives in Northern California, New York and the Southwest are particularly upbeat, those in every region of the country are extraordinarily positive about prospects for growth. Even at the low end of the spectrum, executives project a median employment growth rate of 20 percent.

Across the survey, 64 percent of executives expect their workforce to grow by more than 20 percent. The median expected workforce growth is 30 percent. Expectations vary a bit by sector, from 50 percent median growth projected by hardware executives to 33 percent in cleantech to 30 percent each in software and healthcare.

Not surprisingly, smaller companies plan to grow more, in percentage terms. Executives from companies with revenue under $5 million project a median growth rate of 50 percent. Executives from companies with more than $50 million in revenue, meanwhile, project a median growth rate of 15 percent, still enough to create a meaningful number of new jobs in 2014.

Growth means jobs

Growing in 2014? ◻ We will grow our workforce.◻ We will stay flat.◻ We will reduce our workforce.

76%

2%

22%


Growth means jobsCHAPTER 1

Planned workforce growth in 2014: Median responses by region

While executives in Northern California, New York and the Southwest are particularly upbeat, those in every region of the country are extraordinarily positive about prospects for growth.

Expected workforce growth◻ 1%–20%◻ 21%–50%◻ 51%–100%◻ More than 100%

60%

50%

40%

30%

20%

10%

0%

20%

30%

40%

50%

PRE-REVENUE COMPANIES

REVENUE-GENERATING COMPANIES

$50M+ COMPANIES

25%

18%27%

24%

15%

2%

31%

6%

34%

22%

45%

76%Northern California

New York

New England

NorthwestSoutheastGreat Lakes

SouthwestMid- Atlantic

Great Plains

Southern California


As companies grow, support functions

become increasingly important. Forty-three percent of companies

exceeding $50 million in revenue expect most

of their hires to be in non-STEM functions.


Companies need workers to grow. In terms of skills, workers with science, technology, engineering and math (STEM) skills are most in demand. In terms of experience, more than 8 in 10 executives say their companies are looking for employees with a track record. Put those two factors together and more than half of respondents say their companies will hire mostly experienced STEM workers.

The numbers are particularly compelling for hardware companies, where 92 percent say

they want to hire mostly experienced staff and 71 percent say they are looking specifically for experienced STEM workers.

As companies grow, support functions become increasingly important. Only 26 percent of pre-revenue companies expect most of their hires to be in non-STEM functions. Among companies with $50 million or more in revenue, that number rises to 43 percent.

Regionally, Texas and New York stand out for placing an extraordinary emphasis on skilled workers (96 percent and 93 percent, respectively), while the Southwest stands out for its relatively high demand for people with management, marketing, sales, finance, operations and other non-STEM skills.

It’s all about skills and experience

WORKFORCE GROWTH: OVERALL MIX

◻ Experienced STEM◻ Experienced Other◻ Entry-level STEM◻ Entry-level Other

More than half say their company will hire mostly experienced STEM workers.

60%

50%

40%

30%

20%

10%

0%

53%


Scale — and how to achieve it — is the core challenge for executives trying to build a breakout company.

The top three challenges are pieces of a whole: how to build the infrastructure and product set, how to

assemble a team that can successfully ramp up and how to raise the capital it takes to reach scale.

Within the overall mix of obstacles, the survey responses break down fairly clearly by stage of growth. Executives with pre-revenue companies are most focused on raising equity financing, with 41 percent saying access to equity is their top challenge in 2014.6 As companies mature, executives shift their focus to the challenge of scaling operations. Finding the right people is a challenge across the board.

Not surprisingly, there are also some variations by sector. Executives in the capital-intensive healthcare and cleantech sectors are particularly focused on access to equity, and healthcare executives see the regulatory and political environment as a greater challenge than recruiting and managing employees. In contrast, executives in the software sector are especially focused on recruiting and managing talent.

2 2 T H E F I R S T H U R D L E : A C C E S S T O E Q U I T Y

2 5 T H E S H I F T I N G L A N D S C A P E O F I N N O V A T I O N C A P I T A L

2 8 T H E S E C O N D H U R D L E : A C C E S S T O T A L E N T

6 This is twice the number in the companion U.K. survey, though significantly more venture capital is invested in U.S. startups than U.K. startups.

Meeting obstacles head-on

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Top challenges for 2014◻ Scaling operations

◻ Access to equity financing

◻ Recruiting employees and managing talent

◻ New products or markets

◻ Regulatory/political environment

◻ Business conditions in existing markets

24%

21%

15%


The top three challenges are pieces of a whole:

how to build the infrastructure and product set, how to

assemble a team that can successfully ramp

up and how to raise the capital it takes to

reach scale.


