Startup Outlook Report SVB 2013 by Sensible Marketing

Startup Outlook 2013 Report

Key Findings

Understanding Startups

Business Environment

Hiring Talent

Public Policy Issues

U.S. Versus U.K. Startups

20 32

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

Part 2: Detailed Findings 10 12 16 20 20 24 25 28 32

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

Startup Outlook Report 2013

“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

Startup Outlook Report 2013

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.

Startup Outlook Report 2013

▶▶ 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.

Startup Outlook Report 2013

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%

7% 7% 8%

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

Startup Outlook Report 2013

2013 Survey Respondents (conâ&#x20AC;&#x2122;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

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 â&#x20AC;&#x201D; 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).

Startup Outlook Report 2013

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%

26%

13%

56% 37%

25%

24% 20%

2011

19%18%

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%

0% 6% 6% 8%

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

19%

$10M to less than $25M

18%

$5M to less than $10M

12%

32% 22%

27%

$1M to less than $5M

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 $5 M to <$ 10 $1 M 0M to < $2 5M $2 5M to < $5 0M $5 0M or m or e

Number of Employees

â&#x20AC;&#x153;Please provide funding to small companies through the market in small bets rather than trying to pick a few winners. The market will choose the winners better than the government ever could.â&#x20AC;? President/CEO, Cleantech Startup

Startup Outlook Report 2013

Part 2: Detailed Findings Understanding Startups High-growth startups have an outsized long-term

or revenue level, most startups don’t earn a profit —

impact on the U.S. economy, generating revenues equal

even when they earn significant to topline revenues,

to an estimated 21 percent of U.S. GDP and creating

and even in capital-efficient sectors (like software)

roughly 11 percent of all U.S. private sector jobs.

where the cost to start a company has declined

(Venture Impact: The Economic Importance of Venture

meaningfully in recent years.

Capital-Backed Companies to the U.S. Economy, 6th Ed. (2011)).

This year we added two survey questions to determine who is creating startups. The data indicate that women

In order to reach this size and scale, however, these

remain under-represented among startup founders

companies need to make significant investments for

(with only about one in four startups having one or

an extended period of time. To better understand the

more women on their founding team), while people

relationship between size and profitability, we asked

born outside the United States are an important overall

revenue-generating respondents in this year’s survey

part of the startup ecosystem (with about half of all

whether they expected to be profitable in 2012. As the

startups having one or more foreign-born person on

following charts illustrate, whether one looks by sector

their founding team).

“Immediate reforms to visa policy for skilled workers are necessary to ward off a brain drain AND to help stimulate the economy through … startups that are driven by … tax-paying people that may have been born elsewhere in the world.” President/CEO, Cleantech Startup

Startup Outlook Report 2013

69% 83%

71%

83%

No Yes 32%

Consumer Internet

Enterprise Software

17%

Healthcare

29%

Hardware

17%

Cleantech

Startups’ Profitability (By Revenue Level) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

78%

68%

65%

Yes

< $5M Revenues

75%

23%

15%

13%

Both Men and Women on Founding Team

81%

83%

85%

72%

Only Women on Founding Team Only Men on Founding Team

Founding Team Composition (By Place of Birth per Industry)

22%

17%

Co ns In um te er rn En et t So erp ftw rise ar e He alt hc ar e

28%

23%

32%

35%

$5.0 - $24.9M Revenues

$25.0 - $99.9M Revenues

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

21%

28%

30%

21%

14%

19%

60% 51%

31%

23%

41%

10%

56% 46%

49%

Both Represented on Founding Team Only Persons Born Outside U.S. on Founding Team Only Persons Born in U.S. on Founding Team

Ha rd w ar e Cl ea nt ec h

72%

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

Co ns In um te er rn En et te So rp ftw rise ar e He alt hc ar e

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

Founding Team Composition (By Gender per Industry)

Ha rd w ar e Cl ea nt ec h

Startups’ Profitablity (By Industry)

Business Environment: Tech Economy Continues To Perform as the Economy Stabilizes Highlights: ▶▶ Nearly six in 10 companies (58 percent) met or exceeded revenue targets, down somewhat from

▶▶ 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: year-over-year, the number of software executives who say business conditions are somewhat worse more than doubled. ▶▶ Healthcare executives are the most downbeat

the past two years but meaningfully better than in

— less likely to say business conditions are

the depth of the recession.

better, and more likely to say they are worse.

▶▶ About as many executives expect to miss

▶▶ Looking toward 2013, hardware and software

2012 targets as hit them (41 and 43 percent,

companies are the most upbeat, and

respectively).

healthcare companies are the most downbeat.

▶▶ Executives in this year’s survey are substantially less likely to predict they’d

By and large, startups continued to meet their

exceed targeted revenues than in previous

revenue targets in 2012. Interestingly, executives were

surveys.

substantially less likely to say their company would

▶▶ Companies with revenues over $25 million are far more likely to outperform their targets, and somewhat less likely to underperform their targets. ▶▶ Hardware companies are the most likely to miss targets.

exceed their target (only 15 percent, down from 23 percent a year earlier). Hardware companies were the most likely to miss targets; healthcare companies were the most likely to meet or beat targets. Companies with revenues over $25 million were far more likely to outperform their targets, and somewhat less likely to underperform their targets.

▶▶ Startup executives remain optimistic, believing 2012 was better than 2011, and 2013 will be better than 2012.

