SURVEY REPORT 1st Annual Private Tech Investor Survey
Highlights From SharesPost s 1 st Annual Private Tech Investor Survey We are pleased to announce the results of SharesPost s first private tech investor sentiment survey. Over 600 accredited individual and institutional tech investors let us know their expectations for the new year. Survey participants represented a wide range of private and public market investment styles. Although such surveys admittedly have a degree of sampling bias, the results were surprisingly consistent. In short, investors of all types are predominantly bullish about the prospects for tech companies in 2017. Key highlights include: #1. Bullish prospects for Private Tech company valuations 49% of investors surveyed think private company valuations would increase in 2017 (vs. 28% of investors expect valuations to decrease). This clearly implies a bullish sentiment among investors towards private tech companies, particularly given the downward valuation correction we witnessed through much of 2016. We note that the bullbear gap for private tech companies is a bit narrower versus the corresponding gap for public market performance expectations. Slicing the survey data by investor category, we observed that high net worth investors were marginally more bullish about the private market s upside in 2017 than institutional investors. #2. There is a greater enthusiasm for Small/Mid-Cap Tech companies We asked survey respondents their preference between Public Large Cap Tech, Private Large Cap Tech, Public Small/Mid-Cap Tech, Private Small/Mid-Cap Tech, and Early/Seed investments. 29% of the surveyed investors chose Private Small/Mid-Cap Tech followed by 25% of investors believe that Public Small/Mid-Cap Tech companies would provide best returns over the next 12 months. Interestingly, we observed a greater bias among institutional investors towards the Small/Mid-Cap asset classes. In other words, 38% of surveyed VC/PE investors prefer SMID private tech companies and 43% of public equity investors prefer SMID public tech companies. #3. Investors expect roughly 10 Unicorns to go public in next 18 months, in-line with historical levels 65% of surveyed investors think that 10 or fewer Unicorns would go public over the next 18 months, implying a runrate of less than two $1 billion IPOs per quarter. We observed that public equity-focused institutional investors are marginally more optimistic about the IPO prospects of Unicorns as compared to their VC/PE-focused counterparts. On a weighted average basis, public equity investors believe that roughly 11 Unicorns would go public over the next 18 months whereas VC/PE folks estimate 9 such IPOs. Recall that in our earlier report, Zero to One Billion, we illustrated a trendline of real Unicorns i.e. $1B+ IPOs or M&As of VC-backed tech companies. There have been 6-8 $1B+ IPOs of VC-backed tech companies every year since 2009. This annual run rate has largely stayed within this range since the Great Recession, with few peaks (2013 and 2014) and valleys (2016). In short, investors expect a reversion to mean IPO activity over the next 12-18 months, implying an uptick in activity observed in 2016. 2
#4. Sectors with highest growth potential are Big Data, Security, VR/AR, and FinTech We asked participants, regardless of investment time horizons, where do you see greatest growth opportunity in the future? We presented 15 options (as illustrated in exhibit 13), and asked investors for their top three choices. Regardless of investor groups or cohorts, we noticed Big Data/Analytics, Security (Software), VR/AR, FinTech, and Wearables (IoT) as the most selected choices whereas Gaming, Ad-Tech, and Clean-Tech as the least selected choices among all investor groups. We were surprised that almost all cohorts of investors, accredited individual vs. institutional or public equity vs. VC/PE investors, seem to generally prefer the long-term growth prospects for Enterprise Software companies above Consumer Mobile or Web Internet companies, particularly given 3 out of 5 most valuable public companies today are in the latter group (GOOGL, AMZN, FB) versus just one in the first group (MSFT). #5. Generally positive bias towards investing in private tech companies via secondary shares About 37% of all surveyed investors think that investing in late-stage, private tech growth companies via secondary shares is an attractive investment strategy. This compares to 23% of surveyed respondents who indicated that secondary shares do not present an attractive investment opportunity. Both private equity and accredited individual investors think positively about investing in this asset class. But, a marginally higher proportion of public equity-focused institutional investors are negatively biased towards this asset class. 35% of public equity investors think that this asset class is not an attractive investment opportunity. This proportion is marginally higher than the 33% of public equity investors who think that secondary share investing is an attractive investment. #6. Investors expect public markets to continue to rally in 2017 57% of investors surveyed believe the S&P 500 would rise by 5% or more over the next 12 months. On the other hand, 17% of survey respondents believe the S&P 500 would decrease by 5% or more during 2017. Institutional investors are marginally more bullish about public markets than individual investors. 64% of surveyed institutional investors are bullish, whereas 53% of accredited individual investors expect public markets to rise 5% or more. This perspective is consistent with the most recent investor sentiment study conducted by American Association of Individual Investors (AAII) from December which reported that 43% of respondents felt bullish versus the 28% feeling bearish. 3