Building teams, developing products and penetrating markets aren’t easy — or cheap. That’s why many high-growth companies need to continue raising capital long after they begin earning revenue, and why continued access to adequate risk capital is key to their success.

Overall, innovation economy companies fared reasonably well in 2013. About half of the executives

in this year’s survey (48 percent) raised equity capital in 2013, and 24 percent obtained a loan or other form of credit financing. For pre-revenue companies, the mix between debt and equity was shifted, with a much smaller number (9 percent) saying they obtained credit and far more (51 percent) saying they raised equity.

In contrast, 13 percent of all executives — and 23 percent of those with pre-revenue companies — say they were unable to raise private capital in 2013. Cleantech companies were particularly challenged, with 28 percent of executives in that sector reporting unsuccessful fundraising attempts.

The fact that some companies cannot raise funds doesn’t necessarily signal a problem in the overall fundraising environment. It’s a basic truth of the innovation economy that many companies won’t succeed in raising capital.

That’s why we asked only those who succeeded in raising capital what they think about the fundraising environment. And even though these executives were the ones who survived the gauntlet, they were clear in their assessment: It’s tough out there.

The first hurdle: Access to equity

CONTINUED ON 24

48% 24% 13% 6% 1%

2013 fundraising landscape◻ Successfully raised private capital◻ Obtained a loan◻ Unsuccessfully attempted to raise private capital◻ Acquired or were acquired◻ Filed for an IPO

Note: This question allowed for more than one response.


The first hurdle: Access to equityCHAPTER 2

Types of capital raised

About half of the executives in this year’s survey (48 percent) raised equity capital in 2013, and 24 percent obtained a loan or other form of credit financing.◻ All companies◻ Pre-revenue companies

6%8%

Other

2% 3%

Crowdfunding

4%3%

Governmentgrant

9%12%

Corporateinvestor

20%

17%

Privateequity

41%

59%

Angelcapital

48%

38%

Venturecapital

Raising equity capital in 2013◻ Successfully raised private capital◻ Unsuccessfully attempted to raise private capital

48%

13%

51%

23%

ALL RESPONDENTS

PRE-REVENUE COMPANIES


Across the survey, 8 in 10 executives who raised capital in 2013 rate the environment as somewhat or extremely challenging. Numbers for cleantech and healthcare are near unanimous, at 96 percent and 91 percent. Software company executives fared somewhat better, with “only” 74 percent saying the environment is challenging.

Broken out by stage, a similar pattern emerges. Nine in 10 executives at companies with revenue under $5 million call the fundraising environment challenging, compared with only 6 in 10 executives with companies bringing in more than $50 million.

For those who successfully raised capital in 2013, venture capital remains the go-to source. Among executives who raised capital in 2013, 48 percent say they raised venture dollars. Angel capital comes in a close second, with 41 percent of executives raising capital from angel investors, followed by private equity at 20 percent. Nine percent of executives say they raised capital from corporate investors, followed by government grants (4 percent) and crowdfunding (2 percent).

Not surprisingly, the pattern varies depending on the company’s stage of growth, with executives at pre-revenue companies reporting angel funding 59 percent of the time. Geographically, venture capital is more common in Northern California and Massachusetts, while private equity is more common in the middle part of the country.

CONTINUED FROM 22

The first hurdle: Access to equityCHAPTER 2

Healthcare

Software

Hardware

Cleantech

38%

15%

36%

42%

View of fundraising environment: by sector◻ Somewhat challenging◻ Extremely challenging

52%

54%

59%

53%


Responses to the survey illustrate the shifting pattern of innovation capital. Among executives planning to raise funds, 43 percent predict that funds will come from venture capital (down from 48 percent).

The number who expect their next round of funding to come from angel investors dropped even more, from

41 percent to 23 percent, although this may reflect the natural shift of maturing companies to larger investors. Sixteen percent of executives, up from 9 percent, plan to look to corporate investors, while only 14 percent plan to look to private equity, down from 20 percent.

Overall, 14 percent of companies, and 26 percent of those with revenue over $50 million, are planning for organic growth, while another 14 percent are looking to raise bank debt. Public capital markets become relevant only for the larger companies in the survey, with one-quarter of executives at companies with revenue above

$50 million saying they intend to go public to raise their next round of equity.

These results reflect broad changes in sources of funding. Ten years ago, venture capital dominated the scene. More recently, the mix of capital has become a blend of angels, venture, corporate, private equity and others. We believe that in 2013 “innovation capital” looked more or less like the depiction at right, with venture capital remaining a very important contributor but making up only a fraction of total dollar funding.

