Capital Source Study by Austin Chamber

Capital Source Study Capital Source Research Briefing Deck

The Capital Source Survey Project

§ An ongoing debate has been going on in Austin – ‘Do we not have enough capital or just not enough good companies worth funding?’ § Austin is being viewed as one of the top metro areas for entrepreneurs – do we have the capital investment infrastructure to support them? § An empirical demographic study was undertaken to count capital sources in 9 major metro areas § The NVCA/MoneyTree 2014 VC Investment Report was used as the dependent variables to understand investment activity by metro § The broader question being investigated is around all capital funding sources, not just Venture Capital firms 2

© 2015 David Altounian, Ph.D., Austin Technology Council

Austin has become a Startup Center Silicon Valley

Austin Metro

§ Austin was just ranked as #1 in the US for Startup Activity § The growth rate of entrepreneurs and startups continues to climb in the Austin Metro area § Startup Density addresses the number of startups per 100,000 resident population § Austin Startup Density is higher now than Silicon Valley § Capital Funding infrastructure should be similar yet Austin is far behind other major startup metros

Source: The Kauffman Startup Index, The Kauffman Foundation, 2015

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© 2015 David Altounian, Ph.D., Austin Technology Council

Data Collection Process A Demographer was engaged to locate and count sources for funding for specified metro areas. Approximately 10 weeks were taken to collect the initial data.

Second pass completed by demographer after primary review.

Investment Amounts and Deals sourced from National VC Association (NVCA) and PWC/ Moneytree Data.

Metro Areas Surveyed 1.

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3.

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6.

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8.

9.

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Third and Fourth pass completed by independent student worker with <3% errors and omissions found.

Data updated.

Funding Sources Counted

Austin Colorado (Denver and some Boulder) San Diego Seattle Chicago NY Metro New England (Boston) LA/Orange County Silicon Valley

1.

2.

3.

4.

5.

6.

7.

8.

Angel Groups Venture Capital – Seed Stage Funds Venture Capital – Early/Mid Stage Funds Venture Capital – Late Stage Funds Venture Capital Mezzanine Commercial Banks Private Equity – Local and National with local office Investment Banks – Local and National with local office

© 2015 David Altounian, Ph.D., Austin Technology Council

2014 Investment Activity - $ and # of Deals § Silicon Valley had ~$24B in investment over 1390 deals § New England (Boston) and NY Metro were in the ~$4B range § Austin Metro had $620M with $1.2B for all of Texas § There were 114 venture deals in Austin compared to 395 in NY, 371 in New England (Boston), and 1390 in Silicon Valley § Austin had the lowest mean average deal size of any of the metro areas § Even though Colorado (Denver) had a lower number of deals and less overall investment, the average deal size was over 2X Austin deals Source: NVCA/MoneyTree Report, National Venture Capital Association, January 2015

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© 2015 David Altounian, Ph.D., Austin Technology Council

Mean Average Deal Size by Metro § Silicon Valley has highest mean average investment per deal § Most Metro areas average $10M-$11M per deal § Austin is significantly lower with a $5.4M mean average § Even though there are a large number of Austin deals (114) the average is much lower § Angel, Seed, and Early Stage investment may be driving this phenomenon § Correlates to the type of funding available in these metro markets

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Source: NVCA/MoneyTree Report, National Venture Capital Association, January 2015 © 2015 David Altounian, Ph.D., Austin Technology Council

Largest 2014 Venture Capital Deals

Silicon Valley: $15.75M

Average Deal Size subtracting the top 5 largest deals in each metro:

Seattle: $8.3M

Austin: $2.9M

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Source: The 2014 U.S. Venture Capital Year in Review, Financing and Exits, CBInsights, January 2015 Š 2015 David Altounian, Ph.D., Austin Technology Council

