1303-1048256 PGH VC Report v10.indd - Innovation Works

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Optimizing Opportunities Investment in Pittsburgh’s technology sector Trends and highlights, 2008—2012

Growing capital, growing companies On behalf of Ernst & Young and Innovation Works, we are pleased to present this review of investment trends and highlights in the Pittsburgh region’s growing technology sector. In this report, we’ve taken a look at the past five years and the variety of sources of capital supporting our region’s growing base of technology companies – including venture capital firms (VCs), angel investors (angels), corporate/ strategic investors, seed funds, accelerators and other sources of funding.

217 companies $1.3 billion Total investment, 2008—2012

Last year showed positive momentum for technology companies in the Pittsburgh region. Despite a national slowdown in both the number of investment deals and amount of funding, the Pittsburgh region saw a marked increase in the number of companies raising capital, and the overall amount of funding obtained by these companies increased slightly from 2011. Software companies, including consumer and enterprise software, garnered the largest share of venture capital in our region in 2012, followed by medical devices, energy technology and health care IT. The diversity of these sectors speaks to the broad base of technical talent in the Pittsburgh region, as well as to the varied strengths of our region’s universities. As Pittsburgh’s technology sector continues to grow and evolve, we hope that the recent trends in venture funding will continue in a positive direction. We encourage you to explore this report, and we hope that it will provide useful insights into the current state of the tech community and venture capital ecosystem in Pittsburgh.

Lynette Horrell Managing Partner, Ernst & Young LLP

Rich Lunak CEO, Innovation Works, Inc.

Investment in Pittsburgh’s technology sector | Trends and highlights

Overview During the five-year period of 2008—2012, 217 technology companies in the Pittsburgh region attracted a total of more than $1.3 billion in investment from venture capital firms, angel investors, strategic investors, accelerators, seed funds and other sources. Last year saw a 54% increase in the number of fundraising rounds, but the aggregate amount of investment obtained by these companies increased only slightly compared to 2011. Prior to 2012, Pittsburgh experienced increases in the amount of technology company investment during 2010 and 2011. The 2009 recession brought a decline in the amount of funding, while holding steady the number of companies that were able to obtain funds.

In 2012, more than

$329 million was invested in Pittsburgh technology companies by VCs, angels, seed funds and other sources.

As shown in the charts below, Pittsburgh’s investment performance during 2012 was more positive than the national trends, which saw both the amount of funding and the number of deals decrease in the US as a whole.

Continued growth in Pittsburgh company investment compares favorably to national trends. US venture financing

Pittsburgh technology company financing

Annual investment amount and number of deals 2008—2012

From all sources 2008—2012 190

3,505

3,363

3 116 3,116

3,049 2,759

126

123

113 85

$230.8

$159.1

$261.4

$326.9

$329.1

$33,100

$24,300

$29,300

$35,100

$29,700

2008

2009

2010

2011

2012

2008

2009

2010

2011

2012

Amount invested ($ million)

Number of deals

Amount invested ($ million)

April 2013

Number of deals

1

Sector diversity, with strengths in software and medical devices The Pittsburgh region is not characterized by a single area of technical strength, but rather a diversity of sectors in which regional companies are developing innovative products. The region benefits from its highly educated workforce across multiple engineering disciplines – from computer science to electrical, biomedical, environmental and materials. Among the 217 companies that attracted funding during the 2008-12 period, the largest number came from the software and information technology sector – including enterprise and consumer software, electronics, robotics, telecom and IT infrastructure. The second-largest sector was the combined life sciences/health care sectors – including medical devices, health care IT, biotechnology/drug development and health care services. Among life sciences companies, medical device firms experienced the most success in attracting funding. According to Dow Jones VentureSource, software/IT and life sciences/health care were likewise the top two sectors receiving funding nationally in 2012. Pittsburgh’s concentration in both sectors was higher than the US as a whole. Taken together, companies in the software/IT segments accounted for 57% of all companies attracting venture investment in Pittsburgh, versus 32% in the US. Pittsburgh’s life sciences/health care sectors accounted for 29% of all funded companies, versus 23% nationally.