The evolution will likely go on as nonequity crowdfunding continues to provide seed-stage financing, as equity crowdfunding either takes hold or atrophies under its heavy regulatory burden, as two forms of fundraising7 that the JOBS Act made significantly easier gain a footing and as technology platforms increasingly match buyers and sellers across a broader landscape.

The expansion in funding sources is important for two reasons.

The shifting landscape of innovation capital

7 The two forms of fundraising are private offerings, under what is generally referred to as “Reg D” offerings, and small public offerings, under a new provision called “Reg A+.”

8 Silicon Valley Bank, National Crowdfunding Association, Angel Capital Association, NVCA, Dow Jones.

$0.7$2.8$4.4

$22.5$24.3

$1012013 mix of innovation capital (billions)8

◻ Tech private equity◻ Venture capital funds◻ Angel investors◻ Corporate venture funds◻ Crowdfunding◻ Micro VC


CONTINUED ON 26

First, over the past several years, the rate of company formation has been strong and rising, and venture funds have been investing an increasing share of their capital into these early-stage companies. The mouth of the funnel is widening. But at later stages, venture investors have been completing fewer deals, placing larger amounts of capital into a smaller number of “winners.” In other words, the stem of the funnel is shrinking.

In addition, since 2008, venture funds on average have been investing significantly more (on the order of $6 billion to $10 billion annually) than they have been raising.

The net result? There are a lot of younger companies out there with an appetite for growth capital that venture alone can’t meet. And that comes full circle, back to the views of the executives in the survey: Finding capital is a challenge.

The shifting landscape of innovation capitalCHAPTER 2

50%

40%

30%

20%

10%

0%

14%14%14%16%

23%

43%The next source of capital

Venture capital

Angel capital

Corporate investor

Bank Organic growth

Private equity


CONTINUED FROM 25

The shifting landscape of innovation capitalCHAPTER 2

9 NVCA Yearbook 2013, PWC/NVCA 2013 MoneyTree Report, Thomson Reuters/NVCA 2013 Fundraising Report.

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

$50

-$75

$0

Projected

Venture capital: A looming funding gap (billions) 9

◻ VC fundraising◻ VC investments◻ Cumulative shortfall◼ Projected

There are a lot of younger companies out there with

an appetite for growth capital that venture alone

can’t meet.

$50

$0

-$75


The good news is that innovation economy companies are hiring. The challenge is that they are struggling to find and retain the people they need to grow.

A whopping 91 percent of executives in the survey say it’s challenging to find workers with the skills

and experience necessary to grow their business. That’s up from 2013, when 87 percent took this view.

The pain is particularly acute in the software and hardware sectors, where 94 percent and 92 percent of executives, respectively, say the situation is challenging. Northern California and New York top the list of regions with the biggest challenges on this front. New York, which has a smaller employee base upon which to draw because of its shorter history as a tech hub, faces a particular challenge, exacerbated by a very high cost of living.

Interestingly, larger companies are more likely than their smaller peers to characterize the situation as extremely or somewhat challenging. In fact, pre-revenue companies are the least likely to have that view and are significantly more likely than larger companies

to define the situation as not very challenging. This probably reflects the greater number of people needed by larger companies as well as the draw toward tech startups across the nation, particularly in places such as San Francisco and New York.

Hiring difficulties cut to the core of companies’ ability to succeed and can’t be solved by companies alone. One-third of executives say the biggest challenge is finding workers with the necessary experience, and 28 percent say the biggest challenge is finding people with the right skills and education. Executives in the software sector switch the order, putting skills and education at the top of the list, likely because of the rapidly evolving types of skills needed by software companies.

Hiring and retaining people with the right skills and experience is a challenge across the country. Finding experienced workers is particularly challenging in regions farther from technology hubs such as the Southwest and Southeast where executives cite location as a significant obstacle.

The second hurdle: Access to talent


The second hurdle: Access to talentCHAPTER 2

Getting the right people: Tough and getting tougher◻ Extremely challenging◻ Somewhat challenging◻ Not very challenging

57%

28%

Jobs and hiring: Top challenges◻ Experience◻ Skills/education◻ Salary and benefits◻ Candidates prefer companies of a different size

91%

2014 RESPONSES

Executives surveyed say it’s challenging to find workers with the skills and experience necessary to grow their business.