Survey Methodology The SharesPost Investor Survey was created to obtain feedback from high net worth accredited individual and institutional investors on market sentiment and sector-specific expectations for 2017. The online survey was conducted from November 21 to December 15, 2016. We invited accredited individual investors and institutional clients of SharesPost to participate. The anonymity of all survey responses has been maintained and online IP tracking disabled. We received more than 600 completed survey responses. Based on a sample population of between 1,000,000 to 2,000,000 members, we estimate the margin of error for the survey was below ±5% for a 95% confidence interval. As a first question, we asked survey respondents to identify themselves as one of the following: Public equity investor, VC or Private equity investor, Working inside a company, and Other. If survey respondents chose either working inside a company or other, we categorized them as an accredited individual investor. We illustrate the overall breakdown below. Note that unaccredited investors were not invited to participate. Exhibit 1: Please identify yourself. My day job is., 91 respondents 15% 121 respondents 388 respondents 65% ; Accredited survey respondents who indicated that they work inside a company or run their own business were categorized as Accredited individual investors 4
#1. Bullish prospects for Private Tech company valuations 49% of investors surveyed think private company valuations would increase in 2017 (vs. 28% of investors expect valuations to decrease). While this implies a generally bullish sentiment among investors towards private tech companies, we d highlight that this bull-bear gap for private tech companies is a bit narrower versus the corresponding gap in the proportion of investors expecting the public markets to rise and fall. Our interpretation? Overall optimism for public markets is more widespread than the optimism for private tech company investing. But, the key point here is that more than 7 of the surveyed investors believe that private tech company valuations would either stay flat or rise over the next 12 months. In addition, we observed that individual PE investors were marginally more bullish than institutional investors and public equity investors, respectively. For context, 75% of surveyed accredited individuals believe that private tech company valuations would stay flat or rise over the next 12 months. This compares to 7, 68%, 65% levels for VC/ PE investors, Institutional investors, and Public equity institutional investors, respectively. Exhibit 2: Over the next 12 months, do you expect valuations of Private Technology Growth companies to go up, down, or remain about the same as in recent couple of quarters? 350 300 250 200 150 100 49% of investors surveyed think private company valuations would increase in 2017 (vs. 28% of investors expect valuations to decrease) 50 0 Increase Roughly Flat Decrease Exhibit 3: Comparable private tech valuation expectations among Institutional & Accredited Individuals Exhibit 4: VC/PE investors are more optimistic than their public equity counterparts 6 6 5 5 1 1 Increase Roughly Flat Decrease Increase Roughly Flat Decrease 5
#2. There is a greater enthusiasm for Small/Mid-Cap Tech companies We asked survey respondents specific questions to gauge their preference for specific sectors. We provided five options to chose among: Public Large Cap Tech, Private Large Cap Tech, Public Small/Mid-Cap Tech, Private Small/Mid-Cap Tech, and Early/Seed investments. 29% of the surveyed investors believe that Private Small/Mid- Cap Tech would provide best returns over the next 12 months followed by 25% of investors that believed Public Small/Mid-Cap Tech companies would do so. Institutional investors have a marginally greater bias towards SMIDs versus accredited individuals. 58% of surveyed institutional investors think that Small/Mid-Cap private or public tech companies would yield the best returns over the next 12 months. This compares to a tad lower proportion of 54% of accredited individuals who indicated either public or private small/mid-cap tech companies as their top choice to invest over the next 12 months. VC/PE investors prefer Private SMIDs and public equity institutional investors prefer public SMIDs. We observed a greater bias among institutional investors towards Small/Mid-Cap asset classes. 38% of surveyed VC/PE investors prefer SMID private tech companies and 43% of public equity investors prefer SMID public tech companies. Exhibit 5: Thinking about your investments over the next 12 months, which of the following asset classes do you believe are likely to deliver the best returns? Early-stage/Seed Small/Mid-Cap Private Tech Large Cap Private Tech Small/Mid-Cap Public Tech Large cap Public Tech 0 50 100 150 200 Exhibit 6: Similar asset class preferences across Institutional & Accredited Individuals Exhibit 7: Public equity investors prefer public SMIDs & VC/PE prefer private SMIDs Early-stage/Seed Early-stage/Seed Small/Mid-cap Private Tech Small/Mid-cap Private Tech Large Cap Private Tech Large Cap Private Tech Small/Mid-cap Public Tech Small/Mid-cap Public Tech Large Cap Public Tech Large Cap Public Tech 1 1 5 6