Pittsburgh companies receiving funding, by tech sector 2008—2012

Enterprise software 24%

Consumer products 2%

Consumer software 22%

Electronics 5% Advanced materials 4% Energy 8%

Health care services 1%

2

Robotics 3% Telecom 2% Medical device 14%

IT infrastructure 1%

Biotechnology 7% Health care IT 7%

Investment in Pittsburgh’s technology sector | Trends and highlights

Pittsburgh Number of investment rounds by stage of company development

3

Increased number of rounds for companies at all stages

90 2

2

1

2

42

59

70

65

71

31 98 52

2008

2009

50

2010 Pre-revenue

2011

Generating revenue

2012

Profitable

Funding for Pittsburgh companies, by type of investor ($ million)

$5.7 $30.6

$4.8 $21.4

$5.3 $16.2

$6.4

In 2012, Pittsburgh experienced a dramatic increase in the number of very early stage companies attracting funding, with the number of “pre-revenue” companies nearly doubling from 2011. The number of revenue-generating companies that attracted funding also increased, growing by approximately 27% in 2012.

$52.7

$79.3

VCs provide the majority of funds, but lead a minority of rounds

$27.7

$24 3 $24.3

$6.3

$47.5

$28.8 $237.9 $27.7

$212.2

$223.7

$152.7 $96.3

2008

2009 VC

Angels

2010 Corporate and other

2011

2012

Seed funds and accelerators

Number of investment rounds, by type of investor 2008—2012

48

26

42 50 16

Of the capital invested in Pittsburgh’s technology sector during the five-year period of 2008—2012, nearly threequarters of the funding came from venture capital firms. The second-largest share of funding was provided by angels, followed by corporate investors and finally seed funds and accelerators.

While the total amount of capital provided by venture capital firms was large, such firms accounted for only a minority of the number of deals in Pittsburgh. Instead, nearly two-thirds of all Pittsburgh regional tech company financings consisted of smaller rounds featuring angels or seed funds/accelerators as the lead investor.

36

12

76

37 11 40

2 21

30

25

22

2008

2009 VC

Angels

28 2010 Corporate and other

43

32

2011

40

2012

Seed funds and accelerators

April 2013

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Limited supply of indigenous venture capital The chart below estimates the annual supply of uncommitted funds at venture capital firms based in Pittsburgh. This analysis considers the timing of new fund closings by VC firms in the Pittsburgh region, and assumes that a firm will commit 25% of a new fund’s capital during each of the first four years post-closing. Furthermore, if a fund is managed by partners who are located outside of the Pittsburgh region, the total amount of the fund’s capital that is “located” in Pittsburgh is determined by applying the percentage of the fund’s partners who work in the region. According to this analysis, during the past decade, Pittsburgh’s supply of indigenous venture capital decreased from 2007 to 2011. In recent years, however, several smaller funds have been launched, with the largest being a $40 million fund in 2012. These new funds enabled the total available capital in 2012 to increase to approximately $29.3 million, thereby reversing the downward trend of the prior years. While 2012’s increase in available capital is a positive sign, it may still represent a relatively modest source of financing relative to the region’s growing supply of technology companies. By comparison, Pittsburgh’s total pool of available capital in 2012 ($29.3 million) would equal only 23% of the average size of a single venture capital fund in the United States ($149 million in 2010, as reported by the National Venture Capital Association).

Supply of Pittsburgh-based venture capital Estimate of uncommitted capital at VC firms Pittsburgh-based g ($ million)

$136.6 $120.5

$87.7

$81.1

$70.0 $48.3

$45.6

$29.3 $18.0 $7.1 2003

4

2004

2005

2006

2007

2008

2009

2010

Investment in Pittsburgh’s technology sector | Trends and highlights

2011

2012

Technology company exits on the rise Consistent with national trends, M&A activity in Pittsburgh’s tech sector began to increase in 2010 and saw continued growth in the number and size of deals during 2011 and 2012. Of the 28 Pittsburgh tech company exit transactions tracked during this period, several are believed to have been in the $95+ million range. These included the acquisitions of Vocollect ($190 million), M*Modal ($130 million) and Carnegie Learning ($97 million), plus other deals with undisclosed valuations.

28 companies $2+ billion Total value (Disclosed and undisclosed)

Whereas many of the larger transactions were completed by companies that were more than 10 years old, several Pittsburgh-born tech companies were acquired prior to their third birthdays at valuations of up to $40 million, after having raised only a modest amount of outside capital. In addition, during 2011—12, two publicly traded tech companies with Pittsburgh roots were taken private via acquisitions by private equity firms. These included the 2011 acquisition of Tollgrade Communications ($137 million) and the 2012 acquisition of M*Modal (a $1.1 billion acquisition of the combined entity that resulted from M*Modal’s 2011 acquisition).

