State of the MarketsInside views on the health and productivity of the innovation economy

Second Quarter 2018

State of the Markets: Second Quarter 2018

State of the Markets 2

4 Macro Snapshot: Long-Lived Bull Market

7 IPO Conditions: Value in the Face of Volatility

12 Late Stage: Another Round of Mega-Rounds

17 Global Perspective: Tension Over Tech

22 Special Report: Prepared for a Downturn?

State of the Markets 3

State of the Markets: Second Quarter 2018The Good Times Roll, Even as Risks Rise

The bull market powers on, and money continues to flow into the innovation economy. At the same time, we are seeing a reemergence of volatility and a bevy of new risks — including tighter monetary policy and the specter of a trade war — but it’s still status quo for now in the capital markets.

Despite market turbulence, the first quarter of 2018 ushered in several high-profile IPOs, and consumer- and enterprise businesses are finding success as public entities. Furthermore, companies reluctant to go down the IPO route found alternative paths. After years of successful fundraising, the world remains awash in capital, and sovereign wealth funds appear poised for even greater contributions. All of these factors are expected to provide further tailwinds for the tech sector.

This remains an exciting time for tech around the globe, with some caveats. Innovation companies thrive on open markets, and rich valuations could be undermined by strained geopolitics, wavering consumer confidence and a releveling of investors’ portfolio mix as interest rates rise. While the good times roll, economic cycles don’t last forever, and the trends don’t always point upward. For the moment, however, it’s game on.

Bob BleeHead of Corporate Finance

State of the Markets 4

Long-Lived Bull Market

The Second Longest Bull Market Powers On

State of the Markets 5Sources: LPL Research, S&P Capital IQ and SVB analysis.

Since the end of the global financial crisis, equities have been enjoying a nine-year bull run —the second longest since the Second World War. The longest streak was also tech-powered, but ended in the dot-com bust of 2000. Will things end differently this time?

Cumulative Return: Longest S&P 500 Market Runs Since 1945

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6/13/194910/3/19748/12/198210/11/199010/9/20023/9/2009

Duration of Bull Market (Years)

Dot-Com Bubble

Current

June 1949 – Aug. 1956Oct. 1974 – Nov. 1980Aug. 1982 – Aug. 1987Oct. 1990 – Mar. 2000Oct. 2002 – Oct. 2007Mar. 2009 – Active

0 1 2 3 4 5 6 7 8 9

Signaling the End of Easy Money

State of the Markets 6

Notes: 1) & 2) Forecasts and projections provided by Federal Open Markets Committee of the Federal Reserve. 3) Mortgage-backed securities. Sources: S&P Capital IQ, Federal Reserve Bank of New York and SVB analysis.

Strong economic data suggests that the Federal Reserve will continue raising interest rates. This may allow money managers to capture more attractive yields in less-risky asset classes. Concurrently, its unwinding of $1T in assets will also reduce the availability of capital.

Fed Funds Effective Rate: 2010–2020

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2009 2011 2013 2015 2017 2019 2021

Fed Balance Sheet (Projected2): 2010–2021

2011 2013 2015 2017 2019 2021

Without Reinvestment

Fed Plan

MBS3

Treasuries

Historical Projected0.0%

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2009 2011 2013 2015 2017 2019 20212011 2013 2015 2017 2019 Long Run

ActualMidpoint of Forecasts1

State of the Markets 7

Value in the Face of Volatility

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 ’18

Volatility (VIX)1 vs. U.S. Venture-Backed Tech IPOs: 2005–1H’182

State of the Markets 8

Spotify Lists, Undeterred by Market Turbulence

Early Trading Values vs. Offer Price

Notes: 1) Volatility presented is implied forward volatility of the S&P 500. 2) 1H’18 IPO count includes six completed IPOs as of 4/20/18 and three upcoming listings.Sources: S&P Capital IQ, PitchBook, Renaissance Capital and SVB analysis.

History confirms that tech companies prefer calm markets for IPOs. But even the recent surge in volatility couldn’t derail Spotify from its nontraditional direct listing. In fact, SPOT experienced milder swings relative to the early trading of SNAP.

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1H'05 2H' 05 1H'06 2H' 06 1H'07 2H' 07 1H'08 2H' 08 1H'09 2H' 09 1H'10 2H' 10 1H'11 2H' 11 1H'12 2H' 12 1H'13 2H' 13 1H'14 2H' 14 1H'15 2H' 15 1H'16 2H' 16 1H'17 2H' 17 1H'18

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IPOs Don’t Happen Overnight

State of the Markets 9Note: 1) Xiaomi IPO value, $100B, based on high end of range as reported by The Wall Street Journal, March 5, 2018.Sources: The Wall Street Journal, S&P Capital IQ, PitchBook and SVB analysis.

