Startup Outlook 2013 Report

Startup Outlook 2013 Report

Key Findings

4

Understanding Startups

10

Business Environment

12

Hiring Talent

16

Public Policy Issues

U.S. Versus U.K. Startups

20 33

Part 1: Overview 1 Executive Summary 4 Key Findings 7 2013 Survey Respondents

Part 2: Detailed Findings 10 12 16 20 20 24 26 28 33

Understanding Startups Business Environment Hiring Talent The Impact of Public Policies on Startups Intellectual Property Protection Tax Reform U.S. Manufacturing Medical Device Tax U.S. Versus U.K. Startups

Startup Outlook Report 2013

Part 1: Overview Executive Summary

When you look at world of high-growth technology startups, there’s a lot to be happy about. Entrepreneurs continue to form companies at a truly remarkable pace. Disruptive transformation is spreading into areas ripe for change: mobility, financial services and education, to name just three. Nine in 10 startups are hiring. Most entrepreneurs continue to believe we’re on an upward trajectory, that 2012 was better than 2011 and that 2013 will be better than 2012. Innovation is at the top of corporate America’s agenda, as evidenced by the broad, deep array of “traditional” corporations that have established venture investing arms or innovation centers. Technology remains the most trusted sector on the planet, according to the 2013 Edelman Trust Barometer.

“The Federal Government needs to be as flexible and lean as a small startup. Learn to pivot and learn to endorse new technology that will stay here in the US.” President/CEO, Healthcare Startup


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“Please find ways to financially support innovation within smaller companies and startups. We are the engine of the economy and need a bit of help to get going and keep going.” COO, Software Startup

“Excess federal regulation and fiscal uncertainty has a chilling effect on the business environment.” CFO, Medical Device Startup

“We are bullish on our company’s growth, however feel the government policies will not help us at all. Further regulations and tax increases will stifle all business, and hurt our customers, who may look for ways to eliminate or reduce our product content.” CFO, Cleantech Startup

“Help find more ways to allow creative minds to explore and finance new ideas beyond the current VC networks.” President/ CEO, Hardware Startup


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Executive Summary (con’t.)

invest in real companies, doing real things. And they

Yet for all of our optimism about the technology sector,

new 2.3 percent tax on the topline revenues of medical

this year’s Startup Outlook again shows that we’re

device companies, including device startups that aren’t

not doing what we need to do to help this important

yet profitable.

need government to avoid misguided policies — like the

part of our economy thrive. Nine in 10 startups plan to hire new employees, but an equal number say it is

We publish the Startup Outlook survey annually to help

challenging to find workers with the skills they need.

give startups a voice. We hope that if people see firsthand

Sixty percent of software executives think business

the opportunities and challenges entrepreneurs face, they

conditions in 2012 were better than 2011, but the number

will recognize the immense potential startups offer to our

who think business conditions were worse doubled

country. We hope they’ll also see how short-sighted or

year-over-year, from six percent to 13 percent. And

seemingly benign policies can hurt the companies we need

the critically important healthcare sector remains

to drive our economy in the coming decade.

challenged, with a majority of healthcare executives believing business conditions in 2012 were the same or

In the end, we think good business decisions and good

worse as 2011 and one in 10 seeing them as much worse.

public policy both come down to a few things. We need to base decisions on facts. We need to embrace the right

Startups don’t want or need a lot of help. Entrepreneurs

kinds of risks. We need to invest in the underpinnings

are remarkably versatile and solutions-oriented. But

of a strong economy, such as infrastructure and basic

they do need a few things from government — like

research and development. And we need to focus on

an education system that teaches students about

creating a better future, not entrenching the status quo.

science, technology, engineering and math (the so-called “STEM” skills); an immigration system that

We hope this year’s Startup Outlook promotes this kind

welcomes people who bring talent and energy to

of forward-looking, fact-based discussion and provides

our economy; an intellectual property system that

new insights to policymakers and business leaders. We

rewards invention, not litigation; and a tax system that

look forward to participating in those discussions and

provides certainty, predictability, and an incentive to

doing what we can to help innovative companies thrive.

Key Findings Understanding Startups: A Few Facts

Startups Remain a Job-Creation Engine … But Can They Find the People They Need?

▶▶ Most startups don’t earn a profit. That’s true even

▶▶ Respondents are even more likely than in past

when they earn significant topline revenues,

years to say they’re hiring, with nearly nine in 10

and even in capital-efficient sectors (like software)

executives say they will hire new employees in 2013.

where the cost to start a company have declined meaningfully in recent years. ▶▶ Twenty-two percent of startups have one or more women on their founding team. ▶▶ Forty-six percent of startups have one or more foreign born persons on their founding team.

▶▶ Most executives are looking for workers with STEM (Science, Technology, Engineering, and Math) skills. Hardware executives are the most focused on workers with STEM skills. ▶▶ But finding the right workers will be a real challenge. Nine in 10 executives say it is hard to find workers with the skills needed to grow their

Tech Economy Continues to Perform as the Economy Stabilizes ▶▶ Startups have performed well in 2012 with 58

businesses. Software and hardware executives face the greatest challenges.