Representative deals Vocollect

Vivisimo

Carnegie Learning

Inmedius

acquired by

acquired by

acquired by

acquired by

Intermec

IBM

Apollo Group

Boeing

2011

2012

2012

2012

BlueBelt

BlackLocus

Allpoint Systems

Invivodata

acquired by

acquired by

acquired by

acquired by

HealthpointCapital

The Home Depot

Autodesk

ERT

2011

2012

2012

2012

April 2013

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Firms making investments in Pittsburgh companies, 2008—2012

Pittsburgh region Adams Capital Management Alphalab Birchmere Ventures BlueTree Allied Angels Bradford Capital Partners Draper Triangle Ventures Eagle Ventures Idea Foundry iNetworks Advisors Innovation Works Meakem Becker Venture Capital Newlin Investment Company Pittsburgh Equity Partners Pittsburgh Life Sciences Greenhouse Smithfield Trust Stonewood Capital Management

California and Western region Accel Partners CrunchFund El Dorado Ventures ePlanet Capital Floodgate Foundation Capital Harrison Metal Capital Health Evolution Partners Horizon Ventures InCube Ventures Kern Whelan Capital Kleiner Perkins Caufield & Byers Lightspeed Venture Partners Lovell Minnick Partners

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Menlo Ventures Norwest Venture Partners ONSET Ventures Pacific Venture Group Prescient Capital Rincon Venture Partners Sand Hill Angels Sequoia Capital Silicon Valley Bank Silverton Partners Tech Coast Angels Tenaya Capital Trident Capital TriplePoint Capital

Investment in Pittsburgh’s technology sector | Trends and highlights

New England region Advanced Technology Ventures Bain Capital Ventures FourWinds Capital Management GE Healthcare Harbor Light Capital Partners Highland Capital Partners Nexus Medical Partners North Atlantic Capital Corp. Polaris Venture Partners Saturn Management Spectrum Equity Investors Summit Partners

New York region Enhanced Capital Partners ff Venture Capital General Atlantic Golden Seeds ICV Capital Partners Insight Venture Partners Morgan Stanley New York Angels

Northwood Ventures Ogden Capital Radius Ventures Rose Tech Ventures The NPD Group The Vertical Group Union Square Ventures Warburg Pincus

Philadelphia region Comcast Ventures Cross Atlantic Capital Partners Delaware Crossing Investor Group Edison Ventures First Round Capital Innovation Ventures Mid-Atlantic Angel Group Fund

NewSpring Capital Novitas Capital Originate Ventures Osage Partners Quaker Partners Robin Hood Ventures

Midwest

Baltimore/Washington, DC region

Arboretum Ventures Ascension Health Ventures Capvest Venture Fund Chrysalis Ventures CID Capital Inc. Hopewell Ventures River Cities Capital Funds Salix Ventures Seneca Partners

ABS Capital Partners Active Angel Investors Columbia Capital LLC Horizon Technology Finance New Atlantic Ventures

April 2013

New Enterprise Associates Oxford Finance Corporation Square1 Bank Virginia Active Angel Network Vital Financial LLC

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2012 Pittsburgh investment highlights The following were among the Pittsburgh companies completing funding rounds in 2012:

4moms

www.4moms.com CEO: Robert Daley Investors: Bain Capital Ventures, Blue Tree Allied Angels, Innovation Works

4moms (Thorley Industries, LLC) has introduced robotics technology to the juvenile industry with its innovative 4moms baby gear products. Products include: mamaRoo® infant seat designed to move the way parents do when comforting their babies; origami® stroller, the world’s first power-folding stroller; breeze™ playard that opens or closes in one easy step; and infant tub and spout cover with built-in digital thermometers to make bath time safe and comfortable.

Aethon, Inc.

www.aethon.com CEO: Aldo Zini Investors: Ascension Health Ventures, Draper Triangle Ventures, Mitsui USA, Radius Ventures, Robert Bosch Venture Capital Group, Salix Ventures, Trident Capital

Aethon improves healthcare efficiency and patient care by providing innovative logistics solutions. Its industry leading mobile robotic platform (TUG) enables hospitals to automate and improve the delivery and retrieval process across all major functions – including medications, supplies, meals, linen, and waste removal. Its product tracking and security software (MedEx) gives hospitals the ability to track, monitor and electronically document the delivery process, particularly for high-value medications and other items requiring consistent chain-of-custody documentation

ALung Technologies, Inc.

www.alung.com CEO: Pete DeComo Investors: Birchmere Ventures, Eagle Ventures, BlueTree Allied Angels, Innovation Works, Pittsburgh Life Sciences Greenhouse, Private Investors

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ALung is commercializing the Hemolung Respiratory Assist System (RAS), a dialysis-like alternative or supplement to mechanical ventilation originally developed at the University of Pittsburgh. The Hemolung RAS removes carbon dioxide and delivers oxygen directly to the blood, allowing the patient’s lungs to rest and heal. A simple extracorporeal circuit, small venous catheter, and techniques similar to hemodialysis make the Hemolung RAS easy to use.

