Optimizing Opportunities

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Optimizing Opportunities

Investment in Pittsburgh’s

technology sector

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On behalf of Ernst & Young and Innovation Works, we are pleased to present this review of investment trends and highlights in the Pittsburgh region’s growing technology sector. In this report, we’ve taken a look at the past fi ve years and the variety of sources of capital supporting our region’s growing base of technology companies – including venture capital fi rms (VCs), angel investors (angels), corporate/

strategic investors, seed funds, accelerators and other sources of funding.

Last year showed positive momentum for technology companies in the Pittsburgh region. Despite a national slowdown in both the number of investment deals and amount of funding, the Pittsburgh region saw a marked increase in the number of companies raising capital, and the overall amount of funding obtained by these companies increased slightly from 2011. Software companies, including consumer and enterprise software, garnered the largest share of venture capital in our region in 2012, followed by medical devices, energy technology and health care IT. The diversity of these sectors speaks to the broad base of technical talent in the Pittsburgh region, as well as to the varied strengths of our region’s universities. As Pittsburgh’s technology sector continues to grow and evolve, we hope that the recent trends in venture funding will continue in a positive direction. We encourage you to explore this report, and we hope that it will provide useful insights into the current state of the tech community and venture capital ecosystem in Pittsburgh.

Lynette Horrell Rich Lunak

Managing Partner, Ernst & Young LLP CEO, Innovation Works, Inc.

217

companies

$1.3 billion

Total investment, 2008—2012

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During the fi ve-year period of 2008—2012, 217 technology companies in the Pittsburgh region attracted a total of more than $1.3 billion in investment from venture capital fi rms, angel investors, strategic investors, accelerators, seed funds and other sources. Last year saw a 54% increase in the number of fundraising rounds, but the aggregate amount of investment obtained by these companies increased only slightly compared to 2011.

Prior to 2012, Pittsburgh experienced increases in the amount of technology company investment during 2010 and 2011. The 2009 recession brought a decline in the amount of funding, while holding steady the number of companies that were able to obtain funds.

As shown in the charts below, Pittsburgh’s investment performance during 2012 was more positive than the national trends, which saw both the amount of funding and the number of deals decrease in the US as a whole.

In 2012, more than

$329 million

was invested in Pittsburgh

technology companies by

VCs, angels, seed funds

and other sources.

Overview

Continued growth in Pittsburgh company investment compares favorably to national trends.

85

113

126 ₁₂₃

190 Pittsburgh technology company financing

From all sources 2008—2012

$230.8 $159.1 $261.4 $326.9 $329.1

2008 2009 2010 2011 2012

Amount invested ($ million) Number of deals

US venture financing

Annual investment amount and number of deals 2008—2012 3 116 3,505 3,363 3,049 2,759 3,116 $33,100 $24,300 $29,300 $35,100 $29,700 $33,100 $24,300 $29,300 $35,100 $29,700 2008 2009 2010 2011 2012

Amount invested ($ million) Number of deals

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The Pittsburgh region is not characterized by a single area of technical strength, but rather a diversity of sectors in which regional companies are developing innovative products. The region benefi ts from its highly educated workforce across multiple engineering disciplines – from computer science to electrical, biomedical, environmental and materials.

Among the 217 companies that attracted funding during the 2008-12 period, the largest number came from the software and information technology sector – including enterprise and consumer software, electronics, robotics, telecom and IT infrastructure. The second-largest sector was the combined life sciences/health care sectors – including medical devices, health care IT, biotechnology/drug development and health care services. Among life sciences companies, medical device fi rms experienced the most success in attracting funding.

According to Dow Jones VentureSource, software/IT and life sciences/health care were likewise the top two sectors receiving funding nationally in 2012. Pittsburgh’s concentration in both sectors was higher than the US as a whole. Taken together, companies in the software/IT segments accounted for 57% of all companies attracting venture investment in Pittsburgh, versus 32% in the US. Pittsburgh’s life sciences/health care sectors accounted for 29% of all funded companies, versus 23% nationally.

Sector diversity, with strengths in software

and medical devices

Pittsburgh companies receiving funding, by tech sector

2008—2012 Enterprise software 24% Consumer software 22% Electronics 5% Consumer products 2% Robotics 3% Telecom 2% Energy Advanced materials 4% 2% IT infrastructure 1% Medical device 14% Biotechnology 7% Health care services

8%

Health care IT 7% 1%

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In 2012, Pittsburgh experienced a dramatic increase in the number of very early stage companies attracting funding, with the number of “pre-revenue” companies nearly doubling from 2011. The number of revenue-generating companies that attracted funding also increased, growing by approximately 27% in 2012.