The Impact of Public Policies on Startups

percent of executives saying that they either met or or exceeded revenue targets. ▶▶ This isn’t dampening entrepreneurs’ enthusiasm. Executives are as likely as in previous years to say that current business conditions compared to last year are “better” and that conditions in the coming year will continue to improve. ▶▶ Software executives are more likely than other executives to say business conditions are better than a year ago. But that optimism isn’t universally shared, even within the software sector: year over year, the number of software executives who say business conditions are somewhat worse more than doubled. ▶▶ Healthcare executives are the most downbeat — less likely to say business conditions are better,

In this year’s survey, we dig deeper into a handful of issues that are front and center on the policy landscape: intellectual property protection, federal tax and fiscal policies, U.S. manufacturing, and the new 2.3 percent excise tax on medical device companies’ topline revenues.

Intellectual Property Protection ▶▶ About half of the surveyed executives see IP as a “key strategic asset,” but litigation is a real issue for startups. Nearly one in four respondents faces lawsuits. Healthcare startups are hardest hit, but software companies are the most likely to be sued by non-practicing entities, patent assertion entities, or “patent trolls.”

and more likely to say they are worse.


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▶▶ Overall, about half of all executives say they

U.S. Manufacturing

think IP is an important asset and worth the cost, but views vary dramatically by sector.

▶▶ Just over one in three startups (35 percent)

Two in three hardware, healthcare and

either currently manufacture or plan to start

cleantech executives share this view, while

manufacturing in the next 18 months. And

software executives are much more likely

a great deal of this activity will occur in the

to focus on non-legal means to create their

United States. Eighty percent of respondents

competitive advantage.

say they will do at least some manufacturing in the U.S. When deciding where to locate

Tax Reform ▶▶ When asked which federal tax change would best promote their company’s near-term

manufacturing facilities, the number one factor for startups is the availability of workers with the necessary skills. ▶▶ Manufacturing has the potential to create

success, startups focus first on using the tax

middle class jobs. Approximately two in three

code to provide incentives to invest in startups

of these jobs require some combination of high

(23 percent agree with this).

school education, experience, and training,

▶▶ Helping startups preserve scarce dollars

but not a college diploma.

to invest in their growth (remember, most startups aren’t profitable) comes in second,

Medical Device Tax

with one in five (19 percent) believing a tax credit to offset employment and other taxes would be most beneficial. ▶▶ Fifteen percent of executives ask Congress to “just get it done so we have certainty.” ▶▶ Healthcare, hardware and cleantech executives highlight the importance of R&D, through R&D tax credits and direct government investments in R&D.

▶▶ Eight in 10 executives at medical device startups (82 percent) believe the 2.3 percent revenue tax that went into effect at the beginning of 2013 will affect their company’s long-term growth. ▶▶ Device startups — the vast majority of which are not yet profitable — have a variety of ways they plan to cope with the tax. One in three will try to pass most or all of the increased cost to customers. Nearly as many (28 percent) will focus on expanding overseas instead of in the U.S., while others will cut hiring, R&D, and/or growth.


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U.S. Versus U.K. Startups: Similarities and Differences

▶▶ Directionally, U.K. executives’ views on intellectual property mirror their U.S. peers, although they are less likely to classify IP as a “key strategic

▶▶ For the first time, we included U.K. entrepreneurs in this year’s Startup Outlook survey. ▶▶ Like their U.S. counterparts, U.K. entrepreneurs are performing strongly and are optimistic about future conditions and growth. In fact, U.K. entrepreneurs express greater confidence than their U.S. peers. ▶▶ Two-thirds of U.K. startups reported revenues in 2012 – roughly the same as in the U.S. with 64 percent of revenue-generating startups. ▶▶ However, U.K. revenue generating startups were much more likely to be profitable in 2012 — 46 percent, compared to 27 percent of U.S. startups. ▶▶ Like their U.S. counterparts, nine in 10 U.K. startups are hiring and are primarily looking for workers with STEM (Science, Technology, Engineering, and Math) skills. ▶▶ As in the United States, finding the right workers will be difficult.

asset,” and more likely to describe it as primarily a defensive tool. U.K. entrepreneurs are less likely to face IP disputes and more likely to focus on nonlegal means rather than on IP rights to create a competitive advantage. ▶▶ Nine in 10 (90 percent) of entrepreneurs in this study say the U.K. fundraising environment is challenging. Over half say government initiatives that would help the startup sector are greater access to government grants and funds designed specifically for startups and tax reform. ▶▶ Twenty-six percent of startups in the U.K. survey have women on founding team, similar to the 22 percent for startups in the U.S. survey. ▶▶ Thirty-seven percent of startups in the U.K. survey have foreign born members on founding team, compared to 46 percent for startups in the U.S. survey.

