venture capital - EY

Adapting and evolving Global venture capital insights and trends 2014

Contents 01 Executive summary 03 Emerging markets post higher median round size in later rounds and stages 04 Exit environment challenging 08 Later-stage VC investing dominates, but angel participation grows 13 VC prefers industries with a fast route to value 14 Governments playing a crucial role 16 Global VC hotbeds 17 US 18 Europe 19 Israel 20 China 21 India 22 Emerging VC hotbeds to watch

Global venture capital insights and trends 2014 / 3

Welcome 2013 was a turning point for venture capital (VC) investment. As economic conditions improved in many markets, increasing levels of liquidity, coupled with strengthening investor [gfÕ\]f[]Yf\Yegj]hgkalan]]pal]fnajgfe]fl$j]kmdl]\afYkda_`laf[j]Yk]afl`]_dgZYd total of VC investment compared to 2012. However, this report reveals a fascinating range of variation in VC activity in different geographic hotbeds in 2013 that highlights some enduring truths about the VC industry: namely, its ability to constantly adapt and react to changes in market conditions and consistently support the growth of the world’s most dynamic start-up companies and to deliver returns for investors. A number of trends emerged or gained momentum in 2013. Angel investors are becoming egj]ka_faÕ[YflYf\Z]ll]jgj_Yfar]\$]phYf\af_l`]ajhj]k]f[]Yll`]klYjl%mhklY_]YkN;k become more risk averse and shift their attention to later-stage investments. Technology has enabled new mechanisms such as crowdsourcing, which is changing the funding environment at the early seed stages. Corporates looking to fund innovation gaps or to reinvest surplus cash are pioneering new ways to collaborate with fast-growth businesses and with VCs. And governments in many countries are becoming more “switched on” in terms of taking positive steps to create entrepreneurial ecosystems in which venture ÕfYf[][Yfl`jan]& These changes have challenged VC players to change and raise their game. They have become more global in their geographic outlook, more sophisticated in their analysis of opportunities and more innovative in terms of how, where and when to invest. The result has been a trend toward consolidation among those unable to read or respond to the changing environment. It has also seen new funds established in new markets and a greater appetite for investment in rapid-growth markets including Russia, Brazil and Mexico. In this, our 11th annual report on VC, we examine key developments in the industry and analyze the VC hotbeds of the US, Europe, China, Israel and India, as well as some of the markets emerging onto the VC scene. 9keYjc]lk[gflafm]lgaehjgn]af*(),$o]`gh]qgmÕf\làkj]hgjllgZ]YnYdmYZd] source of insight as you adapt to the changing VC environment. Bryan Pearce Global VC Leader, EY

1 / Global venture capital insights and trends 2014

Executive summary A solid year that ended well

The remarkable rebound in Europe, which saw a 19% rise in capital invested and 6% rise in the number of deals, although à_`dq]f[gmjY_af_$oYkfgl]fgm_`lg\jan]ka_faÕ[Yfl movement in the global total. Europe accounts for only 15% of global VC activity.

2013 was a solid year for the global VC industry. Reversing the decline seen in 2012, investment levels rose 2% to MK,0&-ZLàkkge]o`YlÖYlh]j^gjeYf[]eYkckYf exceptional fourth quarter in which investment soared by )(Yf\l`]fmeZ]jg^jgmf\kZq)($j]Ö][laf_aehjgnaf_ economic fundamentals toward the end of the year and paving the way for a stronger 2014.

China, the third largest hotbed in the global VC rankings, had a poor year in which the value of deals fell by US$1.5b, marking the lowest point for the country since 2009. In previous years, China has been a close second to Europe afl]jekgâlk_dgZYdka_faÕ[Yf[]^gjN;Y[lanalq$Zmll`] closure of the domestic stock exchanges during 2013 had a ka_faÕ[YflaehY[lgfl`]k][lgj$Yk;àfY\][daf]\^jge)) of global VC dollars invested in 2012 to 7% in 2013.