34%

21%$6%

30%

30%

9%

13%

2013 RESPONSES

61%

Find hiring somewhat or extremely challenging

87%


The race is on. While the United States remains the epicenter of the global innovation economy today, nothing is static. As this year’s survey makes clear, there is enormous opportunity ahead — and those sectors, regions and countries that can help executives access equity and talent will have a good shot at enticing and retaining rapidly growing companies, which need both.

All other things being equal, it’s apparent that U.S. executives would rather build companies close

to home, both domestically and regionally. Keeping employees together helps entrepreneurs create a strong culture and promote collaboration, particularly in earlier-stage companies.

Yet while most executives in the survey see the United States as their top hiring market, many are open to hiring from outside the country. This view is most often shared by executives at software companies, larger companies with revenue above $50 million, and companies in Northern California and New York.

More broadly, innovation economy companies often establish a broader global footprint as part of their normal evolution and growth, and even relatively small companies look to international markets as they expand. In this year’s survey, 30 percent of executives with companies generating revenue below $5 million say they sell internationally, and an equal share say they have

overseas production capabilities. Moreover, the level of activity rises as revenue rises. Among companies with $50 million or more in sales, three-quarters sell outside the United States now or plan to do so in the coming year.

It’s an exciting time to be in the innovation economy. The level of creativity is extraordinary. The opportunities are exciting and changing constantly. And even the challenges are good ones to have, because they exist only in an environment where organizations are thriving.

Keeping momentum

CHA

PTER



Hiring difficulties cut to the core of companies’ ability to succeed and

can’t be solved by companies alone.


Establishing a global footprintCHAPTER 3

44% 39% 36% 35%

14%

6%8% 4% Innovation economy

companies’ global footprint

PERCENTAGE OF RESPONDENTS PERFORMING ACTIVITIES OUTSIDE THE U.S.

◻ Currently◻ Next 12 months

Sales Production (includes

coding and manufacturing)

Service R&D

TOP REGIONS FOR HIRING ABROAD U.S. RESPONDENTS

◻ Europe ◻ Asia ◻ Americas (exclude U.S.)◻ Middle East

31%

13%

4%

PLAN TO HIRE PRIMARILY IN THE U.S.

Top hiring destinations

96%

52%

While most executives in the survey see the United States as their top hiring market, 24 percent are also planning to hire from outside the country. Even relatively small companies look to global markets as they grow.

24% PLAN TO DO SOME HIRING OUTSIDE THE U.S.


While most executives in the survey see the

United States as their top hiring market, many

are open to hiring from outside the country.


Innovation Economy Outlook 2014 is Silicon Valley Bank’s fifth annual report based on a survey of executives in the innovation economy.

When we launched the survey and report in 2010, we focused on U.S. startups — companies with up

to $50 million in revenue and fewer than 500 employees. Not surprisingly, given our focus, we named our findings Startup Outlook.

As SVB has grown by serving entrepreneurs and high-growth companies of all sizes around the world, so has our survey. Last year, we added startups in the United Kingdom. This year, we expanded the survey to include executives covering the full breadth and depth of the markets we serve, including executives in larger companies and from around the world. In light of our expanded focus, we’ve renamed our report the Innovation Economy Outlook.

To help readers focus on the insights most relevant to them, we are presenting our findings in three separate reports. This report focuses specifically on the innovation economy in the United States, the world’s largest, examining the outlook for growth and challenges across different sectors and regions. It is a companion to two other reports based on SVB’s Innovation Economy Outlook 2014 survey. One focuses on the global innovation economy, examining views from executives across the global survey, highlighting the most important issues

and opportunities for growing companies and comparing the views of executives from the United States, the United Kingdom and the rest of the world. The other explores the U.K. innovation economy, reporting the views of U.K. entrepreneurs and comparing them with those of their peers across the Atlantic.

In addition to the three comprehensive reports, we are issuing targeted reports that look at executives’ views by industry sector, company stage and geography. Over the coming months we will also examine key public policy issues, the representation of women in the innovation economy, and the ties that link innovation economy companies across regions and nations.