Startup Outlook Report 2013

Performance Against Revenue Targets (By Year)

Performance Against Revenue Targets (By Company Size in Revenue)

100% 15%

24%

15%

22%

80% 70% 60%

34%

43%

39%

50%

42%

Above Target Revenues About on Target Below Targets

40% 20%

50%

38%

35%

2011

2012

42%

10% 0%

2010

2013

Performance Against Revenue Targets (By Industry)

43%

15%

14% 30%

40%

42%

45%

50%

56%

49%

34%

39%

65%

Above Target Revenue About on Target Below Target

33% 53%

44%

33%

28%

Performance Against Revenue Targets (By Number of Employees)

Cl ea nt ec h

45%

18%

Ha rd w ar e

10%

Co ns In um te er rn e En t te So rp ftw rise ar e He alt hc ar e

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

13%

16%

34%

Pr eRe ve nu e

30%

Re < ve $5M nu es $5 Re $24 ve .9M nu es $2 5 -$ Re 99 ve .9M nu es

90%

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

Above Target Revenue about on Target Below Target

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

12%

55%

34%

Under 10 Employees

14%

39%

47%

10 - 49 Employees

21%

Above Target Revenues about on Target Below Target

35%

43%

50 - 499 Employees

“My company is on target to grow at a 36x rate with all the capital invested from the track record of this past year. Exciting times.” President/CEO, Consumer Internet/Digital Media Startup

“Great time for innovation in high tech.” COO, Hardware Startup

Startup Outlook Report 2013

Business Conditions Compared to Last Year (By Year)

Business Conditions Compared to Last Year (By Company Size in Revenue)

50%

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

45%

46%

40%

38%

36%

35% 30% 25% 20%

27% 23%

25%

35%

27%

26%

Much Better

Same

15% 10%

Somewhat Worse

13% 9%

5% 0%

Somewhat Better

24%

19%

2010

8% 3%

2011

2012

Much Worse

47% 66%

64%

53%

17%

33%

Better Same Worse

15%

Cl ea nt ec h

25%

Ha rd w ar e

13%

15%

En t So erp ftw rise ar e He alt hc ar e

13%

Co ns In um te er rn et

23%

31% 16%

59%

58%

22%

33%

17%

16%

18%

Pre-Revenue

< $5M Revenues

$5 - $24.9M Revenues

Better Same Worse

10%

$25 - $99.9M Revenues

Business Conditions Compared to Last Year (By Company Size in Employees)

68%

28% 21%

68%

2013

Business Conditions Compared to Last Year (By Industry) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

52%

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

61%

59%

25%

22%

16%

18%

Under 10 Employees

10 - 49 Employees

60%

24%

Better Same Worse

16%

50 - 499 Employees

Highlights (conâ&#x20AC;&#x2122;t): Roughly six in 10 executives continue to believe

of software executives who say business conditions

that conditions in 2012 are better than a year earlier,

are somewhat worse more than doubled, from five

though we saw an uptick in the number who believe

percent to 12 percent. Healthcare executives are the

things are somewhat worse than theyâ&#x20AC;&#x2122;d been.

most downbeat, with only 47 percent saying business

Interestingly, software executives are more likely

conditions are better, 16 percent saying they are

than executives in other sectors to say that business

somewhat worse, and nine percent saying they are

conditions are better than a year ago (65 percent for

much worse.

software versus 60 percent overall). But the number

Startup Outlook Report 2013

Outlook on Business Conditions in 2013 (By Year)

Outlook on Business Conditions in 2013 (By Company Size in Revenue)

100%

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

90% 80% 70% 60%

74%

72%

78%

74%

50%

Better Same Worse

40% 30% 20% 10% 0%

18%

19%

17%

18%

2010

2011

2012

2013

Outlook on Business Conditions in 2013 (By Industry)

62% 76%

78%

86%

72%

Better Same Worse 20%

15%

9% 6%

Cl ea nt ec h

Ha rd w ar e

17%

En t So erp ftw rise ar e He alt hc ar e

17%

21% 10%

Pre-Revenue

71%

76%

78%

Better Same Worse 14%

17%

< $5M Revenues

24% 6%

$5 - $24.9M Revenues

$25 - $99.9M Revenues

Outlook on Business Conditions in 2013 (By Company Size in Employees)

23%

Co ns In um te er rn et

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

69%

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

75%

72%

76%

Better Same Worse

16%

19%

10%

10 - 49 Employees

50 - 499 Employees

Under 10 Employees

19%

By stage, smaller, pre-revenue companies are

the most upbeat (with 85 percent and 78 percent,

meaningfully less likely than their peers whoâ&#x20AC;&#x2122;ve

respectively, saying conditions will be better).

started earning revenues to say things are better,

Healthcare executives are again the most downbeat,

and more likely to say conditions are about the same.

with only 62 percent saying conditions will be better

Overall, the largest companies in the survey (by revenue)

and 15 percent predicting they will get worse. And, as

are the least likely to see things as worse.

was true when comparing 2012 to 2011, pre-revenue companies are more likely than companies earning

Looking forward, executives are about as likely as

up to $5M to say conditions going forward will be the

those in the previous two surveys to say business

same, while revenue-generating companies (earning

conditions for their companies will be better in the

up to $5M) are more likely to believe conditions will

coming year. Hardware and software companies are

be much better in the coming year.

Startup Outlook Report 2013

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

▶▶ Finding people with the right skills tops the list of challenges, followed by competition for workers. The cost of salaries and benefits is also a factor, particularly for smaller companies with only a handful of employees. Since we launched the Startup Outlook in 2010,

▶▶ Nearly nine in 10 startups (87 percent) plan to hire

we have tracked startups’ plans to hire. Every year,

new employees in 2013, up from 83 percent in last

startups have been a bright spot in an otherwise dismal

year’s survey.

jobs landscape. But this year sets a new record for

▶▶ Software, hardware, and cleantech executives are most likely to hire. ▶▶ While healthcare companies’ expectations

hiring expectations. Nine in 10 (87 percent) of the respondents to this year’s survey plan to hire new employees in 2013, up

are less robust than their peers, a substantial

slightly from last year’s survey (83 percent). Software,

number of healthcare executives will be

hardware, and cleantech executives are most likely

hiring.

to hire, at 91 percent, 90 percent, and 90 percent,

▶▶ Eighty-two percent of executives we surveyed are looking for workers with STEM (Science, Technology, Engineering, and Math) skills. ▶▶ Four in 10 executives (40 percent) say it is

respectively. While healthcare companies are less likely to hire than their peers, a substantial number — 78 percent — plan to hire. We did not see meaningful differences in hiring

the most critical job skill. Only one in five (17

expectations by company size, although directionally

percent) say management, marketing, and

the larger companies (by employees and revenues)

other non-STEM skills are most critical.

seemed to have somewhat higher expectations for

▶▶ Hardware executives are the most focused on workers with STEM skills. ▶▶ Finding the right workers will be difficult. ▶▶ Nine in 10 executives say it is challenging to find workers with the skills needed to grow their businesses.

hiring — a good sign for the overall amount of job creation in the high growth economy. Yet while the jobs are there, nine in 10 (87 percent) of the surveyed executives said that it is challenging to find workers with the skills they need. This is particularly true for software and hardware executives, and for the somewhat more mature companies.