European and Israeli rebound fails to [gmfl]jZYdYf[]ÕYlMKYf\;àf]k]\][daf] Stronger signs of growth in the US economy, which account for 68% of global VC activity, came too late in the year to eYc]Yka_faÕ[YflaehY[lgfl`]gn]jYddÕ_mj]k&

?dgZYdYffmYdN;afn]kle]fl*((.%)+ Totals: (Rounds)

4,991

5,805

5,435

4,748

5,349

5,820

5,741

5,753

Totals: (US$b)

42.7

49.7

50.8

35.2

46.4

54.7

47.6

48.5

1.5 1.8

0.9 3.9 0.6 2.5 1.5

1.9 0.7

1.0 2.2

7.6

7.8

6.3

6.5

0.9

5.0 0.8

1.9

6.1 1.9

0.8 2.8 0.9

0.5

1.0

1.8

1.6 1.2

3.5

5.0 1.1

7.3

6.2

0.9

1.7

1.0

7.4

7.1

5.7

31.1

34.3

36.2

33.3 29.3

24.5

2006

2007

2008

United States

2009

Europe

2010

Israel**

Canada

2011

China

32.8

33.1

2012

2013

India

Source: Dow Jones VentureSource, 2014 **All-site Israeli companies


India, fourth in the global VC rankings, saw an increase af\gddYjkafn]kl]\g^)+$j]Ö][laf_kljgf_afl]j]klafalk consumer services sector, although the number of rounds fell back slightly. Israel performed strongly with a US$0.6b rise in the value of investments — 55% up in terms of value and 18% up in terms of the number of rounds. However, with these

economies accounting for just over 7% of the global industry, km[àehjgn]e]flk$oàd]à_`dqka_faÕ[Yflafdg[Ydl]jek$\g little to move the global needle. Canada, which accounts for 2% of global VC activity, also had an extremely strong year, with volumes up 23% and value up 14%.

N;afn]kle]flZqj]_agf*()+ Region

Invested capital (US$b)

Invested rounds

% change (amount invested)

% change (deals)

% of the global VC activity

United States

33.1

3,480

0.9%

-4.6%

68.2%

Europe

7.4

1,395

19.4%

5.7%

15.3%

Canada

1.0

176

14.4%

23.0%

2.1%

China

3.5

314

-30.0%

20.3%

7.2%

India

1.8

222

12.5%

-2.2%

3.7%

Israel**

1.7

166

54.5%

17.7%

3.5%

Total

48.5

5,753

1.9%

0.2%

100%



Emerging markets post higher median round size in later rounds and stages marked in the rapid-growth markets, with China recording the highest median round size in both second and later rounds.

9[jgkkYddeYjc]lk$e]\aYf\]YdnYdm]kafl`]k]]\Yf\Õjkl round classes fell or saw little change compared to 2012 — [gfÕjeaf_l`]_dgZYdhYll]jfl`YlegklN;khj]^]jlgeYc] bigger investments at the second or later investment stage, when companies are perceived to be partially de-risked.

*()+e]\aYf\]Ydkar]Zqjgmf\[dYkk In terms of median deal size by stage of development, China and India were larger than other regions. India was notable at l`]hjgÕlYZd]klY_]oal`Ye]\aYfjgmf\kar]g^MK,-&0eÈ 4.6 times larger than China, which was in second place, and 8.2 times that of the US.

Only the developed markets of the US and Europe made notable investments in businesses at the start-up stage of development in 2013. Europe and Israel were the only regions to record a slight increase in median deal size at the product development stage.

Seed

United States

First round

Europe

10.0 6.7

9.5 6.0

5.3

5.7 3.3

2.5 1.3 4.0 1.6 2.6 1.5

0.5 0.3 0.4 0.1 0.7 0.2

10.0

*()+e]\aYfZqjgmf\[dYkk MKe!