VCs provide the majority

of funds, but lead a

minority of rounds

Of the capital invested in Pittsburgh’s technology sector during the fi ve-year period of 2008—2012, nearly three-quarters of the funding came from venture capital fi rms. The second-largest share of funding was provided by angels, followed by corporate investors and fi nally seed funds and accelerators.

While the total amount of capital provided by venture capital fi rms was large, such fi rms accounted for only a minority of the number of deals in Pittsburgh. Instead, nearly two-thirds of all Pittsburgh regional tech company fi nancings consisted of smaller rounds featuring angels or seed funds/accelerators as the lead investor.

Increased number of

rounds for companies

at all stages

42 59 71 90 2 1 2 ₂ 3 Pittsburgh

Number of investment rounds

by stage of company development

52 70 65 50

98 31

2008 2009 2010 2011 2012

Pre-revenue Generating revenue Profitable

Funding for Pittsburgh companies, by type of investor

($ million) $30.6 $21.4 $5.7 $4.8 $27.7 $52.7 $79.3 $24 3 $16.2 $6.4 $5.3 $47.5 $24.3 $6.3 $212.2 $237.9 $223.7 $27.7 $28.8 $152.7 $96.3 2008 2009 2010 2011 2012

VC Angels Corporate and other Seed funds and accelerators

Number of investment rounds, by type of investor

2008—2012 48 26 50 42 36 40 43 76 2 11 16 12 37 25 22 28 32 40 21 30 40 2 22 2008 2009 2010 2011 2012

VC Angels Corporate and other Seed funds and accelerators

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The chart below estimates the annual supply of uncommitted funds at venture capital fi rms based in Pittsburgh. This analysis considers the timing of new fund closings by VC fi rms in the Pittsburgh region, and assumes that a fi rm will commit 25% of a new fund’s capital during each of the fi rst four years post-closing. Furthermore, if a fund is managed by partners who are located outside of the Pittsburgh region, the total amount of the fund’s capital that is “located” in Pittsburgh is determined by applying the percentage of the fund’s partners who work in the region.

According to this analysis, during the past decade, Pittsburgh’s supply of indigenous venture capital decreased from 2007 to 2011. In recent years, however, several smaller funds have been launched, with the largest being a $40 million fund in 2012. These new funds enabled the total available capital in 2012 to increase to approximately $29.3 million, thereby reversing the downward trend of the prior years.

While 2012’s increase in available capital is a positive sign, it may still represent a relatively modest source of fi nancing relative to the region’s growing supply of technology companies. By comparison, Pittsburgh’s total pool of available capital in 2012 ($29.3 million) would equal only 23% of the average size of a single venture capital fund in the United States

($149 million in 2010, as reported by the National Venture Capital Association).

Limited supply of indigenous venture capital

Supply of Pittsburgh-based venture capital

Estimate of uncommitted capital at Pittsburgh-based VC firms g ($ million) $136.6 $120.5 $87.7 $81.1 $45.6 $70.0 $48.3 $18.0 $7.1 $29.3 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

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Consistent with national trends, M&A activity in Pittsburgh’s tech sector began to increase in 2010 and saw continued growth in the number and size of deals during 2011 and 2012. Of the 28 Pittsburgh tech company exit transactions tracked during this period, several are believed to have been in the $95+ million range. These included the acquisitions of Vocollect ($190 million), M*Modal ($130 million) and Carnegie Learning ($97 million), plus other deals with undisclosed valuations.

Whereas many of the larger transactions were completed by companies that were more than 10 years old, several

Pittsburgh-born tech companies were acquired prior to their third birthdays at valuations of up to $40 million, after having raised only a modest amount of outside capital.

In addition, during 2011—12, two publicly traded tech companies with Pittsburgh roots were taken private via acquisitions by private equity fi rms. These included the 2011 acquisition of Tollgrade Communications ($137 million) and the 2012 acquisition of M*Modal (a $1.1 billion acquisition of the combined entity that resulted from M*Modal’s 2011 acquisition).