We are grateful to the 1,200 executives who took the time to answer this year’s survey. Through them, we hope we will encourage others, across the United States and around the world, to see how much the future has to offer to those willing to do the hard work that drives the innovation economy.BA

CKG

ROU

ND

About Silicon Valley Bank’s Innovation Economy Outlook 2014

All reports are available at www.svb.com

3 6 A S N A P S H O T O F S U R V E Y R E S P O N D E N T S


http://www.svb.com

http://www.svb.com/innovation-economy-outlook/

“We are not limited by business opportunities. We are limited by access to capital, both debt and equity. Solving this would move our business forward domestically and internationally.” — CTO, SOUTHWEST CLEANTECH COMPANY

“I feel very fortunate I started my company in 2013 and am now prepared to fundraise. The climate is very good compared to the last five years.” — CEO, CALIFORNIA BIOTECH COMPANY

“This is an exciting time for new healthcare technology startup companies; capital is readily available for experienced management teams and the future is very bright.” — EXECUTIVE, NEW ENGLAND HEALTHCARE IT COMPANY


A snapshot of survey respondentsThe Innovation Economy Outlook 2014 U.S. Report provides a representative view of high-growth companies across the United States. Of the 1,004 respondents, more than half are CEOs and 84 percent are C-level executives.

Executives in 36 states and the District of Columbia participated. California, particularly Northern California, dominates the

sample, with 48 percent of respondents, followed distantly by Massachusetts at 9 percent and New York at 5 percent.

By sector, software companies account for the largest number of respondents (55 percent), followed by healthcare (25 percent). Within software, more than half of the respondents are from the enterprise software or consumer Internet/digital media subsector.

In terms of size, the innovation economy is shaped like a funnel, with a very large number of very small companies, a smaller number of midsize companies and far fewer large companies.

Thirty-one percent of this year’s respondents work for a company that did not earn revenue in 2013. Of those whose companies earned revenue, nearly half had revenue below $5 million in 2013 and nearly one-third had revenue between $5 million and $25 million.BA

CKG

ROU

ND

RESPONDENTS BY REGION

◻ California 48% ◻ New England 10%◻ Southeast 9%◻ Southwest 7%◻ Mid-Atlantic 6%◻ New York 5%◻ Northwest 5%◻ Texas 4%◻ Great Lakes 3%◻ Great Plains 2%

EARNING REVENUE YET?

◻ Revenue-generating ◻ Pre-revenue

48%

55%

69%

By sector, software companies account for the largest number of respondents.

31%

California dominates the sample, with 48 percent of respondents.

25%

5%

10%

5%

PERCENTAGE OF RESPONDENTS BY SECTOR

◻ Software ◻ Hardware ◻ Healthcare◻ Cleantech◻ Other


Overall, 43 percent of this year’s respondents say their companies were profitable in 2013, up significantly from 26 percent last year. While the share of companies that were profitable in 2013 increased with company size, one-quarter of executives working for companies with revenue of $50 million or more say their company was not profitable in 2013. This illustrates the long road to profitability that innovation economy companies take, because they need to invest so much in their businesses to reach the level of success to which they aspire.

In the survey, 39 percent of respondents say their company has fewer than 10 employees. Two-thirds report fewer than 50 employees, and more than three-quarters report fewer than 100.

The vast majority of companies represented in the survey are privately held.

Survey respondentsBACKGROUND

U.S. REVENUE-GENERATING COMPANIES

◻ Less than $1M◻ $1M–$4.9M◻ $5M–$9.9M◻ $10M–$24.9M◻ $25M–$49.9M◻ $50M–$99.9M◻ $100M+

39%

of respondents say their company has fewer than 10 employees

28%

11%

20%18%

9%8%

6%

Of those whose

companies earned

revenue, nearly half

had revenue below $5

million in 2013.

PUBLICLY TRADED VS. PRIVATELY HELD

◻ Privately held◻ Publicly traded

74%

26%

96%

4% All

respondents$50M+

companies

PROFITABLE YET?

◻ Yes◻ No

43%

of this year’s respondents say their companies were profitable in 2013


Special thanks to dcIQ for your collaboration on this study. Thank you for your support:

Angel Capital Association

Churchill Club

Cleantech Group

Computer History Museum

Engine

Galvanize

Hattery

Illinois Venture Capital Association

Intelligent.ly

MassBio

MassMEDIC

Medical Device Manufacturers Association

Mid-America Healthcare Investors Network

National Venture Capital Association

Software & Information Industry Association (SIIA)

Techstars

The Capital Network

TiE

TUGG (Technology Underwriting Greater Good)

Washington Biotechnology & Biomedical Association

Acknowledgments

©2014 SVB Financial Group. All rights reserved. Silicon Valley Bank is a member of FDIC and Federal Reserve System. SVB>, SVB>Find a way, SVB Financial Group, and Silicon Valley Bank are registered trademarks. A third-party firm, Q&A Research, conducted the survey online on our behalf from January 8 through January 29, 2014.This material, including without limitation the statistical information herein, is provided for informational purposes only and is compiled from the survey that we worked with Q&A Research, a third party source. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. 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 decisions.

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