▶▶ Software and hardware executives face the greatest challenges.

Startup Outlook Report 2013

Across sectors, executives are looking for workers with

Plans to Hire in 2013 (By Year)

STEM (Science, Technology, Engineering, and Math) skills. Four in 10 (40 percent) say it is the most critical job skill, versus only one in five (17 percent) who say

100% 90%

management, marketing, and other non-STEM skills

80% 70% 60%

73%

84%

83%

88%

50% 40% 30% 20% 10% 0%

10% 6% 11%

11%

4% 9%

2011

2012

2013

17%

2010

are most critical. Four in 10, or 42 percent, report Likely to Hire Neither Likely nor Unlikely Unlikely to Hire

both skill sets will be critical in 2013. STEM skills are particularly critical to very early-stage companies and to hardware companies.

Plans to Hire in 2013 (by Industry)

78% 92%

91%

5% 3%

3% 6%

90%

4% 6%

3% 7%

Likely to Hire Neither Likely nor Unlikely Unlikely to Hire

Ha rd w ar e

Cl ea nt ec h

5% 18%

Co ns In um te er rn e En t te So rp ftw rise ar e He alt hc ar e

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

“Provide 21st century computational thinking skills to children in K12 space to enhance their creativity to prepare them for Science, Technology, Engineering and Math jobs.” President/CEO, Software Startup

“Educate our workforce and expand the visa program in the meantime to create a supply of qualified workers.” President/CEO, Software Startup

Startup Outlook Report 2013

How Challenging is it to Find Workers with the Skills You Need? (By Industry)

How Challenging is it to Find Workers with the Skills You Need? (By Revenues)

120% 120%

100%

10%

12%

20%

60%

54%

Not Very Challenging

54%

56% 58%

64%

40% 39%

32%

17%

Co In nsu te m rn e et r En So ter ftw pris ar e e He alt hc ar e

23%

Somewhat Challenging Extremely Challenging

15%

8% Not Very Challenging

80% 60%

57%

55%

59%

30%

26%

Pre-Revenue

< $5M in Revenues

58%

Somewhat Challenging

40% 20% 0%

Cl ea nt ec h

35%

Ha rd w ar e

20%

100%

19%

80%

36%

Extremely Challenging

35%

$5 - $24.9M $25 - $99.9M in Revenues in Revenues

How Challenging is it to Find Workers with the Skills You Need? (By Number of Employees)

HiringCompanies’ Most Critical Skills in 2013 (By Industry)

120%

53%

57%

63%

40% 20%

29%

31%

Under 10 Employees

10 to 49 Employees

29%

Some what Challenging Extremely Challenging

0% 50 to 499 Employees

80%

45%

60% 40% 20%

29%

32% 51%

43%

4% 23%

17%

18%

15% 67%

38%

34%

45%

39%

Both Equally Critical Management, Marketing, Sales, Operations and Other Non-STEM Skills STEM Skills

Cl ea nt ec h

Not Very Challenging

Ha rd w ar e

80% 60%

100%

He alt hc ar e

12%

E So nter ftw pri ar se e

17%

C In ons te u rn m et er

100%

Highlights (con’t.): What makes it challenging for startups to hire and

generally — a distinct problem for consumer internet

retain workers with the skills they need?

companies and in Northern California. The cost of salaries and benefits is also a factor, particularly for

Finding people with the right skills tops the list,

smaller companies with only a handful of employees.

particularly for enterprise software, healthcare and cleantech companies. (Interestingly, however, this is a

The survey results also demonstrate that startups are

less important issue in the Northern California market.)

focused on access to workers with the skills they need — not immigration — as the true issue. Immigration

Competition for workers comes in second. We asked

reform is a necessary piece of solving the talent

about two particular types of competition for workers:

problem, particularly in the near term, but technology

competing against larger companies — a distinct

startups appear to see the issue as a workforce issue,

problem for hardware startups — and competition more

not an immigration issue.

Startup Outlook Report 2013

Hiring Companiesâ&#x20AC;&#x2122; Most Critical Skills in 2013 (By Company Size in Employees)

Most Challenging Aspect of Finding and Retaining Talent (By Number of Employees)

120% 100% 80% 60%

40%

43%

12%

20% 0%

45%

18%

40% 48%

Management, Marketing, Sales, Operations and Other Non-STEM Skills

25%

38%

Under 10 Employees

Both Equally Critical

30%

10 to 49 Employees

STEM Skills

3% 6% 11% 14%

5% 7% 8%

Under 10 Employees

60%

10%

43%

45%

Both Equally Critical

46%

22%

21%

40%

Management, Marketing, Sales, Operations and Other Non-STEM Skills

25%

52% 35%

34%

Too Hard to Compete with Larger Companies 21%

STEM Skills

29%

$5 - $24.9M in Revenues

2% 2%

Hardware Healthcare Enterprise Software Consumer Internet

0%4%

13%

5% 9% 7%

3% 4%

Other 46%

31%

17% 18%

46% 42%

30% 25% 28%

0% 10% 20% 30% 40% 50%

Finding People with the Right Skills

Too Hard to Compete with Larger Companies Too Much Competition Generally Cost of Salaries and Benefits Finding People with the Right Skills

Other 40%

14% 24% 17%

4% 5% 8%

15%

4% 8% 8% 13%

Pre-Revenue

Immigration Regulations Too Hard to Compete with Larger Companies

41%

27%

Too Much Competition Generally

39%

Cost of Salaries and Benefits Finding People with the Right Skills

40%

0% 10% 20% 30% 40% 50%

Most Challenging Aspect of Finding and Retaining Talent (By Region)