Investment in Pittsburgh’s technology sector | Trends and highlights

Aquion Energy, Inc.

www.aquionenergy.com CEO: Scott Pearson Investors: Advanced Technology Ventures, Kleiner Perkins Caufield & Byers, Foundation Capital

Aquion Energy is fundamentally changing the economics of power generation and distribution by developing and commercializing a safe, reliable, and affordable energy storage solution from nontoxic components as simple as saltwater. Based on the research of Carnegie Mellon University Professor Jay Whitacre, Aquion’s proprietary Aqueous Hybrid Ion (AHI) battery overcomes the pitfalls of conventional energy storage technologies. AHI systems will enhance the electrical grid by providing flexible, emissionsfree capacity that optimizes existing generation assets and enables broad adoption of renewable energy technologies.

Avere Systems

www.averesystems.com CEO: Ron Bianchini Investors: Lightspeed Venture Partners, Menlo Partners, Norwest Venture Partners, Tenaya Capital

Avere is defining a new architecture for data storage that enables customers to achieve unlimited storage performance scaling, locate storage and compute resources where it is most advantageous for the business – all while cutting storage costs by more than half. In a broad range of industries from Media to Financial Services, from Software Development to Oil & Gas, from Life Sciences to Web, Avere customers are using its products to optimize their NAS infrastructure and increase the throughput and scalability of key applications and workflows, resulting in productivity gains that translate to higher revenues and happier customers.

Branding Brand

www.brandingbrand.com CEO: Chris Mason Investors: Insight Venture Partners, CrunchFund

Branding Brand powers mobile commerce sites and apps for over 150 of the world’s leading retailers, including American Eagle Outfitters, Crate & Barrel, Ralph Lauren, and Sephora. Founded in 2008 by three friends from Carnegie Mellon University, the company launched a mobile platform at the end of 2009 to seamlessly extend brands into optimized experiences for smartphones, tablets, and in-store. It is now the largest m-commerce provider to the Internet Retailer Top 500. Partners include eBay and Google.

April 2013

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2012 Pittsburgh investment highlights

CivicScience, Inc.

www.civicscience.com CEO: John Dick Investors: Cox Enterprises, Innovation Works, New Atlantic Ventures

CivicScience polls millions of consumers every week on their favorite websites and social networks. The company’s polls ask users about favorite brands, TV shows, current events, and just about anything else you can think of. CivicScience then helps the world’s leading marketers and other decisionmakers see results in real-time and dive deep into the most important trends. The company makes survey research super-fast, super-easy, and super-smart. CivicScience’s proprietary data mining technology uncovers the most important insights automatically and makes them easy to understand.

Cohera Medical, Inc.

www.coheramedical.com CEO: Patrick Daly Investors: Bradford Capital Partners, Kern Medical LLC, Innovation Works, Pittsburgh Life Sciences Greenhouse

Cohera Medical, Inc is a leading innovator and developer of absorbable surgical adhesives and sealants that improve patient care and quality of life. Cohera has entered the European market with its first product offering, TissuGlu® Surgical Adhesive, which Cohera’s researchers designed to help plastic and aesthetic surgeons to eliminate or reduce fluid accumulation and the need for post-surgical drains in abdominoplasty (tummy tuck) and other large flap surgical procedures. TissuGlu Surgical Adhesive is resorbable, biocompatible for internal use, uses no human or animal based ingredients and forms a strong bond between tissue layers.

Cognition Therapeutics, Inc.

www.cogrx.com CEO: Hank Safferstein Investors: Alzheimer’s Drug Discovery Foundation, Golden Seeds, Innovation Works, OgdenCAP, Pittsburgh Life Sciences Greenhouse, Tech Coast Angels

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Cognition Therapeutics is committed to the discovery of new, disease-modifying therapeutics to improve the lives of those living with Alzheimer’s disease and other neurodegenerative disorders. The company is developing first-in-class small molecule drugs that effectively block the interaction of toxic Abeta proteins with their receptor on brain cells and thus stop memory loss. CogRx’s drugs are the first small molecule Abeta oligomer receptor antagonists ever reported.