#3. Investors overall expect roughly 10 Unicorns to go public in next 18 months, in-line with historical levels 65% of surveyed investors think that 10 or fewer Unicorns would go public over the next 18 months, implying a runrate of less than two $1 billion IPOs per quarter. We observed that public equity-focused institutional investors are marginally more optimistic about the IPO prospects of Unicorns as compared to their VC/PE-focused counterparts. Accredited Individuals are more optimistic about Unicorn IPO prospects versus : 45% of surveyed accredited individuals think that there would be more than 10 Unicorn IPOs over the next 18 months. On the other hand, 33% of their institutional counterparts agree with this level of IPO activity. And, the flip side of these statements is also true. Roughly 67% of surveyed institutional investors believe that there would be 10 or fewer Unicorn IPOs over the next 18 months. On average, Institutional investors expect 9 to 11 Unicorn IPOs thru 1H:2018: On a weighted average basis, public equity investors believe that roughly 11 Unicorns would go public over the next 18 months whereas VC/PE folks estimate 9 such IPOs. Interestingly, the investors who are closest to these private companies i.e. the VC/PE investors seem to have the least optimistic view on their IPO prospects over this period. Exhibit 8: How many Unicorn private companies do you expect to go public over the next 18 months? 250 200 150 65% of investors surveyed think that 10 or fewer Unicorns would go public over the next 18 months; or, less than 2 per quarter 100 50 0 <=5 6-10 11-20 >20 Exhibit 9: Institutional & Individual Investors have comparable Unicorn IPO expectations Exhibit 10: Public equity investors have slightly higher IPO expectations Vs. VC/PE investors 1 1 <=5 6-10 11-20 >20 <=5 6-10 11-20 >20 7
#4. Sectors with highest growth potential are Big Data, Security, VR/AR, and FinTech We asked all survey takers the following question: regardless of investment time horizons, where do you see greatest growth opportunity in the future? We presented investors with 15+ options and asked them to choose their top three choices. Regardless of investor groups or cohorts, we noticed Big Data/Analytics, Security (Software), VR/AR, FinTech, and Wearables (IoT) were the most selected choices whereas Gaming, Ad-Tech, and Clean-Tech were the least selected choices among all investor groups. We were surprised that almost all cohorts of investors, accredited individual vs. institutional or public equity vs. VC/PE investors, seem to generally prefer long-term growth opportunity in Enterprise Software companies versus Consumer Mobile or Web Internet companies, particularly given 3 out of 5 most valuable public companies today are in the latter group (GOOGL, MZN, FB) versus just one in the first group (MSFT). Exhibit 11: Regardless of investment time horizons, where do you see greatest growth opportunity in the future? Big Data / Analytics** Security Software** VR/AR Fin-Tech Wearables / IoT Infrastructure Apps** Bio-Tech ecommerce* Social Media / Messaging* New Media* Clean-Tech Ad-Tech Gaming* Online Travel* 0 50 100 150 200 250 300 Source: SharesPost Research; N=600 survey respondents; * Consumer Apps; ** Enterprise Software Apps; Survey options also included Other Enterprise Software Apps, Other Mobile or Web Consumer Apps, and Other ; We qualified Infrastructure Apps to include Storage, Computing, & Networking Exhibit 12: Similar sector preferences for Institutions & Accredited Individuals Exhibit 13: Top Seven sector choices of Institutions & Accredited Individuals are similar Infrastructure Apps Bio-Tech Wearables & IoT Wearables & IoT VR / AR FinTech FinTech Infrastructure Apps Security Software Security Software VR / AR Big Data / Analytics Big Data / Analytics 5% 1 15% 25% 35% 45% 5 5% 1 15% 25% 35% 45% 5 8
#5. Generally positive bias towards investing in private tech companies via secondary shares About 37% of all surveyed investors think that investing in late-stage private tech companies via secondary shares is an attractive investment strategy. This compares to 23% of surveyed respondents who indicated that secondary shares do not present an attractive investment opportunity. Both private equity and accredited individual investors think positively about investing in this asset class. But, a marginally higher proportion of public equity-focused institutional investors are negatively biased towards this asset class. 35% of public equity investors think that this asset class is not an attractive investment opportunity. This proportion is marginally higher than the 33% of public equity investors who think that secondary share investing is an attractive investment. Exhibit 14: How do you view secondary shares of late-stage VC-backed tech companies as an asset class? 300 250 200 150 100 50 0 Attractive Neutral Not attractive Exhibit 15: Institutional investors are marginally more positive than individual investors Exhibit 16: VC/PE investors are more bullish than public equity investors 5 5 VC/PE investors are more bullish about private company secondary shares than public investors 1 1 Attractive Neutral Not attractive Attractive Neutral Not attractive 9