Second round

China

Canada

8.1 10.0

As expected, second and later-stage investment rounds continued to see relatively high median deal sizes across all geographies in 2013. However, this trend was particularly

5.0

Later rounds and development stages dominated by emerging markets

20.0

Companies in China are typically more developed, further along in their life cycle and poised to exit within 18 to 24 months, which increases their valuation and is why their median rounds are higher than in other regions. India had three deals that were worth more than US$200m, which is why they saw a jump in their median deal size.

Later stage

Israel**

India

Start-up

United States

Product development

Europe

45.8 5.6 3.3 10.0 6.2 8.0

4.8 2.0 7.7 2.3 6.4 4.0

2.9 1.5 2.0 1.1 4.5 2.0

0.8 0.3 NS NS NS NS

*()+e]\aYfZqklY_]g^\]n]dghe]fl MKe!

Revenue generation

China

Canada

Profitable

Israel**

India



Exit environment challenging

The exit environment in 2013 was marked by some interesting variations by geographic hotbed. Globally, both the number of, and amount raised from VC-backed initial public offering (IPO) exits decreased in 2013, with 14.6% of VC portfolio companies exiting via IPO, up from 8.9% in 2012. The number of VC-backed mergers and acquisitions (M&A) exits also fell on a global basis. However, median valuations for M&A rose

across all markets, indicating a broadly positive environment going forward. With IPO momentum building through the last quarter of 2013 and into 2014, and many older companies sitting in VC portfolios ready to go public when the time is right, we believe it is likely that 2014 will see a rising VC appetite positioned to take advantage of the improving exit environment globally.

?dgZYdN;%ZY[c]\AHGk*((/%*()+ 214 164

163

114

26.3

108

21.9 58 12.1

16.1 11.0

32 5.5 1.4

2007

2008

2009

2010

Amount raised (US$b)

2011

2012

2013

Number of IPOs

?dgZYdN;%ZY[c]\E9*((/%*()+ 864 899

813

734

698

671

636 398.3

183.6

2007

108.8

102.9

2008

2009

184.1

210.5

2010

2011

Global median deal value ($USm) Source: Dow Jones VentureSource, 2014


162.9

2012

Number of transactions

2013

MKd]Y\kl`]oYqafN;%ZY[c]\AHGk The US continued to be the most active market for venturebacked IPOs in 2013. The number of deals (74) rose nearly 50%, with biopharmaceuticals the leading sector for new listings in terms of both volume and value. However, despite the increase in the number of US venture-backed IPOs, the YegmfljYak]\^]ddZY[cZq*/lgMK0&*Z$Yka_faÕ[Yfl proportion of which was accounted for by Facebook. At US$100.9m, the median amount raised prior to IPO by US businesses in 2013 was the highest since our records Z]_Yfaf*((/$af\a[Ylaf_kljgf_[gfÕ\]f[]afl`]hgl]flaYd of these companies to achieve high valuations at IPO in 2014. Indeed, US companies that did choose to go public have been j]oYj\]\Zqkljgf_j]lmjfk&L`]Yn]jY_]Õjkl\YqÉhghÊ of businesses that listed in 2013 was 29.7% while by mid-February 2014, average returns for IPOs had risen to 69.9%. China saw a 523% rise in the median amount raised prior to IPO and a 77% rise in median pre-IPO valuation to MK+10&.e$kmjhYkkaf_MKd]n]dk^gjl`]Õjkllae]kaf[]

E]\aYflae]^jgeafalaYdN;ÔfYf[af_lgAHG]pal afq]Yjk!