Other Regions

2% 4%

Immigration Regulations 26% 35%

1%5% 10% 5% 7%

28%

32% 31%

19% 19% 19%

1% 3%

< $5M in Revenues

$5 - $24.9M $25 - $99.9M in Revenues in Revenues

Most Challenging Aspect of Finding and Retaining Talent (By Industry)

Cleantech

Too Much Competition Generally Cost of Salaries and Benefits

16%

0% Pre-Revenue < $5M in Revenues

46%

Most Challenging Aspect of Finding and Retaining Talent (By Revenues)

$25 - $99.9M in Revenues

100% 38%

Immigration Regulations

44%

0% 10% 20% 30% 40% 50%

120%

80%

Other

12%

22% 18%

10 to 49 Employees

50 to 499 Employees

Hiring Companiesâ&#x20AC;&#x2122; Most Critical Skills in 2013 (By Company Size in Revenues)

20%

2% 3%

50 to 499 Employees

12% 16%

Boston MA

7% 7% 4% 7%

Northern CA

3% 8% 8%

Other 24%

Immigration Regulations

42%

Too Hard to Compete with Larger Companies 25%

21% 26%

20%

Too Much Competition Generally

49%

Cost of Salaries and Benefits Finding People with the Right Skills

34%

40%

60%

Startup Outlook Report 2013

The Impact of Public Policies on Startups

Intellectual Property Protection Highlights:

In past surveys, we’ve asked startups how government policies affect their ability to succeed. This year, we

▶▶ Close to half of the respondents (46 percent) say IP

decided to shift gears and dig deeper into a handful

is a “key strategic asset.” Hardware, healthcare and

of policy issues. We asked about two of the issues

cleantech executives are much more likely to take

that have consistently topped startups’ lists in

this view than software executives, who are much

prior surveys: intellectual property protection and

more likely to see IP primarily as a defensive tool.

federal tax and fiscal policies. In addition, we tried to understand better what drives startups’ decisions about where to locate manufacturing facilities. Finally, we asked a series of questions designed to get a clearer picture for how medical device companies are coping with a new, 2.3 percent excise tax on topline revenues, which went into effect on January 1, 2013.

▶▶ One in four startups — even very early-stage startups — faces IP lawsuits. Healthcare startups are the hardest hit, although software startups appear more vulnerable to suits by non-practicing entities, patent assertion entities, and “patent trolls.” The prevalence of suits rises with company size. ▶▶ Overall, slightly over half (54 percent) of executives feel IP is an important asset and worth the cost. But views differ significantly by

“Create general conditions for a successful economy [by enabling immigration for skilled knowledge workers, simplifying and minimizing the tax burden, and investing in education and infrastructure] and then let entrepreneurs and the market do the rest.” President/CEO, Software Startup

Across the board, startups view intellectual property

View of Intellectual Property (By Industry)

both as a strategic asset and a defensive tool. The mix, however, varies by industry, with software executives

Cleantech

5% 6%

Hardware

4% 6%

Healthcare Enterprise Software

Not Involved in IP Combination of Both

36% 55%

colleagues in the healthcare, hardware and cleantech

43% 47%

3% 6%

Consumer Internet

more likely to see it as a defensive tool than their

43% 46%

15% 16% 15%

20%

Primarily a Defensive Tool Key Strategic Asset

34% 43%

We also found that nearly one in four startups — even very early-stage startups — face IP lawsuits.

29% 40%

40%

sectors.

60%

Healthcare startups are the hardest hit, with three in 10 respondents reporting that they face lawsuits.

sector. Roughly seven in 10 healthcare, cleantech and hardware executives take this view, while only about four in 10 software executives do. In contrast, six in 10 software executives say they focus on non-legal means rather than on IP rights to create a competitive advantage.

Given the cost of litigating an IP lawsuit, this is an important and concerning finding. Startups have a finite amount of cash, and we should be concerned if IP lawsuits are siphoning that cash away from more productive uses. In this vein, it is interesting to see the patterns in the types of lawsuits small companies are facing. Software executives say they are nearly

Intellectual property historically has topped startups’ list of policy priorities. In the 2012 Startup Outlook survey, 62 percent said IP protection was a priority, and

four times as likely to be sued by a non-practicing entity, a patent assertion entity, or a “patent troll” as in a legitimate dispute with a competitor. In contrast,

only 13 percent said it was not.

healthcare companies are more likely to describe

Yet how best to use a system of intellectual property

competitors.

protections to promote innovation is a hotly debated issue, even within the technology community. Different industries — and even different executives within the same sector — can disagree sharply on a host of legal and policy issues. As a result, rather than asking again whether IP is important or asking which policies people think make the most sense, we asked a series of questions about the role IP plays in startups’ businesses, how often they face IP disputes, the nature of those disputes, and how well

their suits as primarily as legitimate disputes with

Company size, not surprisingly, affects the pattern. The number of executives who said that they face disputes and that most of their disputes are with a non-practicing entity, a patent assertion entity, or a “patent troll” rises measurably as company size increases. The 2013 survey also points to a potentially interesting divergence by region. Northern California (primarily Silicon Valley) companies are much more likely to report that they face disputes, and, of those, the majority say

the current system is meeting their business needs.

Startup Outlook Report 2013

Nature of IP Disputes (By Industry) 4% 15%

80%

100% 18% 12%

10% 15%

14% 10%

60% 40%

81%

70%

74%

76%

20%

Most IP Disputes are Legitimate Disputes with Competitors Most IP Disputes Brought by NPEs, PAEs, or Trolls Rarely or Never Face IP Disputes

Co ns In um te er rn En et te So rp ftw rise He are alt hc ar e Ha rd w ar e Cl ea nt ec h

Nature of IP Disputes (By Number of Employees) 100% 80%

10%

11%

12%

22%

80%

77%

71%

20% 0%

Under 10 Employees

9% 20%

7% 39%

60% 40%

83%

77%

71%

20%

55%

Most IP Disputes are Legitimate Disputes with Competitors Most IP Disputes Brought by NPEs, PAEs, or Trolls Rarely or Never Face IP Disputes

Nature of IP Disputes (By Region)

60% 40%

80%

6% 11%

14%

< Re $5M ve i nu n $ es Re 5 - $ ve 24 nu .9 es M s in $ Re 25 ve $9 nu 9. es 9M in

