Upfront LP Survey of the Venture Capital & Startup Industry

LP Survey Results January 2017

1

Mark Suster, @msusterChang Xu, @_changxu

LPs continue to be optimistic about the venture capital asset class

2

3

The mood of LPs over the past 5 years has gotten consistently more optimistic about venture capital off of a low period from 2009-2012.

Source: Upfront Ventures survey of LPs (N=82 and N=73, respectively), Jan 2017, Jan 2016

2016 2017

4%4%

28%22%

58%67%

11%7%

Right allocation

Too much

Aggressively grow

Trying to grow

Q. How would you describe your fund’s current allocation to VC?

4

We have seen a steady recognition over the past 5 years by LPs that there is a need to find new managers to drive alpha in addition to established firms.

2016 2017

3%2%

43%39%

36%40%

16%19%3% Too many

Looking to add

Aggressively add

Cutting back, may add 1-2

Happy with roster

Q. How would you describe your fund’s current outlook on VC managers?


5

Perhaps the biggest shift we’ve seen is the increasing focus on LPs in co-investments and in fact some LPs now specialize in this.

2016 2017

1%1%

29%17%

18%

20%

38%45%

13%16%

Q. How would you describe your fund’s position on direct investments?

Only reason we fund VCs

Some, opportunistic

Starting to do more

Never

Very important


6

LPs believe that a large correlating factor driving our industry is large pools of capital chasing higher yields due to low interest rates affecting other asset classes.

Low interest rate environment

Late-stage VC funds raising larger funds

Many new VC funds

Increases in corporate VC arms

Mutual funds and hedge funds

Increases in Sovereign Wealth Funds

Increases in Chinese money

Increases in LPs making direct investments 21%

23%

28%

41%

41%

59%

66%

77%

Note: Survey asked respondents to rate each item on a scale of 1-5. Above chart indicates percent of respondents that rated 4 (relevant) or 5 (most relevant). Source: Upfront Ventures survey of LPs (N=82), Jan 2017

Q. In 2016 many investors warned “Winter is Coming” referring to a slowdown in venture markets. That slowdown happened but was very short lived. Which of the following are relevant in influencing why “Winter was Mild”?

7

LPs expect to continue to fund the venture industry at a relatively stable pace over the next 3 years, which should mean consistent capital available for entrepreneurs.


2016 2017

12%8%

79%82%

9%10%

Q. How would you describe your likely investment pace in venture over the next 3 years?

Increase pace

Keep pace

Slow down pace

LPs do believe VCs need to slow down our pace

8

9

LPs have noticed the “valuation creep” in venture-backed companies and have some concerns about burn rates and financial discipline.


2016 2017

26%26%

71%68%

3%6%

Q. How would you describe your fund’s outlook on your existing (VC) managers activities?

Very happy

Deeply concerned

A bit concerned by pace, valuation creep and burn rates

10

VCs have been shortening the cycles in which they raising money from LPs, which also has LPs a bit concerned.


2016 2017

24%24%

11%15%

66%61%

Q. How would you describe your fund’s outlook on your existing (VC) managers funding (and fundraising) pace?

More quickly; it concerns us

Normal cadence

More quickly; we’re fine with it

LPs expressed that they are discerning about which VC managers they fund

11

12

Compared with a year ago there are far fewer bears amongst LPs - likely driven by a sense that the industry has gotten through its short-lived tough patch.

2016 2017

6%1%

76%70%

17%29%

1%

Q. How would you describe your current views on venture capital overall?

Bearish

Haven’t changed

Too much capital

More bullish


13

And most LPs we’ve spoken with over the past 5 years have now acknowledge that the seed stage of the venture market is here to stay.


2016 2017

7%11%

75%66%

18%23%

Q. How would you describe your fund’s outlook on the seed market?

Fund, but discerning

Invest heavily

Over-done

14

Traditional A/B round venture capital is still the most favored part of the venture industry but LPs acknowledge they need a healthy mix of seed, A/B & growth.


2016 2017

30%32%

57%51%

14%16%

Q. How would you describe your fund’s outlook on traditional Series A/B venture capital?

Best fit

Being squeezed

Want a healthy mix

15

LP dollars still go disproportionally to large funds that end up doing later stage investing but this is also the stage of the market they are most concerned about.