Technology company exits on the rise

28

companies

$2+ billion

Total value

Invivodata

acquired by

ERT

2012 5 April 2013

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Firms making investments in Pittsburgh

companies, 2008—2012

Accel Partners CrunchFund El Dorado Ventures ePlanet Capital Floodgate Foundation Capital Harrison Metal Capital Health Evolution Partners Horizon Ventures InCube Ventures Kern Whelan Capital

Kleiner Perkins Caufi eld & Byers Lightspeed Venture Partners Lovell Minnick Partners

Menlo Ventures

Norwest Venture Partners ONSET Ventures

Pacifi c Venture Group Prescient Capital Rincon Venture Partners Sand Hill Angels Sequoia Capital Silicon Valley Bank Silverton Partners Tech Coast Angels Tenaya Capital Trident Capital TriplePoint Capital

California and Western region

Adams Capital Management Alphalab

Birchmere Ventures BlueTree Allied Angels Bradford Capital Partners Draper Triangle Ventures Eagle Ventures

Idea Foundry iNetworks Advisors Innovation Works

Meakem Becker Venture Capital Newlin Investment Company Pittsburgh Equity Partners

Pittsburgh Life Sciences Greenhouse Smithfi eld Trust

Stonewood Capital Management

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Arboretum Ventures Ascension Health Ventures Capvest Venture Fund Chrysalis Ventures CID Capital Inc. Hopewell Ventures River Cities Capital Funds Salix Ventures

Seneca Partners

Advanced Technology Ventures Bain Capital Ventures

FourWinds Capital Management GE Healthcare

Harbor Light Capital Partners Highland Capital Partners Nexus Medical Partners North Atlantic Capital Corp. Polaris Venture Partners Saturn Management Spectrum Equity Investors Summit Partners

Enhanced Capital Partners ff Venture Capital

General Atlantic Golden Seeds ICV Capital Partners Insight Venture Partners Morgan Stanley

New York Angels

Northwood Ventures Ogden Capital Radius Ventures Rose Tech Ventures The NPD Group The Vertical Group Union Square Ventures Warburg Pincus

Comcast Ventures

Cross Atlantic Capital Partners Delaware Crossing Investor Group Edison Ventures

First Round Capital Innovation Ventures

Mid-Atlantic Angel Group Fund

NewSpring Capital Novitas Capital Originate Ventures Osage Partners Quaker Partners Robin Hood Ventures

ABS Capital Partners Active Angel Investors Columbia Capital LLC Horizon Technology Finance New Atlantic Ventures

New Enterprise Associates Oxford Finance Corporation Square1 Bank

Virginia Active Angel Network Vital Financial LLC

Midwest

New England region

New York region

Philadelphia region

Baltimore/Washington, DC region

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The following were among the Pittsburgh companies completing funding rounds in 2012:

www.4moms.com CEO: Robert Daley

Investors: Bain Capital Ventures, Blue Tree Allied Angels,

Innovation Works

4moms

4moms (Thorley Industries, LLC) has introduced robotics technology to the juvenile industry with its innovative 4moms baby gear products. Products include: mamaRoo® infant seat designed to move the way parents do when comforting their babies; origami® stroller, the world’s fi rst power-folding stroller; breeze™ playard that opens or closes in one easy step; and infant tub and spout cover with built-in digital thermometers to make bath time safe and comfortable.

www.aethon.com CEO: Aldo Zini

Investors: Ascension Health Ventures, Draper Triangle

Ventures, Mitsui USA, Radius Ventures, Robert Bosch Venture Capital Group, Salix Ventures, Trident Capital

Aethon, Inc.

Aethon improves healthcare effi ciency and patient care by providing innovative logistics solutions. Its industry leading mobile robotic platform (TUG) enables hospitals to automate and improve the delivery and retrieval process across all major functions – including medications, supplies, meals, linen, and waste removal. Its product tracking and security software (MedEx) gives hospitals the ability to track, monitor and electronically document the delivery process, particularly for high-value medications and other items requiring consistent chain-of-custody documentation

www.alung.com CEO: Pete DeComo

Investors: Birchmere Ventures, Eagle Ventures, BlueTree

Allied Angels, Innovation Works, Pittsburgh Life Sciences Greenhouse, Private Investors

ALung Technologies, Inc.

ALung is commercializing the Hemolung Respiratory Assist System (RAS), a dialysis-like alternative or supplement to mechanical ventilation originally developed at the University of Pittsburgh. The Hemolung RAS removes carbon dioxide and delivers oxygen directly to the blood, allowing the patient’s lungs to rest and heal. A simple extracorporeal circuit, small venous catheter, and techniques similar to hemodialysis make the Hemolung RAS easy to use.

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www.aquionenergy.com CEO: Scott Pearson

Investors: Advanced Technology Ventures,

Kleiner Perkins Caufi eld & Byers, Foundation Capital

Aquion Energy, Inc.