In Europe, the number of venture-backed IPOs held steady compared to the prior year, and the amount raised increased slightly to US$0.6m. The median amount raised prior to IPO increased slightly to US$26.4b, but there was a three-fold increase in median pre-IPO valuations to US$85.6b. The Israeli IPO market performed strongly, with the volume of VC-backed listings restored to 2011 levels and, at US$0.2b, the highest amount raised for Israeli VC-backed companies at IPO since our records began in 2003. India saw a tailing off in the number and value of IPO VC exits, and Canada saw only one VC exit by IPO — which is comparable with activity in 2012 and 2011. Median time to IPO exit was slightly accelerated in the US in *()+lg.&0q]Yjk$ZjgY\dqÖYlaf=mjgh]Yl.&+q]YjkYf\ af;àfYeYjc]\dqmhlg+&1q]Yjk$j]Ö][laf_l`]*()+ market closure.

E]\aYfYegmfljYak]\hjagjlgAHG MKe!

9.2

8.7 7.9

8.0

100.9 7.3

8.1

6.8

2010. These increases are indicative of high levels of [gfÕ\]f[]afl`];àf]k][gehYfa]kl`YlYj]eYlmj] enough to sustain foreign listing requirements.

6.4

6.2

6.4

2.3

6.3

2.6

2.5

48.6

42.5

2.4

2007

NS 2008

2009

Source: Dow Jones VentureSource, 2014

7.2 2010

2011

2012

2013

United States

2007

Europe

46.1 21.5

18.2 1.8

78.4

72.1

64.4

3.9

3.8

3.8

82.8

6.8

3.7 3.0 2008

5.0 NS 2009

6.9 2010

22.4 5.9 2011

23.9

26.4

7.4 2012

2013

China


E9hj]%egf]qnYdmYlagfkgfl`]jak] Globally, the value story in 2013 was much improved, with an uplift in median pre-money valuations in all hotbeds except the US, which saw a slight decline. In 2013, median valuations were the highest since 2007 in Europe, China, Israel and India, with developing markets outperforming mature markets by a considerable margin. This suggests that the VC investing outlook is broadly positive, particularly in emerging markets due to in part corporate acquirers accelerating growth through M&A.

However, despite some improvement in the global economic outlook, uncertainty continued to impact M&A exits as j]Ö][l]\Zq\][dafaf_fmeZ]jkY[jgkkYddeYjc]lk]p[]hl ;YfY\Y$o`]j]fmeZ]jko]j]ÖYl$Yf\;àfY&Af;àfY$oal` M&A the only exit option barring a foreign listing, the volume of M&A almost doubled to 20 transactions and pre-money valuations almost tripled to US$87.5m.

E]\aYfYegmfljYak]\hjagjlgE9 MKe! 20.2

19.9

19.0 19.7

15.3 12.8

20.6

13.5

11.4 9.6

9.5 9.0 3.9 4.4 2007

15.1

17.9

NS 2008

4.8 NS 2009

United States

15.6 12.8 13.2

14.7

11.4 10.2

7.1

5.7 5.7

4.8

5.5 3.0

2010

Europe

16.8

2011 China

2012 Israel**

6.8 5.5 3.0 2013 India

E]\aYflae]^jgeafalaYdN; ÔfYf[af_lgE9]pal afq]Yjk! 9.7 8.6 7.5 6.5 6.5 5.9

5.8 4.3

3.5

6.7

6.7 5.5 5.5 4.2

3.7

3.4

5.7

5.5

5.3 3.8

5.3 4.1 4.1

3.5

7.5 5.9 5.2 4.4 4.0

6.3 5.9 5.0 3.5 2.5

NS 2007

2008

2009

United States Source: Dow Jones VentureSource, 2014 **All-site Israeli companies


Europe

2010

2011

China

2012

Israel**

2013

India

>mf\jYakaf_ZqN;k

jYf[]Yf\Dmp]eZgmj_ Franck Sebag +33 1 4693 7374 [email protected] India Mayank Rastogi +91 22 6192 0850 [email protected] 9kaY%HY[aÔ[ Ringo Choi +86 755 2502 8298 [email protected] ?j]Yl]j;àfY Lawrence Lau +86 21 2228 2816 [email protected]