3% 16%

Pr eRe ve nu e

100%

Nature of IP Disputes (By Revenues)

100% 80% Most IP Disputes are Legitimate Disputes with Competitors

60%

Most IP Disputes Brought by NPEs, PAEs, or Trolls

40%

Rarely or Never Face IP Disputes

20%

10 to 49 50 to 499 Employees Employees

10% 17%

15% 0%

7% 15%

Most IP Disputes are Legitimate Disputes with Competitors 73%

85%

78%

Most IP Disputes Brought by NPEs, PAEs, or Trolls Rarely or Never Face IP Disputes

0% Northern CA Boston MA Other Regions

Highlights (con’t.): these disputes are primarily suits by a non-practicing

views on how they think about IP within their broader

entity, a patent assertion entity, or a “patent troll.” While

business objectives. (Respondents were able to select

other regions largely echo this experience, Boston is

multiple answers, so the totals exceed 100 percent.)

a notable outlier, with executives less likely to report IP lawsuits and no executives reporting suits by a

Only about half (54 percent) say they think IP is an

non-practicing entity, a patent assertion entity, or a

important asset and is worth the cost. Underlying this

“patent troll.” This may be a product of the relatively

statistic, however, are two sharply different views. Just

small sample size for Boston (55 respondents for this

over one in three software executives say IP is worth

question), but given the magnitude of the difference we

the cost, while two in three healthcare, hardware and

felt it merited including in this report.

cleantech executives say IP is worth the cost.

Given the issues with relying on the legal system to

Software executives are much more likely to say they

protect IP rights, we asked executives about their

rely on non-legal means (such as moving faster than

Startup Outlook Report 2013

Business Impact of IP (By Industry)

Business Impact of IP (By Revenues)

Cleantech

36% 36%

Hardware

33% 38%

Healthcare

Enterprise Software

Consumer Internet

72%

We Sometimes Settle Suits or License IP Because Litigation Is Too Expensive

64%

28% 27%

The Cost of IP Protection Diverts Resources from More Productive Uses

69%

36% 42%

We Sometimes Settle Suits or License IP Because Litigation Is Too Expensive

59%

26% 34%

IP Isn't Important to Our Company

59%

50 to 499 Employees

10 to 49 Employees

11%

2% 6%

Under 10 Employees

IP Isn't Important to Our Company 48% 53%

31%

46%

57%

37% 44% 51%

20%

23%

1% 6%

< $5M in Revenues

We Sometimes Settle Suits or License IP Because Litigation Is Too Expensive The Cost of IP Protection Diverts Resources from More Productive Uses

51% 51%

32% 36%

20%

IP Isn't Important to Our Company

48% 50%

53% 46%

34%

1% 7%

Pre-Revenue

36%

We Sometimes Settle Suits or License IP Because Litigation Is Too Expensive

60%

40%

60%

80%

IP Isn't Important to Our Company

Business Impact of IP (By Region)

22%

2% 5%

$5 - $24.9M in Revenues

20% 40% 60% 80%

Business Impact of IP (By Number of Employees)

$25 - $99.9M in Revenues

40%

60%

We Sometimes Settle Suits or License IP Because Litigation Is Too Expensive The Cost of IP Protection Diverts Resources from More Productive Uses We Sometimes Settle Suits or License IP Because Litigation Is Too Expensive IP Isn't Important to Our Company

2% 8%

Other Regions

2% 3%

Boston MA

Northern CA

IP Isn't Important to Our Company 45%

20%

36%

40%

We Sometimes Settle Suits or License IP Because Litigation Is Too Expensive

55%

24% 33%

1% 8%

30%

63%

We Sometimes Settle Suits or License IP Because Litigation Is Too Expensive

49% 50%

60%

The Cost of IP Protection Diverts Resources from More Productive Uses

80%

IP Isn't Important to Our Company

their competitors), rather than on IP rights, to create

litigation-driven problem, with nearly one in four

their competitive advantage. Smaller startups also

reporting that they sometimes settle lawsuits or license

appear more concerned about the cost of IP — and the

IP they otherwise wouldn’t because it’s too expensive

need to divert resources from other more productive

to defend IP in a lawsuit. Regionally, Boston appears to

uses — than their larger counterparts. Larger

remain a more IP-centered ecosystem than other markets.

companies, in contrast, appear to face a meaningful

“As a Fast Growth company I do not worry about government policy too much. I worry about what I can control. Our outlook is very strong.... Cheers.” President/CEO, Software Startup

Startup Outlook Report 2013

Taxes Highlights: ▶▶ When asked which federal tax change would best promote their company’s near-term success, startups focus first on providing incentives to promote capital formation for high growth companies. ▶▶ Coming in second is helping preserve startups’ scarce capital through a tax credit for preprofit companies to offset other taxes (such as employment taxes). ▶▶ Fifteen percent of executives ask Congress to “just get it done so we have certainty.”

One of the most pressing issues on the federal agenda is our tax system. Most people agree it’s ready for an overhaul, for a host of reasons. But there’s a lot less agreement about what, precisely, the solution should look like. Since startups play a critical role in economic growth, global competitiveness, and job creation, we think the U.S. tax system should promote (or at least not inhibit) startups’ success. So we asked startup executives what they see as the single most beneficial change Congress could make to promote their company’s near-term success. Promoting capital formation — specifically, providing a tax incentive to invest in startups — topped the list. This was particularly true for smaller companies. Promoting capital efficiency — specifically, providing

▶▶ Healthcare, hardware and cleantech executives highlight the importance of R&D, through R&D tax credits and direct government investments in R&D.

a credit for pre-profit companies to offset other taxes

▶▶ Larger companies were more likely to focus on the overall corporate tax rate and on capital gains tax rates.

Promoting simplicity and certainty — specifically, “just

(such as employment taxes) so they can devote their available cash to growing — came in a close second. get it done” and “make the tax code simpler” — came in third. Healthcare, hardware and cleantech executives were much more likely than their colleagues in the software sector to highlight the importance of R&D, either in the form of R&D tax credits or direct government investments in R&D. Larger companies (with over $25 million in revenues) were much more likely to recommend keeping the capital gains tax at the current rate (20 percent, versus six to seven percent for smaller companies). Not surprisingly, executives’ focus on the corporate tax rate rose as their company sizes increased.

