Global Internet Users (Millions) 1999 Is vc still a thing final

!1 Mark Suster @msuster Chang Xu @_changxu Is VC Still A Thing? Image Credit: Freepik

!2 Last year, the discussion was how ICOs were going to wipe out VC. Image Credit: Pexels

3 And we know some founders eschew venture capital. Image Credit: Pexels

4 Some fear that SoftBank, Sequoia and sovereign wealth funds may eat VCs alive. Image Credit: Pexels

Let’s take a closer look at what’s actually happening. !5 Image Credit: Pexels

6 We all know that startup funding is up massively… …and VC funds are raising signiﬁcantly more capital. 2006 2008 2010 2012 2014 2016 2018 $131B $83B $29B 2006 2008 2010 2012 2014 2016 2018 $55B $34B $34B Source: Pitchbook NVCA Venture Monitor 4Q’18

Some LPs express concerns about valuation creep or too much capital. !7

But let’s peel back the onion to see what’s really happening. 8 Image Credit: Freepik

9 The number of Pre-Seed deals (<$1M) backed by VCs skyrocketed (600%) but has cooled off by 1/3rd over the past three years. 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 US VC Number of Deals under $1M 3,374 488 3,543 2,144 Source: Pitchbook NVCA Venture Monitor 4Q’18 >600% Cooled off by >1/3

10 The exact same phenomenon happened in the Seed market ($1-5M). 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 US VC Number of $1-5M Deals 3,315 1,036 3,104 2,699 Source: Pitchbook NVCA Venture Monitor 4Q’18 >300% Down ~20%

11 And the number of Micro Funds raised has followed in lock step. 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 # Funds and Capital Raised ($) for <$100M Funds 181 83 181 129 Source: Pitchbook NVCA Venture Monitor 4Q’18 2.2x Down 30%

What is going on at the seed stage? !12 Image Credit: Pexels

13 For one thing, traditional Series A venture capital hasn’t meaningfully increased investment pace over the past decade. US VC Number of $5-10M Deals 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 1,118 687 Source: Pitchbook NVCA Venture Monitor 4Q’18 4% CAGR

14 Series B deal volume also has been fairly constant over the past decade. US VC Number of $10-25M Deals 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018* 1,103 643 Source: Pitchbook NVCA Venture Monitor 4Q’18 5% CAGR

15 As a result, we see a rise in the “Seed Extension” deals feeding into the Series A pipeline and companies staying in seed phase for longer. Source: Cendana Capital portfolio company data (with permission) Time to Series A Pre-2012 2012 2013 2014 2015 2016 2017 2018 0.9 1.2 0.8 1.1 1.2 1.2 1.4 1.6 Number of Seed Extension Rounds Pre-2012 2012 2013 2014 2015 2016 2017 2018 69 45 52 39 28 1189 Median years from Series Seed to A

16 The Series A and B part of the market is very similar to how it was 15 years ago— except with a 3x bigger top end of the funnel. Series A funds Series A funds THEN NOW Angel / Seed Angel / pre-seed Seed funds Source: Upfront analysis Series B funds Series B funds Bottom end of the funnel haven’t changed much Top end of the funnel is now 3x larger

17 While it’s true that there has been valuation creep for Series A and B… US VC Median Pre-Money Valuation ($M) by Year $0M $15M $30M $45M $60M 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018* Series A Series B Source: Pitchbook NVCA Venture Monitor 4Q’18

18 …part of fund size increases has been about maintaining ownership levels. US VC Series A Round Median Ownership 0% 10% 20% 30% 40% 1990s 2014 2015 2016 2017 2018 25% 25% 26% 28% 29% Methodology: For 2014-2018, divided Median Deal Size by Median Post-Money Valuation for Series A deals Source: Pitchbook data for 2014-2018, Upfront analysis 35%+

!19 For the best VC funds, the upside case has never been bigger. Let’s zoom out and I’ll explain. Image Credit: Pexels

20 We all know that capital going to startups has increased signiﬁcantly in the past ﬁve years (by 300%). US VC Capital Invested by Deal Size ($B) 2013 2014 2015 2016 2017 2018 $131B $83B$77B$83B $71B $48B Source: Pitchbook NVCA Venture Monitor 4Q’18

21 Most of this capital increase, though, falls into three buckets that can be called “mega-rounds.” Source: Pitchbook NVCA Venture Monitor 4Q’18, Upfront analysis $20B Total $40B Total $21B Total $61B in deals over $100M $81B in deals over $50M$50- 100M $100M -1B $1B+ US VC Capital Invested by Deal Size in 2018 ($B)

22 What really happened is that the IPO window was pushed out 5+ years for the best companies and the dollars have shifted from public to private. Old IPO 6-8 years New IPO 10-12 years $50M $2B++ $RaisedPriortoIPO

23 Source: Pitchbook 3 $7M $23M $9M $60M 5 6 $35M $100M $65M $355M VC $ Raised Prior to IPO Last Private Market Valuation Number of Years Private In the past, the best companies IPO’d in 6-7 years from inception. As a result the value captured was all in the public markets. Companies Founded Before 2000

24 119 10 $1.7B $10B $4.9B $15B $4.4B $31B $19.9B $72B 12 $1.2B $7B $370M $1.5B Note: Due to limited data set, included high-proﬁle tech companies that are expected to IPO in 2019 (Uber, Lyft, Airbnb, Slack) Source: Pitchbook VC $ Raised Prior to IPO Last Private Market Valuation Number of Years Private But now the goalposts have moved and the best companies are staying private twice as long. This is a massive opportunity for venture ﬁrms that have ownership and pro rata rights. Companies Founded Since 2006