Two decacorn debuts captured Q1 headlines, but their decade-plus journeys illustrate different paths to their current robust valuations. Meanwhile, China’s Xiaomi also boasts a “stale” valuation from years ago, but that could double in its highly anticipated IPO later this year.

Valuation Progression from Founding to IPO (Relative to Final Private Round) Xiaomi$100B IPOLate 2018

+117%1

Spotify$27B ListingApril 2018

+33%

Dropbox$8B IPO

March 2018+20%

Snap$20B IPO

March 2017-3%

12 11 10 9 8 7 6 5 4 3 2 1 IPO +1Years Prior to Public Offering

Spotify2006

Dropbox 2007

Xiaomi2010

Snap2010

CompanyYear Founded

Last Private

Valuation

Market Cap Relative to Last Private Valuation: $1B+ U.S. Tech IPOs from March 2017–March 2018

State of the Markets 10

Both Enterprise and Consumer Find Success

Notes: 1) Market Cap is as of March 31, 2018. 2) Market cap as of March 31, 2018 relative to the last private valuation available. 3) IPO offer price is the first data point for each company to capture the pop from its first day of trading. 4) MuleSoft announced its sale to Salesforce on March 20, 2018.Sources: S&P Capital IQ, PitchBook and SVB analysis.

Struggling to prove their growth stories, the stocks of Snap and Blue Apron have sunk, dragging down public perception of consumer tech. However, the data shows solid early performances for both enterprise- and consumer-facing businesses can enjoy success relative to private valuations.

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01/17 02/17 03/17 04/17 05/17 06/17 07/17 08/17 09/17 10/17 11/17 12/17 01/18 02/18

$4.1B4.1x LPV

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$1.9B2.3x LPV

$4.2B3.6x LPV

$5.9B4

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$1.2B2.3x LPV

$3.3B3.1x LPV

$2.2B1.4x LPV

$19.5B1.0x LPV

$0.4B0.2x LPV

$12.3B1.2x LPV

$3.0B0.7x LPV

IPO3 1 2 3 4 5 6 7 8 9 10 11 12 13Months Trading Since IPO

ConsumerEnterprise

$2.0B1

6.6x LPV2

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Public Multiples Bode Well for Venture Deals

State of the Markets 11

Notes: 1) More infoformation 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 pre-money for private transactions and total enterprise value for public companies. 3) Data based on SVB’s observations of ~120 private market transaction multiples of venture-backed companies with $25M+ in run rate. 4) Forecast based on median premium for private transactions relative to public market multiples.Sources: Bessemer Venture Partners, S&P Capital IQ, SVB proprietary data and SVB analysis.

Valuations for forthcoming private SaaS venture deals continue to closely track their public company counterparts as consensus grows around key business metrics. Growth is still being rewarded: The much higher revenue growth rates for companies within the private transactions set (~60% vs. BVP1 median: ~30%) compensates for the typical illiquidity discount.

Example: In mid-November 2015, the median of the BVP Cloud Index was 6.6x. The next 20 transactions (as captured by SVB data) had a median multiple of 7.6x.

2015 2016 2017 Q1’18

Enterprise Software Valuations: Revenue Run Rate Multiple2

Median of Next 20 Private Enterprise Software Transactions3

Median of BVP Cloud Index Public Companies

Forecast4

State of the Markets 12

Another Round of Mega-Rounds

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Private Markets Dominate

Q2 State of the Markets 13Note: 1) “Private IPOs,” or “PIPOs” are $100M+ private venture rounds. Sources: PitchBook and SVB analysis.

Deal Count of U.S. Venture-Backed Tech IPOs vs. PIPOs: 2012–Q1’18

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q12012 2013 2014 2015 2016 2017 2018

U.S. Tech IPOsU.S. Tech PIPOs

Traditionally, companies seeking significant capital would accept the added transparency and scrutiny of the public markets. But starting in 2014, the demand and funding for PIPOs1 has exploded. For the past four years, mega-rounds have outpaced IPOs every quarter.

SoftBank Vision Fund Emerges as Third Propellant

State of the Markets 14

Notes: 1) Crossovers include BlackRock, Coatue Management, Fidelity Investments, Franklin Templeton Investments, T. Rowe Price, The Hartford Financial Services, Tiger Global Management and Wellington Management. 2) Private Equity/Family Offices include BlackRock Private Equity Partners, General Atlantic, ICONIQ Capital, Insight Venture Partners, Kohlberg Kravis Roberts, Silver Lake, TPG, Vulcan Capital and Warburg Pincus.Sources: PitchBook and SVB analysis.