#6. Investors expect public markets to continue to rally in 2017 57% of investors surveyed believe the S&P 500 would rise by 5% or more over the next 12 months. On the other hand, 17% of survey respondents believe the S&P 500 would decrease by 5% or more during 2017. For context, prior 5-year market returns have been 2.1% in 2011, 16% in 2012, 32.4% in 2013, 13.7% in 2014, and 1.4% in 2015. Through Dec 15 2016, the S&P 500 is up approximately 1. Institutional investors are marginally more bullish about public markets than individual investors. 64% of surveyed institutional investors are bullish whereas 53% of accredited individual investors expect public markets to rise 5% or more. This level of optimism largely ties in the most recent investor sentiment conducted by American Association Of Individual Investors (AAII) that reported which 43% of the surveyed individual investors felt bullish versus 28% feeling bearish in early December. Public equity investors are marginally more bullish about public markets than VC/PE investors. 69% of surveyed public equity investors are bullish whereas 6 of private equity institutional investors expect public markets to rise 5% or more. On the other hand, roughly 12-13% of public equity investors expect public markets to decline 5% or more during 2017. Exhibit 17: The S&P 500 is up roughly 8% so far in 2016. Where do you expect the S&P 500 to be in the next 12 months? 250 200 150 57% of investors surveyed think S&P 500 would rise by 5% or more over the next 12 months 100 50 0 Up 1 or more Up 5% Roughly flat Down 5% Down 1 o more Exhibit 18: Institutional investors are more bullish than accredited individual investors Exhibit 19: Public equity investors are more optimistic than VC/PE folks about public markets 5 Institutional investors are marginally more bullish about public markets than individual investors Public equity investors are marginally more bullish about public markets than VC/PE investors (duh!) 1 1 Up 1 or more Up 5% Roughly flat Down 5% Down 1 or more Up 1 or more Up 5% Roughly flat Down 5% Down 1 or more 10
Contact For more information on transacting in the private market: Jennifer Phillips Managing Director, Private Securities Group Email: jphillips@sharespost.com Tel: 650.492.6885 For information on research and analysis: Rohit Kulkarni Managing Director, Private Investment Research Group Email: rkulkarni@sharespost.com Tel: 650.273.7905 Disclaimer SharesPost, Inc., is an affiliate of SharesPost Financial Corporation, SP Investments Management, LLC, and the SharesPost 100 Fund. SharesPost Financial Corporation is a member of FINRA/SIPC. SP Investments Management, LLC is an investment adviser registered with the Securities and Exchange Commission. SharesPost Financial Corporation does or intends to seek to do business with the issuer or issuers covered in this report. Accordingly, certain conflicts of interest may exist that could affect the objectivity of this report. The analyst(s) certifies that the views expressed in this report accurately reflect the personal views of such analyst(s) about any and all of the subject securities or issuers and that no part of such analyst(s) compensation was, is, or will be, directly or indirectly, related to the specific views contained in this report. Analyst compensation is based upon various factors, including the overall performance of SharesPost, Inc. and its subsidiaries, and the performance and productivity of such analyst including feedback from clients of SharesPost Financial Corporation and other stakeholders in our ecosystem, the quality of such analyst s research and the analyst s contribution to the grown and development of our overall research effort. Analyst compensation is derived from all revenue sources of SharesPost, Inc., including brokerage sales. This report does not contain a complete analysis of every material fact regarding any issuer, industry or security. The opinions expressed in this report reflect our judgment at this date and are subject to change. The information contained in this report has been obtained from sources we consider to be reliable, however, we cannot guarantee the accuracy of all such information. None of the information contained in this report represents an offer to buy or sell or a solicitation of an offer to buy or sell any security, nor does it constitute an offer to provide investment advice or service. Registered representatives of SharesPost Financial Corporation, do not (1) advise any member on the merits or advisability of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax or transactional advisory services. Any securities offered are offered by SharesPost Financial Corporation. SharesPost Financial Corporation and SP Investments Management, LLC are wholly owned subsidiaries of SharesPost, Inc. Certain affiliates of these entities may act as principals in such transactions. Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative and involves a high degree of risk and should only be considered a long-term investment. You must be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. You are responsible for verifying the accuracy of the data received. Each investment also carries its own specific risks and because you must make your own independent decisions regarding any securities or financial instruments mentioned herein, you should complete your own independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or other investment advice. Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment. SharesPost, My SharesPost, SharesPost Index, SharesPost Investment Management, SharesPost 100 Fund, and SharesPost 100 List are all registered trademarks of SharesPost, Inc. All other trademarks are the property of their respective owners. Copyright SharesPost, Inc. 2016. All rights reserved. 11