2013 Survey Respondents

Survey Respondents by Industry Segment

Startup Outlook 2013 is Silicon Valley Bank’s fourth

0.6

annual survey of the views of executives at startup

0.5

55%

57%

49% 44%

companies across the United States. We’ve defined

0.4

“startups” as high-growth technology and healthcare

0.3

32%

companies with less than $100 million in revenues

0.2

and fewer than 500 employees.

0.1

2010 29% 27%

2011 2012

22%

2013

17% 14% 12% 7%

6%

7% 7% 8%

0

We retained an independent, third-party market research

Software

Life Science

Hardware

Cleantech

firm, Koski Research, to conduct an online survey on our behalf as in prior years The survey was conducted from December 4 through December 20, 2012.

As in previous years, we received the largest number of responses from software company executives. In order

We received responses from 758 executives of U.S.

to provide more meaningful insights into this segment,

based, high growth technology and healthcare

in this year’s survey we distinguished between two

startups — approximately three times as many

types of software companies: consumer internet

responses as in the 2012 survey. Eighty-seven

companies and enterprise software companies. Of

percent were C-level executives, with 81 percent

the 433 software executives who responded to the

either CEOs or CFOs. The responses by sector were

survey, 158 (36 percent) were from consumer internet

as follows:

companies and 274 (64 percent) were from enterprise

▶▶ Software: 433 responses

software companies. Due to the small sample size for hardware and cleantech companies, survey responses

▶▶ Healthcare: 220 responses

from these executives are directional and are not

▶▶ Hardware: 50 responses

compared statistically to other groups.

▶▶ Cleantech: 63 response

“We cannot produce more than China but we can innovate more than the rest of the world.” President/CEO, Software Startup


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2013 Survey Respondents (con’t.)

750 startup executives from across the US responded to the Silicon Valley Bank survey

In terms of geography, we received responses from executives in 37 states across the country plus the District of Columbia. Northern California remains the most active region for startups and accounted for 39 percent of all responses, followed by Massachusetts with 11 percent. Southern California, New York, Washington, Texas, Georgia, Colorado, New Jersey, Utah, Florida, Oregon, Pennsylvania, Arizona, Minnesota, Illinois,

States who responded

States who did not respond

Delaware, North Carolina, Nevada, Maryland, Missouri, the District of Columbia, Louisiana, Connecticut, Indiana, Maine, Michigan and Virginia all accounted for

Percentage of Respondents by Region

two or more percent. As in prior years, our focus is on high growth startups, measured both in terms of revenues and number of employees. We saw a notable increase this year in the number of respondents with fewer than 10 employees. This was driven by consumer internet startups, 56 percent of which had fewer than 10 employees.

2% 3%

California Southwest

4% 4%

Southeast Northwest

20%

48%

Northeast Mid Atlantic

7%

Midwest Mountain West

9% 1%

Outside of U.S.

On the revenue front, we saw an increase in the number of companies that are not yet earning revenues — from 29 percent in 2012 to 36 percent in 2013. The year-over-year increase in the number of pre-revenue companies was driven by software companies. Sixteen percent of software respondents in the 2012 survey said they were not yet earning revenues. That number rose to 28 percent in the 2013 survey. By sector, we saw the largest number of pre-revenue companies in the healthcare and cleantech sectors (55 and 42 percent, respectively).


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42%

40%

27%

25%

2010

20% 20% 20% 20% 17% 17% 15%

20% 15%

2011 16%16% 14% 12%

10% 5%

2012 2013

11% 8% 7% 6%

7% 1%

2%2%

0% Fewer than 10

10 to 24

25 to 49

50 to 99 100 to 249 250 or more

Number of Employees (By Industry) 100% 90% 80% 70% 60%

1% 7% 10%

16%

10%

0% 10% 20%

2% 8% 17%

16%

250+ 16%

24%

25% 19%

40% 20%

0% 4% 15%

17%

50% 30%

4%

9%

26%

13%

56% 37%

25%

24% 20%

2011

19%18%

14%

14%

13% 10% 8%

16% 14% 11%

2012 8%7% 6%

2013 5% 3% 1%

Annual Trailing Revenues (By Industry)

10% 14%

36% 29%

100-249 50-99 25-49 10-24

40% 28%

37%

0% Consumer Enterprise Healthcare Hardware Cleantech Internet Software

Fewer than 10

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

2% 4% 12% 5% 11%

1% 7% 13% 11% 15%

0% 2% 9% 6% 10%

2% 12% 14%

16%

8%

0% 6% 6% 8%

$50M or more $25M to less than $50M

19%

$10M to less than $25M

18%


12%

32% 22%

27%


55% 34% 24%

30%

42%

Less than $1M Pre-revenue

Cl ea nt ec h

30%

40% 35% 30% 25% 20% 15% 10% 5% 0%

Ha rd w ar e

35%

34% 34% 33%

Co n In sum te e rn r et En t So erp ftw rise ar e He alt hc ar e

45%

Annual Trailing Revenues

Pr ere ve nu e Le ss th an $1 M $1 M to < $5 M $5 M to