Startup Outlook Report 2013

Tax Policies to Promote Startups’ Growth (Top Six, by Number of Employees)

25%

23% 19%

20%

15%

10%

5% 1%

O th er

T In ax ve In st ce in nti Cr S ve Pr ed e- it/ tart to up Pr O of ffs s it et Co fo Ju r m W st p an e G Ha et ies ve It D Ce on rta e M in So ty Si ak m e pl th er e Co de P Ta erm x an Cr e ed nt it R& L D Ta ow x er Ra C Ke te orp Ra ep or at te C e at ap Cu G a G rren ins In ov ve er t Le st nm ve m e en nt l In ts M ce an nt in uf ive R& ac fo D tu r D rin o g m es tic

Tax Policies to Promote Startups’ Growth (Top Six, by Industry) 8% 7% 12% 17% 22%

0% 11% 8% 11% 18%

5% 19% 7% 12%

2% 21% 11%

26% 9%

18%

21%

23%

17%

R&D Credit or Expenditure

20%

Make the Code Simpler Just Get It Done So We Have Certainty

15% 26%

Lower Corporate Tax Rate

11%

15% 21%

27%

Co ns um er In En te te rn rp et ris e So ftw ar e He alt hc ar e Ha rd w ar e Cl ea nt ec h

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

Tax Credit/Offset for PreProfit Companies Tax Incentive to Invest in Startups

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

Lower Corporate Tax Rate

12%

15%

10%

14%

14% 17%

13%

R&D Credit or Expenditure

11%

Make the Code Simpler

20%

Just Get It Done So We Have Certainty

19%

Tax Credit/Offset for PreProfit Companies

20% 32%

Under 10 Employees

21%

10 to 49 Employees

50 to 499 Employees

Tax Incentive to Invest in Startups

Tax Policies to Promote Startups’ Growth (Top Six, by Revenues) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

4% 16%

6% 10%

Lower Corporate Tax Rate 16%

13%

14%

15%

10%

16%

21%

20%

32%

27%

23%

12%

14%

R&D Credit or Expenditure

18%

Make the Code Simpler

10% 14%

Just Get It Done So We Have Certainty

12% 4%

Tax Credit/Offset for PreProfit Companies

Pr eRe ve nu < e $5 M in Re ve nu es $5 -$ 2 Re 4.9 ve M nu in $2 es 5 -$ 99 Re .9 ve M nu in es

Tax Policies to Promote Startups’ Growth

Tax Incentive to Invest in Startups

“Provide incentives for developing technology, hiring new people, creating manufacturing jobs in the US. We need the incentive in the forms of cash, deregulation, tax incentives.” President/CEO, Medical Device Startup

“Reward startups that our actively growing with tiered payroll tax incentives to help them carry the burden of losses as they get to profitability. Stop taxing us so much while we are creating jobs and growing the economy.” President/CEO, Software Startup

Startup Outlook Report 2013

U.S. Manufacturing Highlights:

Plans to Manufacture (by Industry) 120% 100%

▶▶ Over one-third (35 percent) of executives are

80%

at companies who currently manufacture

60%

(15 percent). ▶▶ A great deal of this activity is in the United States.

8% 4%

33%

42%

50% 93%

31%

88%

20%

35%

19%

30%

31%

28%

Plan to Manufacture in Next 18 Months Currently Manufacture

No Plans to Manufacture

Co ns um er In En te rn te et rp ris e So ftw ar e He alt hc ar e Ha rd w ar e Cl ea nt ec h

(21 percent) or plan to in the next 18 months

40%

5% 2%

▶▶ Two-thirds of those who currently manufacture “mostly domestically.” ▶▶ Four in 10 of those who plan to manufacture (40 percent) say they will manufacture “mostly domestically.” Policymakers and many business leaders would like to find ways to re-invigorate U.S. manufacturing, as a way to grow the U.S. economy and create middle class jobs.

Plans to Manufacture (by Revenues) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

50%

54%

45%

42%

14% 49% 41% 24%

Plan to Manufacture in Next 18 Months Currently Manufacture

45% 28%

No Plans to Manufacture

Pr eRe ve nu < e $5 M in Re ve nu es $5 -$ 2 Re 4.9 ve M nu in $2 es 5 -$ 9 Re 9.9 ve M nu in es

manufacture (64 percent) say they

In order to understand the opportunities within the startup sector better, we asked executives about their manufacturing plans, what factors drive their decisions about where to locate manufacturing facilities, and what kinds of workers they hire for manufacturing jobs.

Plans to Manufacture (by Region) 100% 90% 80%

Not surprisingly, manufacturing is centered in the

70%

healthcare, hardware and cleantech segments.

50%

Excluding software, 68 percent of these companies

30%

manufacture or plan to manufacture in the next 18 months, compared to only 10 percent in the software sector.

34%

27%

60% 40% 20% 10% 0%

22%

36% 38%

47%

Plan to Manufacture in Next 18 Months Currently Manufacture

42% 28%

Northern CA

No Plans to Manufacture

27%

Boston MA Other Regions

Notably, pre-revenue companies are much more likely

Startups use various approaches to manufacturing:

to predict that they will begin manufacturing than

in-house, through partners, or a combination of the

their revenue-generating peers indicate is likely. As

two; domestically, overseas, or a combination of the

for regional differences, Boston area companies report

two. In our survey, we found that companies that are

that they manufacture at nearly twice the rate of their

currently manufacturing tend to rely more heavily on

counterparts in other regions.

in-house, domestic manufacturing than those who Startup Outlook Report 2013

Manufacturing: In House Versus Partners 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

distance, etc.). Rounding out the list are regulatory costs and delays, proximity to major markets and customers, tax incentives, regulatory restrictions,

45%

energy costs, and other.