Number of Funding Sources by Metro § Silicon Valley has 785 funding sources across funding types § Top 3 metro areas have over 1999 funding sources and account for 61% of the overall total § Austin Metro has 144 funding sources § Strong relationship exists to number of sources and total venture capital invested in a region § Investment Bank and Private Equity local presence does seem to have an impact on funding activity

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Source: NVCA/MoneyTree Report, National Venture Capital Association, January 2015, Austin Technology Council Funding Source Survey, June 2015 © 2015 David Altounian, Ph.D., Austin Technology Council

Venture Capital Source by Metro § Mezzanine and Late Stage VC are significant in the top tier metros § VC density issues are apparent § Austin is strongest in Early Stage VC and Late Stage VC § May contribute to lower average deal size § More Later Stage and Mezzanine likely important for continued venture investment activity § Porter’s Five Forces model may apply to competitive demand for deals 9

Source: NVCA/MoneyTree Report, National Venture Capital Association, January 2015, Austin Technology Council Funding Source Survey, June 2015

© 2015 David Altounian, Ph.D., Austin Technology Council

Non Venture Capital Sources by Metro § Non-VC sources play an important role in investment activity § Markets with large venture investment sums also have stronger private equity and investment banking firm presence § Commercial Banking segment refers to banks that do Venture Debt Source: NVCA/MoneyTree Report, National Venture Capital Association, January 2015, Source: Austin Technology Council Funding Source Survey, June 2015

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© 2015 David Altounian, Ph.D., Austin Technology Council

Evaluating the Funding Network Effect using Metcalfe’s Law § Metcalfe’s Law states that the value of the network is proportional to the square of the number of nodes in the network and is expressed as (V ∝ n2 ) § Applied as: “VC funding amount is proportional to the square of the number of funding sources in the network” – proportional as a % of the total Venture Capital Invested and % of the total squared amount of the network nodes § Represents the nine metro areas divided into three segments based on total VC investment § Highlights the importance of Network Effect of funding source types on VC Investment in the markets 11

© 2015 David Altounian, Ph.D., Austin Technology Council

Capital Source Survey â&#x20AC;&#x201C; Raw Counts Business'category'/'Count'of'Sources'by'Type Angel Groups (like Central Texas Angels Network) Venture Capital Firms that invest in Seed stage (0-$1M) Venture Capital Firms that invest in Early/mid-growth stage ($1-$5M) Venture Capital Firms that invest in later stage deals ($5-15M) Venture Capital Firms that do Mezzanine/Bridge financing Commercial Banks that provide Working Capital or Line of Credit Loans Local Private Equity Firms National Private Equity Firms with local branches (like UBS)

5 14

4 10

5 26

Midwest '(Chi) 7 14

33

20

41

28

44

26

17

14

29

21

28

8

4

1

9

9 13

9 64

19 39

13

33

Austin

Colorado NW'(Seattle)

Local Investment Banks (do private or public offerings or M&A work) 14 28 National Investment Banks with local branches (do private or public offerings or M&A work) 18 6 Total within a Metro 144 192 2014'Startup'Funding'Amount'(NVCA/MoneyTree 'Report'NVCA2014'1_20_15)'/'in'thousands $620,580 $480,270 Number of Deals Funded 114 43 Metro Ranking by Funding Level 11 14 Mean Average $/deal - in thousands $5,444 $11,169

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So.'Cal'(LA/ San'Diego Orange) 5 5 24 6

Silicon 'Valley 14 113

NY'Metro New'England Total'by'Category 22 85

14 66

81 358

222

149

120

683

20

199

105

93

526

13

4

72

52

53

216

38 75

35 35

6 11

17 39

16 147

12 45

161 468

0

76

1

2

20

19

17

181

16

62

68

19

39

101

40

387

19 195

41 371

34 287

13 112

50 785

43 739

15 475

239 3300

$1,204,830 $1,064,910 108 94 5 7 $11,156 $11,329

$2,600,430 $805,080 $23,809,320 $4,218,200 254 99 1390 395 4 9 1 3 $10,238 $8,132 $17,129 $10,679