2016 2017

1%

38%32%

60%68%

Q. How would you describe your fund’s outlook on later stage venture capital / growth equity?

Want a healthy mix

Over-valued

Bullish

How did LPs feel about Trump — before the

inauguration?

(of course we had to ask)

16

17

Prior to the inauguration LPs didn’t seem overly concerned about the economic & political environment.

LPs 10%32%32%24%1%

Very bullish Optimistic Neutral Somewhat concerned Very concerned

Q. Overall, looking at the current economic & political environment globally I would say I am

Source: Upfront Ventures survey of LPs (N=82), Jan 2017

18

But on point issues LPs did express concern about areas that may affect underlying investment opportunities.

China relations Surveillance / Immigration Offshore development

1%6%7%

25%9%

31%

48%16%

15%

60%30%43%

68%

3%14%16%8%

Very concernedWorriedNo impactGoodVery positive

Q. Do you believe a Trump Presidency could have an impact on the following areas?

/ manufacturing cyber security


19

LPs seem concerned about Trump’s impact on social issues with 1/3rd “concerned or deeply worried”

LPs 15%19%35%30%1%

Right direction No impact Discourage from entering tech Concerned Deeply worried

Q. How will a Trump presidency impact startup companies and tech company employment & social policies including ethnic diversity, immigration, religious tolerance, gender equality and transgender rights?


20

The majority of LPs we surveyed were clearly anti-Trump.

Q. How do you personally feel about a Trump presidency?


LPs 11%40%20%29%

Right leader Fine, too much drama Dislike, but irrelevant Anti-Trump Deeply offended

21

However, most LPs didn’t think the Trump presidency will have a major impact venture capital.

LPs 15%69%12%4%

Very beneficial No impact Uncertainty but limited impact Concerned

Q. Considering all these issues (offshore development, H1-B, M&A, surveillance, China relations / manufacturing, etc.), how will a Trump presidency impact venture capital?


Appendix Annual Upfront LP Survey Participants

82 respondents in January 2017 73 respondents in January 2016

22

2017 LP respondent demographics (I)

23

Fund type

0

10

20

30

9

25

12

34

20

Fund size

0

10

20

$0-250M $250-750M $750M-1.5B $1.5-5B $5-10B $10B+ N/A

5

18

7

13

7

1516

Which of the following best describes your focus on VC?

0

20

40

Only VC Mostly VC Very diverse Not much VC

3

302524

Foundation or Endowment

Fund of Funds

Family Office

Discretionary Advisor

Insurance Company

Other

Survey respondent geography

0

15

30

SF/Bay Area Greater LA NY Boston Other US ROW

7

28

2

13

4

25


2017 LP respondent demographics (II)

24

Position

0

20

40

60

Partner / MD Analyst to Principal

21

60How long has your firm been investing in VC (years)

0

20

40

0-3 3-10 10-20 20+

2

33

26

15

4

How long has your firm existed (years)

0

20

40

0-3 3-10 10-20 20+

44

27

8

1

Personal investment experience (years)

0

20

40

0-3 3-6 6-10 10-15 15+

3028

14

72

Haven’t invested much in VC


2016 LP respondent demographics (I)

25

Fund type

0

10

20

30

9

445

23

28

Fund size

0

10

20

$0-250M $250-750M $750M-1.5B $1.5-5B $5-10B $10B+ Blank

4

16

7

18

3

11

14

Which of the following best describes your focus on VC?

0

25

50

Only VC Mostly VC Very diverse Not much VC

2

42

10

19

Foundation or Endowment

Fund of Funds

Family Office

Discretionary Advisor

Insurance Company

Other

Survey respondent geography

0

15

30

NorCal SoCal NE US Other US ROW Blank

24

28

11

6

22


2016 LP respondent demographics (II)

26

Position

0

20

40

60

Partner / MD Analyst to Principal Blank

1

18

54

How long has your firm been investing in VC (years)

0

20

40

0-3 3-10 10-20 20+

1

23

30

16

3

How long has your firm existed (years)

0

20

40

0-3 3-10 10-20 20+

38

1614

5

Personal investment experience (years)

0

20

40

0-3 3-6 6-10 10-15 15+

2723

15

44

Haven’t invested much in VC


Upfront LP Survey of the Venture Capital & Startup Industry

Internet

Transcript of Upfront LP Survey of the Venture Capital & Startup Industry