44% 37%

33%

30% Currently Manufacture Plan to Manufacture in Coming 18 Months

11%

In House

Through Partners

This implies that policymakers have an opportunity to promote U.S. manufacturing without having to use tax expenditures. The Startup Outlook survey also indicates that taking

Combination of Both

these steps would be smart — for all Americans, not just for technology companies. A meaningful number

Manufacturing: U.S. Versus Non-U.S.

of the manufacturing jobs that startups would create require only a high school diploma or relevant experience,

70%

and fewer than one in three of these jobs require a

64%

60% 50% 40% 30%

Currently Manufacture 23%

20%

college education or above.

44%

40%

16%

14%

Plan to Manufacture in Coming 18 Months

What Drives Startups’ Decisions About Where to Locate Manufacturing Facilities?

10% 0%

Mostly Domestically

Mostly Overseas

50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

Both

say they will begin manufacturing in the coming 18 those differences. From a policy perspective, two of the most important

41% 35%

35%

32% 22%

19%

16%

14% 7%

11% 4%

Av ail a w bilit ith y N of Q ee W Pr ua ded ork od lity S er u o k s Sp ctio f A ills ee n va d Fa ilab of cil le Sa Pr itie M lari od s an es uc Ea uf a tio n a se c d n /D tu B iff rin en icu g ef lty Wo its Re of rke of gu M rs lat or W ana y o gi Co r ng st ker s/ s P De M ro ar xim lay Ta ket ity s x s/C to In u M ce s ajo t (L n o tiv m r an Re es er d gu /R s Us la ef e, tor un En y ds v. Re , L st ab ric or tio En , E ns er tc. gy ) Co st s No O ne th of er th e Ab ov e

months, although it is difficult to know what is driving

44%

questions to understand are: the factors that drive startups’ decisions about where to locate manufacturing facilities, and the kinds of jobs these

Education/Training Needed for Majority of Manufacturing Jobs

facilities create. 35% 29%

30%

On the first, the question of talent and the availability

25%

of skilled workers again rises to the top. This is

20%

followed by two factors relating to the production

10% 5%

and the speed of production. The next two factors again

and the ease/difficulty of managing workers (language,

21%

15%

process: the quality of available production facilities, concern the workforce: the cost of salaries and benefits,

24% 21%

High School

College or Above Highly Experienced We Provided the Workers, Necessary Regardless of Training Education

A Combination of Above

Startup Outlook Report 2013

The Medical Device Tax

This year’s survey also digs into a critically important

Highlights:

device sector. There are a number of reasons why

▶▶ Executives at medical device companies are aware

about the health of the device industry. Perhaps most

segment of the U.S. innovation economy: the medical policymakers and ordinary Americans should care

of the 2.3 percent revenue tax that started at the

importantly, new, innovative devices help improve

beginning of 2013.

patient outcomes and reduce costs. In addition, U.S.

▶▶ Three in four (75 percent) say they know how it will impact their business. One in four (23 percent) say they have heard of the tax but do not know how it will impact their business. Just two percent were unaware of the tax. ▶▶ The top ways to handle the tax are passing along most or all of the increased cost to customers (34 percent of executives plan to do this) or focusing on expanding overseas instead of in the U.S. (28 percent of executives plan to do this). ▶▶ Over eight in 10 (82 percent) say the device tax

leadership in commercializing medical devices helps ensure that U.S. patients have early access to new tools for diagnosing and treating conditions. The device industry also creates high paying jobs and is a major exporter and an important contributor to the U.S. balance of trade. Yet for nearly a decade, rising regulatory costs, delays, and uncertainty have made it significantly harder for device companies to succeed. This has reduced the amount of capital being invested in new device companies to an 11-year low. It has also caused a shift in investments away from capital intensive segments,

will have an impact on their company’s long-

impeding the discovery and commercialization of

term growth.

treatments for chronic, costly conditions such as diabetes, obesity and vascular disease. While Congress and the FDA are taking steps to turn this around, those efforts are still in the relatively early stages. And now a new challenge has emerged for growing companies: starting January 1, 2013, all device companies must pay a 2.3 percent tax on their total U.S. sales. This tax applies even to companies that are not making a profit. We wanted to hear firsthand how executives are dealing with the tax and how they think it will affect the device industry going forward.

Startup Outlook Report 2013

Familiarity with the Device Tax

Startups’ Predictions: Impact of the Tax

The tax will impact our chances of being successful

23%

I know how it will impact my business I don't know how it will impact my business

75%

I have never heard of the device tax

21%

The tax will impact our ability to raise capital

27%

The tax will impact when we become profitable

34%

No meaningful impact

18% 0%

Generally speaking, executives in the device industry were aware of the tax, although many were still working

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

Startups’ Responses to the Device Tax

to understand how it would affect their business. We will focus on expanding overseas instead of domestically

Across the board, executives view the tax as a big issue, with eight in 10 saying it will affect their company’s long-term growth. One in four will focus on expanding overseas instead of domestically. At least two in 10 will take one or more other steps in response to the tax, including reducing their workforce or foregoing

25%

We will need to raise an additional round of capital

21%

We will pass along most or all of the increased cost

30%

We will invest less in R&D for new products

22%

We will invest less in R&D for our existing products

13%

We will shift resources away from growing our business

21%

We will reduce staffing/forego new hires

21%

10%

15%

20%

25%

30%

35%

new hires, shifting resources away from growing their business, investing less in R&D for existing and new devices, or trying to raise more capital from investors.

“The Medical Device Tax is punitive and particularly unfair to earlier stage companies struggling to satisfy FDA, CMS and extremely expensive clinical trials. We are in the perfect storm and this tax is one more nail in the coffin of this industry.” President/CEO, Medical Device Startup

Startup Outlook Report 2013

Other Respondents: 2012 Compared to 2011

Medical Device Companies: 2012 Compared to 2011

13%

27% 41%

Worse than last year

Worse than last year 22%

Same as last year

Same as last year Better than last year

Better than last year 65%

32%

As the data in the earlier sections of this report shows,

And, finally, the survey data illustrated that the

the device tax compounds other challenges that

headwinds facing the device industry threatens U.S.

threaten to affect U.S. leadership in medical device

manufacturing jobs.

innovation. Device companies were much more likely than startups in other sectors to say they fell far short

▶▶ About half of the device respondents (46 percent)

of their 2012 revenue targets (17 percent versus nine

currently manufacture devices. Ninety-three

percent for other segments). Device executives were

percent of these companies manufacture mostly

also much less optimistic about business trends than

in the United States.

their peers in other sectors. Not surprisingly, this translated into less robust expectations for hiring than is true for other startups. Similarly, the data in the remainder of the survey shows that these companies — and the breakthroughs

▶▶ Most of the remaining device companies (45 percent) plan to start manufacturing in the next 18 months. Of these, 50 percent expect to manufacture mostly in the United States. ▶▶ More than half of the device manufacturing jobs

in medical care they are creating — are small, growing

require only a high school degree (28 percent) or

entities that aren’t yet profitable, and hence are highly

hire based on experience regardless of education

vulnerable to a tax on topline revenues.