Investment in Pittsburgh’s technology sector | Trends and highlights

Complexa, Inc. Complexa, Inc. is a biopharmaceutical company focused on discovering and developing innovative therapies for the treatment inflammatory and metabolic diseases. Though www.complexarx.com strong preclinical proof of concept data exists in several CEO: Joshua Tarnoff disease categories, initial focus is placed on acute and Investors: Scientific Health Development, Innovation Works, chronic kidney disease. The Company’s human pathway Pittsburgh Life Sciences Greenhouse, Upstart, and Individual signaling discoveries have revealed new classes of drug candidates that are based on naturally-occurring nitro-fattyInvestor acids. Complexa’s lead compound CXA-10 is expected to receive IND status and enter into human trials 2013.

ModCloth, Inc.

www.modcloth.com CEO: Eric Koger Investors: Accel Partners, First Round Capital, Floodgate, Harrison Metal, StubHub Founder Jeff Fluhr, Norwest Venture Partners

ModCloth’s mission is to democratize the fashion industry. ModCloth seeks to do so by empowering its community of shoppers through a social commerce platform that brings products to market with customer feedback and validation. Programs like Be the Buyer™ allow customers to vote items from emerging designers into production. In just several years, ModCloth has grown from its humble beginnings in a Carnegie Mellon University dorm room to “America’s Fastest-Growing Retailer.”

NoWait, Inc.

www.nowaitapp.com

NoWait is aiming to become the OpenTable for restaurants that don’t take reservations. The Pittsburgh company, which helps would-be diners find out wait times in advance and get text messages when a table is ready, has seated more than 9.2 million patrons to date.

CEO: Ware Sykes Investors: Birchmere Ventures, Sand Hill Angels, Innovation Works, Alphalab

April 2013

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2012 Pittsburgh investment highlights RedZone Robotics, Inc.

www.redzone.com CEO: Michael Lach Investors: ABF Capital Partners, FourWinds Capital Management, Smithfield Trust, Innovation Works

RedZone Robotics simplifies wastewater management by providing municipal clients with the information and tools necessary to address their most valuable wastewater assets – their sewer pipes. RedZone delivers high performance pipeline inspection products and services for municipalities, contractors and engineering firms across North America.

The Resumator

www.theresumator.com CEO: Don Charlton Investors: Birchmere Ventures, Rincon Venture Partners, ff Venture Capital, Innovation Works, Alphalab

The Resumator is a Pittsburgh-based software company that develops Web 2.0 recruiting software. Featured on TechCrunch, Mashable and CNET, the company’s software empowers growing businesses with fun-to-use recruiting tools they’ve never had, but have always needed. The Resumator helps employers extend the reach of their jobs and makes reviewing resumes very efficient.

Voci Technologies

www.vocitec.com CEO: Anthony Gadient Investors: BlueTree Allied Angels, Innovation Works, Pittsburgh Equity Partners

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Based on 8 years of research conducted at Carnegie Mellon University, Voci’s mission is to enable enterprises to extract intelligence from voice data. Voci’s patented technology provides a unique combination of superior accuracy, lowest operating costs and ability to extract emotional-sentiment from voice data allowing enterprises to obtain business intelligence and hear the tone of their customers in real-time.

Investment in Pittsburgh’s technology sector | Trends and highlights

Methodology The data in this report comes from a combination of the Dow Jones VentureSource database and private company data from Innovation Works, Inc. The investment rounds tracked in these datasets were completed by companies in the Pittsburgh region from January 1, 2008 to December 31, 2012. For the purpose of this report, both equity and convertible note investments were counted as “venture” investment. The geographic boundary of the Pittsburgh region used in this report corresponds to the Pittsburgh Metropolitan Statistical Area, as utilized by the U.S. Census Bureau. Throughout this report, the terms “deal” and “round” are used interchangeably, and refer to a single reported round of funding. Companies may complete more than one fundraising round in a single year, in which case each round is counted as a separate “deal.”

About Ernst & Young

About Innovation Works

Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 167,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

Innovation Works, Inc. (IW) invests capital, business expertise and other resources into high-potential companies with the greatest likelihood for regional economic impact in the Pittsburgh region. IW is the single largest investor in seed-stage companies in this region and is one of the most active seed-stage investors in the United States. Three-quarters of all recent venture-funded companies in the Pittsburgh region had previously received funding from IW. Innovation Works is an initiative of the PA Department of Community and Economic Development and is funded by the Ben Franklin Technology Development Authority.

Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com.

For more information, please visit: www.innovationworks.org

Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US.

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This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither Innovation Works, Inc, Ernst & Young LLP nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor. © 2013 Ernst & Young LLP. © 2013 Innovation Works, Inc. All Rights Reserved. BSC No. 1303-1048256 ED none.