Š 2015 David Altounian, Ph.D., Austin Technology Council

$4,443,430 371 2 $11,977

$39,247,050 2868 $13,684

Investment Source Strength/Weakness § Red indicates lowest count in that category among the metros measured, Green indicates highest count § The two metros with the highest amount invested, number of deals, and high average investment per deal had the highest concentration across the sources § Initial correlation analysis indicates that healthy VC community among the four stages is more significant than the other funding sources § The two metros with the lowest funding amounts in 2014 had the lowest counts across the sources

Metro&Capital&Source&Mix&Comparison&to&the&Total&Counted Midwest Austin Colorado NW&(Seattle) Sources& &(Chi) Angel&Groups&(like&Central&Texas&Angels&Network) 6.2% 4.9% 6.2% 8.6% Venture&Capital&Firms&that&invest&in&early&stage&(0I$1M) 3.9% 2.8% 7.3% 3.9% Venture&Capital&Firms&that&invest&in&midIgrowth&stage&($1I$5M) 4.8% 2.9% 6.0% 4.1% Venture&Capital&Firms&that&invest&in&later&stage&deals&($5I15M) 3.2% 2.7% 5.5% 4.0% Venture&Capital&Firms&that&do&Mezzanine/Bridge&financing 3.7% 1.9% 0.5% 4.2% Commercial&Banks&that&provide&Working&Capital&or&Line&of& 5.6% 5.6% 11.8% 23.6% Credit&Loans Local&Private&Equity&Firms 2.8% 13.7% 8.3% 16.0% National&Private&Equity&Firms&with&local&branches&(like&UBS) 7.2% 18.2% 0.0% 42.0% Local&Investment&Banks&(do&private&or&public&offerings&or& 3.6% 7.2% 4.1% 16.0% M&A&work) National&Investment&Banks&with&local&branches&(do&private&or& 7.5% 2.5% 7.9% 17.2% public&offerings&or&M&A&work) Total&within&a&Metro 4.4% 5.8% 5.9% 11.2%

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So.&Cal&(LA /Orange) 6.2% 6.7% 6.4% 5.3% 6.0%

San&Diego Silicon&Valley NY&Metro New&England Total&by&Category 6.2% 1.7% 3.8% 3.8% 1.9%

17.3% 31.6% 32.5% 37.8% 33.3%

27.2% 23.7% 21.8% 20.0% 24.1%

17.3% 18.4% 17.6% 17.7% 24.5%

100% 100% 100% 100% 100%

21.7%

3.7%

10.6%

9.9%

7.5%

100%

7.5% 0.6%

2.4% 1.1%

8.3% 11.0%

31.4% 10.5%

9.6% 9.4%

100% 100%

17.6%

4.9%

10.1%

26.1%

10.3%

100%

14.2%

5.4%

20.9%

18.0%

6.3%

100%

8.7%

3.4%

23.8%

22.4%

14.4%

100%

© 2015 David Altounian, Ph.D., Austin Technology Council

Implications of the Findings

The size of the Austin funding source network is smaller than other major startup metros § Austin is rapidly growing the startup base while the funding source base is significantly behind other established metro areas – Ranked #1 for Startup Density, #11 for VC Funding §

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The funding network effect in Austin is not strong due to a dearth of local later stage funding sources § In the Venture Capital segment there is an urgent need for more late stage and mezzanine venture sources in Austin §

The growth-related funding areas (commercial banking, private equity, and investment banking) are development areas for the Austin market § While non-Austin funding sources do invest in Austin companies anecdotally, these tend to be later stage and at a lower funding level than local funding (the airplane penalty?) §

© 2015 David Altounian, Ph.D., Austin Technology Council

§

Active effort is required to grow the overall funding source count in all segments in Austin and attract later stage venture funds, investment bankers, and commercial bankers