Mutual funds and hedge funds have scaled back their fervor since 2013–2015, and private equity seemingly awaits more favorable valuations. So what led to 21 PIPOs in Q1 — the third highest to date? SoftBank’s Vision Fund has emerged as a force and remains hungry for innovative tech assets.

Participation Rates from Nontraditional Venture Investor Classes in U.S. Tech PIPOs: 2012–Q1’1839%

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SoftBank Vision Fund

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Private Investment Outpaces VC Fundraising

State of the Markets 15Sources: PitchBook and SVB analysis.

Participation by these nontraditional investors, as well as corporate and international investors, has pushed investment in the innovation economy to precarious heights. Venture-backed companies raised 2.5x what their venture firm counterparts received in commitments in 2017.

Venture Investment Dollars Relative to VC FundraisingU.S. Venture Investment & Fundraising: 2008–2017

2008 2011 2014 2017

U.S. Venture InvestmentU.S. Venture Fundraising

State of the Markets 16

Venture Prepares for Even More Mega-Rounds

Notes: 1) Based on reported anticipated values as of March 5, 2018. 2) Includes Sequoia Global Growth fund at anticipated $8B.Sources: PitchBook, The Wall Street Journal and SVB analysis.

Venture firms are adjusting to this cash-rich environment as well. The upper echelon of venture capitalists are stocking their war chests with significant capital to ensure continued participation, even as their portfolio companies raise multiple late-stage rounds.

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The Three Largest Venture Funds Raised Annually as a Percentage of Total Fundraising in That Year

Sequoia Capital: 2018 Fundraising1

UnitedStates

India

China

Global Growth

2

State of the Markets 17

Global Tension Over Tech

Trade Wars Matter, Even for Tech

State of the Markets 18Sources: S&P Capital IQ and SVB analysis.

Technology companies thrive in open markets. Three of the five US tech giants recognize more revenue overseas than in the US. Both sides in the Salesforce.com acquisition of MuleSoft recognize approximately one-third of revenue abroad. Access to global markets is critical to maintain the valuations of innovation companies today.

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AAPL AMZN GOOG MSFT FB CRM MULE

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37% 68% 47% 50% 44% 69% 61%

Select U.S. Tech Company Revenue by Region: 2017

Hemispheres of Influence: Ridesharing Rivals

State of the Markets 19Sources: PitchBook, TechCrunch, Reuters, Bloomberg, The Wall Street Journal and SVB analysis.

Uber and DiDi Chuxing: Valuations, Fundraising and Notable Global Competitions

$16BRaised

$70BValuation

$56B Valuation

$17BRaised

North America

Latin America

China

Southeast Asia

Middle East

Eastern Europe

India

In 2014, with a newly minted $40B valuation, Uber looked set to conquer the world. Then China’s DiDi Chuxing established a network of global partners, contesting Uber’s access to key markets. Since, Uber has sold operations to local rivals in three markets, and the battle rages on elsewhere.

DiDi invested in Lyft’s Series E & F

DiDi invested in, and then acquired, 99

DiDi invested in UAE-based Careem

Uber combined operations with YandexDiDi invested in Estonia’s Taxify

DiDi invested in Ola’s Series F

Uber sold its China operations to DiDi

Uber sold its SE Asia operations to GrabDiDi invested in Grab’s Series E, F & G

Withdrew from Market Investment Acquisition Sale of Operations Partnership

China Focuses Closer to Home

State of the Markets 20Sources: PitchBook and SVB analysis.

U.S. Tech Venture Deals with Participation from a China-Based Investor

Baidu, Alibaba, Tencent and JD.com’sVenture Deal Count by Region

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Investment from China to the United States had slowed well before CFIUS grabbed headlines again in Q1. Certainly this reflects structural changes, such as capital control enforcement, but it’s also a sign of attractive strategic investment opportunities closer to home.

China Eyes Tech Self-Sufficiency

State of the Markets 21Sources: Zero2IPO’s PEdata, The State Council of the People’s Republic of China and SVB analysis.

China has ambitions to become the global leader in several advanced technology areas, each requiring significant investment of capital. Through a combination of government support and domestic enthusiasm, commitments to venture funds topped $50B for the second year in a row.

Key Sectors Outlined in “Made in China 2025”U.S. Venture Fundraising: 2008–2017

China Venture Fundraising — DomesticChina Venture Fundraising — Foreign

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1) New advanced information technology

2) Automated machine tools & robotics

3) Aerospace & aeronautical equipment

4) Maritime equipment & high-tech shipping

5) Modern rail transport equipment

6) New-energy vehicles & equipment

7) Power equipment

8) Agricultural equipment

9) New materials

10) Biopharma & advanced medical products

Likely to compete with US innovation companies

State of the Markets 22

Prepared for a Downturn?