(28 percent). Only 16 percent require college or above.

▶▶ Seventy percent of the companies had fewer than 25 employees. 98 percent had fewer than 100 employees. ▶▶ Sixty-one percent aren’t yet earning revenues. Of those earning revenues, 56 percent earned less than $5 million in 2012, 95 percent earned less than $25 million in 2012. ▶▶ Fewer than one in 10 expected expect to be profitable in 2012. Startup Outlook Report 2013

Medical Device Companies: 2013 Compared to 2012

Other Respondents: 2013 Compared to 2012

15%

16%

25% 60%

Will be worse in 2013

Will stay the same

Will be better in 2013

Will be better in 2013 78%

Likelihood of Hiring: Medical Device Companies

Likelihood of Hiring: Other Respondents

17% 6%

Not likely to hire

Neither likely nor unlikely

Likley to hire

77% 91%

“Lean is my only guidance to offer the FDA. Build excellence into systems that ensure safety, and don’t do anything else. Let markets drive costeffectiveness. Let the NIH and peer-reviewed guidances determine efficacy.” President/CEO, Medical Device Startup

Startup Outlook Report 2013

U.S. and U.K. Startups: Similarities and Differences In this year’s survey, we reached out to entrepreneurs in the U.K. for the first time. Over 125 U.K. executives responded. Like their U.S. counterparts, U.K. entrepreneurs are optimistic about future conditions and growth. In fact, at times U.K. entrepreneurs express greater confidence than their U.S. peers. Here are some of the views from

Business Conditions ▶▶ U.K. startups were slightly more likely to exceed revenue targets than their U.S. peers (18 versus 15 percent), and more likely to meet targets (55 versus 43 percent). ▶▶ U.K. startups were somewhat more likely to describe business conditions in 2012 as better than 2011 (66 versus 60 percent). ▶▶ Looking forward, U.K. startups are more optimistic,

across the pond, on the questions common to the

with eight in 10 (83 percent) saying conditions in

two surveys.

2013 will be better than 2012, compared to seven in 10 (74 percent) of U.S. entrepreneurs.

For a full report on the views of U.K. startups, go to http://www.svb.com/startup-outlook-report

▶▶ 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. ▶▶ Close to half of U.K. revenue-generating startups (46 percent) expected their company to be profitable in 2012, compared to around onequarter of U.S. startups (27 percent). Looking into 2013, seven in 10 U.K. entrepreneurs (71 percent) expect their company will be profitable.

Hiring ▶▶ Like their U.S. counterparts, U.K. startups are hiring. As in the United States, nine in 10 (87 percent) plan to hire new employees in 2013. ▶▶ Ninety-five percent of U.K. startups with 10 or more employees plan to hire, versus 84 percent of smaller U.K. startups and 88 percent of U.S. startups with 10 or more employees.

Startup Outlook Report 2013

Hiring (con’t.)

U.K. Fundraising Environment (U.K. Survey Only)

▶▶ Similar to U.S. startup executives, U.K. startups are looking primarily for workers with STEM (Science, Technology, Engineering, and Math) skills. ▶▶ Four in 10 (38 percent) say STEM skills are the most critical job skills, versus one-quarter (23 percent) who say management, marketing, and other non-STEM skills are most critical. Among U.S. startups, those numbers were 40 and 17 percent, respectively. ▶▶ As in the United States, finding the right workers will be difficult.

▶▶ Nine in 10 of entrepreneurs in this study (90 percent) say the U.K. fundraising environment is challenging. ▶▶ Most are looking to angel investors or VCs for their next source of funding (39 percent for each). ▶▶ Over half of U.K. entrepreneurs say government initiatives that would help the startup sector are greater access to government grants and funds designed specifically for startups and tax reform (56 percent and 52 percent, respectively).

▶▶ Nine in 10 (89 percent) say it is “challenging” to find workers with the skills needed to grow

Founding Teams

their businesses. (Eighty-seven percent of U.S. executives said the same.)

▶▶ Twenty-six percent of startups in the U.K. survey have women on founding team, compared to 22

Intellectual Property (IP) ▶▶ Just fewer than four in 10 of the U.K. respondents (38 percent) classify IP as a “key strategic asset,” compared to 46 percent of the U.S. respondents.

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.

Fifteen percent of U.K. respondents say that IP is primarily a defensive tool, compared to 11 percent of U.S. respondents. One-quarter of U.K. respondents (23 percent) say IP is a combination of both, compared to 35 percent of U.S. respondents. ▶▶ Over eight in 10 U.K. entrepreneurs (84 percent) in this study rarely or never face disputes, compared to 77 percent for the United States. ▶▶ Over half of U.K. entrepreneurs (57 percent) say they focus on non-legal means rather than on IP rights to create a competitive advantage, significantly more than for U.S. startup executives (46 percent). Startup Outlook Report 2013

About Silicon Valley Bank

About the Startup Outlook Survey

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In addition to this comprehensive report, Silicon

life science, cleantech, venture capital, private equity

Valley Bank is publishing a series of more detailed

and premium wine businesses. SVB provides industry

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2011 and 2012 reports, please visit us at

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“Big Data and Cloud computing markets that we are part of will be huge. Financial instabilities make companies look for other vendors so small startups like us become a very good option for them as we are agile, cost effective and approachable.” President/CEO, Software Startup

Startup Outlook Report 2013

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