25 Source: Yahoo Finance If Amazon, Google and Salesforce had each stayed private for 12 years, an additional $197 billion in value creation could have occurred pre-IPO. $0B $207.5B $415B $622.5B $830B -2 -1 +1 +2 +3 +4 +5 +6 +7 +8 +9 +10 +11 +12 +13 +14 +15 +16 +17 +18 +19 +20 $0B $207.5B $415B $622.5B $830B -5 -4 -3 -2 -1 +1 +2 +3 +4 +5 +6 +7 +8 +9 +10 +11 +12 +13 $0B $207.5B $415B $622.5B $830B -4 -3 -2 -1 +1 +2 +3 +4 +5 +6 +7 +8 +9 +10 +11 +12 +13 $708B $102B $829B Year 12 $18B Year 12 $162B Year 12 $17B FOUNDED IPO IPOFOUNDED FOUNDED IPO 1999 2004 2004 1998 1994 1997 2018 2018 2018 Market Cap Appreciation – IPO to 12 Years Post-Inception

26 Here is the “private IPO” phenomenon in numbers. Source: Pitchbook NVCA Venture Monitor 4Q’18 0 50 100 150 200 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 IPOs Mega-rounds ($100M+ ﬁnancings) Total Mega-Round Count 198 104 79 109 125 85 58 43 79 82

27 54 new companies raised at more than $1 billion valuation. Number of Unicorn Births 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 3 4 4 9 11 12 42 43 22 34 54 Source: Pitchbook Unicorn Report 2018, Pitchbook analysis

28 Just ﬁve years ago, $100M+ rounds accounted for just 13% of ﬁnancings as opposed to 47% in 2018. Traditional Venture Capital has only grown 14% per year. Source: Pitchbook NVCA Venture Monitor 4Q’18 US VC Capital Invested by Deal Size ($B) 2013 2014 2015 2016 2017 2018 70 41 $48B $131B GROWTH Mega-rounds ≥$100M 6 61 VENTURE <$100M rounds 14% CAGR 60% CAGR

29 The private IPO trend seems to have gathered steam in 2014. 2008 2009 2010 2011 2012 2013 20 14 25 46 28 36 2014 2015 2016 2017 2018 82 109 79 104 198 Source: Pitchbook NVCA Venture Monitor 4Q’18 US Mega-Round ($100M+) Financings by Year

30 So in reality it seems the private capital market is now three fairly distinct categories. Venture Capital Scale or Bust Private IPOs Growth Capital The Start Seed Capital 20% of deals drive 80% of returns

31 So while time-to-liquidity for VCs has been pushed out, the best VCs (and LPs) are compensated by capturing more of the upside. Pro rata rights have become much more valuable in the best deals. Series A 20% Seed 10% Which is why many stage funds have set up companion funds to defend their ownership through exit Growth Funds Opportunity Funds SPVs Target Ownership @ Exit Structural Changes to Defend Ownership Through Exit

So no, Venture Capital is not dead. Here are some thoughts on why the next decade should see even more upside. !32 Image Credit: Freepik

Global Internet Users (Millions) 1999 2013 2018 4,200 2,800 250 33 In 1999, the US VC industry raised $53 billion for a nascent Internet population. 20 years later, we have 77% of US and 56% of the world online with $55 billion raised. Source: World Bank; Internet World Stats; Pitchbook; Industry Ventures US Internet Users (Millions) 1999 2013 2018 250 230 100

34 Connection speeds in 2018 is a whopping 400 times faster than that in 1999. Source: Akamai’s State of the Internet, Statista 1999 2014 United States (Avg Speed, Mbps) 2017 50 Kbps 11.1 18.7 Dial Up

35 Nearly everybody now has a computer in their pocket. Source: Newzoo, GSMA Global 27% 56%United States 66% 72% 1999 2013 2017 N/A N/A Smartphone Penetration

36 Because we’re all connected—when concepts work, they scale much faster and become much more dominant than at any point in human history. Source: Upfront analysis Monthly Active Users (Millions) 0 500 1,000 1,500 2,000 2,500 1999 2013 2018 2,271 1,189 0 1,057 2360 3262180 1,000 1300 186330 Not in existence 130 33 186

37 And with everybody’s credit cards or banks now connected to tech platforms, we’ve eliminated most purchase friction. We’re one tap away from buying online. *Amazon user data is estimated as straight line from IPO (1997) to 2018 reported values Source: Upfront Analysis, PayPal, Loup Ventures, BigCommerce Total Active Users (Millions) 175 350 525 700 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 *

Most industry analysts haven't even begun to comprehend what an enormous shift 5G speeds will bring. We anticipate enormous creative destruction and company creation. !38 Note: Represented AT&T’s average 3G and 4G download speed. 5G networks have the potential to be signiﬁcantly faster but data is only available from simulated environments Source: RootMetrics, Wikipedia, Upfront analysis 3G 4G 5G 2G <1 Mbps 4 Mbps 25 Mbps ?

!39 What does this all mean? Image Credit: Pexels

!40 Traditional Seed & VC more valuable than ever.  Value has shifted from publics to privates but skills in VC vs. Growth remain distinct.  We are all now broadband, mobile, social & 1-click to buy. The pace of technology & networks will continue to create enormous new opportunities. Image Credit: Pexels

!41 Mark Suster @msuster Chang Xu @_changxu So yeah, VC Is Still A Thing Image Credit: Freepik