Dry Powder Tops $100B in China and the West

State of the Markets 23Sources: PitchBook, Zero2IPO’s PEdata and SVB analysis.

U.S. & European Venture Dry Powder: 2008–2017 China Venture Dry Powder: 2008–2017

Years of strong fundraising have venture firms well-positioned to support their best portfolio companies. Capital available for investment in fervent China suddenly rivals that of the more established Western world, but would these enormous commitments hold up under stress?

$24B

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2008 2009 2010 2011 2012 2013 2014 2015 2016 20172008 2011 2014 2017 2008 2011 2014 2017

WTI Crude Oil Price: 2008–Q1’18 SoftBank Vision Fund Backers

State of the Markets 24

Sovereign Wealth Flows to Innovation

Select Direct Investments in Tech

Sources: S&P Capital IQ, U.S. Energy Information Administration, Financial Times, PitchBook and SVB analysis.

Saudi Arabia and the United Arab Emirates, representing a combined one-sixth of the world’s oil production, are investing in tech — directly and through the Vision Fund. Other oil-rich nations, like the Nordics, are similarly diversifying. Could sovereign wealth serve as a fourth wave of capital?

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$28B

Mubadala(UAE).

$15B.

Saudi Arabia Public Investment Fund

$45B

SoftBankVision Fund

$93B

2008 2011 2014 2017

$4.6B VentureFebruary 2018

Co-Led w/SoftBank

$110M Series DFebruary 2018

Co-Led Investment

$963M Series DMarch 2018

Co-Led w/Temasek

$5.6B Series GJune 2016

Contributed $3.5B

Cheaper Valuations Led to 2016 Acquisition Spree

State of the Markets 25Sources: PitchBook, TechCrunch, Bloomberg, The Wall Street Journal and SVB analysis.

Run Rate Multiples for BVP Cloud Index and Strategic and Financial Public-to-Private Deals: 2015–Q1’18

When public multiples tumbled in early 2016, both financial and strategic buyers pounced. More than a dozen public-to-private acquisitions occurred before year-end, setting a floor for valuations and restoring investor confidence in the space that carried through 2017 and into 2018.

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14 SaaS Acquisitions in 9 Months

2015 2016 2017 Q1’18

BVP Cloud Index (Median)Strategic AcquisitionsFinancial Acquisitions

MuleSoft18.6x

Value is in the Eye of the Acquirer

State of the Markets 26

Notes: 1) These deals are highlighted on the Slide 25 in orange. 2) Most recent quarter’s growth compared to year prior as ofacquisition date. 3) Earnings Before Interest, Taxes, Depreciation and Amortization over the last twelve months as of acquisition date. 4) Implied enterprise value of transaction relative to most recent quarter’s revenue multiplied by 4. Sources: S&P Capital IQ and SVB analysis.

The deals closed following the last (short-lived) downturn are indicative of acquirers’ preferences. Corporates were willing to pay up for higher growth and strategic value. Private equity preferred companies closer to profitability and relatively lower revenue multiples.

Select Metrics for U.S. Tech Public-to-Private Acquisition Targets (Middle 50%): April–December 20161

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Run Rate Multiple4EBITDA Margin3 Transaction ValueRevenue Growth2

State of the Markets 27

Appendix

State of the Markets 28

Report Authors

Steven Pipp, CFAResearch Managerspipp@svb.com

Bob BleeHead of Corporate Financebblee@svb.com

Bob Blee heads SVB’s Corporate Finance Group, which provides commercial banking, lending and guidance to late-stage corporate technology clients throughout the United States.

Previously, Bob held a variety of roles in SVB’s California and Midwest geographies, most recently heading seed, early and mid-stage Infrastructure, Hardware, Consumer Internet and Fintech banking in the Bay Area and Southern California, as well as SVB’s national Mezzanine Lending practice.

Bob sits on the nonprofit board of the Network for Teaching Entrepreneurship (NFTE) and the Silicon Valley Advisory Council of the Commonwealth Club. He is also active with his alma mater, the University of Illinois.

Steven Pipp is a Research Manager based in San Francisco, CA, responsible for capital markets research and data-driven analysis of the innovation economies that SVB serves globally.

Prior to his research role, Steven managed advisory and valuation engagements for venture-backed technology companies as part of SVB Analytics. Before joining SVB, Steven worked in Minneapolis, MN, as a consultant and entrepreneur in clean energy technology.

Steven earned a Master of Science in Finance from Boston College and a Bachelor of Science Business from the University of Minnesota. In addition, he holds the Chartered Financial Analyst (CFA) designation.

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