Aquion Energy is fundamentally changing the economics of power generation and distribution by developing and commercializing a safe, reliable, and affordable energy storage solution from nontoxic components as simple as saltwater. Based on the research of Carnegie Mellon University Professor Jay Whitacre, Aquion’s proprietary Aqueous Hybrid Ion (AHI) battery overcomes the pitfalls of conventional energy storage technologies. AHI systems will enhance the electrical grid by providing fl exible, emissions-free capacity that optimizes existing generation assets and enables broad adoption of renewable energy technologies.

www.averesystems.com CEO: Ron Bianchini

Investors: Lightspeed Venture Partners, Menlo Partners,

Norwest Venture Partners, Tenaya Capital

Avere Systems

Avere is defi ning a new architecture for data storage that enables customers to achieve unlimited storage performance scaling, locate storage and compute resources where it is most advantageous for the business – all while cutting storage costs by more than half. In a broad range of industries from Media to Financial Services, from Software Development to Oil & Gas, from Life Sciences to Web, Avere customers are using its products to optimize their NAS infrastructure and increase the throughput and scalability of key applications and workfl ows, resulting in productivity gains that translate to higher revenues and happier customers.

www.brandingbrand.com CEO: Chris Mason

Investors: Insight Venture Partners, CrunchFund

Branding Brand

Branding Brand powers mobile commerce sites and apps for over 150 of the world’s leading retailers, including American Eagle Outfi tters, Crate & Barrel, Ralph Lauren, and Sephora. Founded in 2008 by three friends from Carnegie Mellon University, the company launched a mobile platform at the end of 2009 to seamlessly extend brands into optimized experiences for smartphones, tablets, and in-store. It is now the largest m-commerce provider to the Internet Retailer Top 500. Partners include eBay and Google.

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www.civicscience.com CEO: John Dick

Investors: Cox Enterprises, Innovation Works,

New Atlantic Ventures

CivicScience, Inc.

CivicScience polls millions of consumers every week on their favorite websites and social networks. The company’s polls ask users about favorite brands, TV shows, current events, and just about anything else you can think of. CivicScience then helps the world’s leading marketers and other decision-makers see results in real-time and dive deep into the most important trends. The company makes survey research super-fast, super-easy, and super-smart. CivicScience’s proprietary data mining technology uncovers the most important insights automatically and makes them easy to understand.

www.coheramedical.com CEO: Patrick Daly

Investors: Bradford Capital Partners, Kern Medical LLC,

Innovation Works, Pittsburgh Life Sciences Greenhouse

Cohera Medical, Inc.

Cohera Medical, Inc is a leading innovator and developer of absorbable surgical adhesives and sealants that improve patient care and quality of life. Cohera has entered the European market with its fi rst product offering, TissuGlu® Surgical Adhesive, which Cohera’s researchers designed to help plastic and aesthetic surgeons to eliminate or reduce fl uid accumulation and the need for post-surgical drains in abdominoplasty (tummy tuck) and other large fl ap surgical procedures. TissuGlu Surgical Adhesive is resorbable, biocompatible for internal use, uses no human or animal based ingredients and forms a strong bond between tissue layers.

www.cogrx.com CEO: Hank Safferstein

Investors: Alzheimer’s Drug Discovery Foundation, Golden

Seeds, Innovation Works, OgdenCAP, Pittsburgh Life Sciences Greenhouse, Tech Coast Angels

Cognition Therapeutics, Inc.

Cognition Therapeutics is committed to the discovery of new, disease-modifying therapeutics to improve the lives of those living with Alzheimer’s disease and other neurodegenerative disorders. The company is developing fi rst-in-class small molecule drugs that effectively block the interaction of toxic Abeta proteins with their receptor on brain cells and thus stop memory loss. CogRx’s drugs are the fi rst small molecule Abeta oligomer receptor antagonists ever reported.

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www.complexarx.com CEO: Joshua Tarnoff

Investors: Scientifi c Health Development, Innovation Works,

Pittsburgh Life Sciences Greenhouse, Upstart, and Individual Investor

Complexa, Inc.

Complexa, Inc. is a biopharmaceutical company focused on discovering and developing innovative therapies for the treatment infl ammatory and metabolic diseases. Though strong preclinical proof of concept data exists in several disease categories, initial focus is placed on acute and chronic kidney disease. The Company’s human pathway signaling discoveries have revealed new classes of drug candidates that are based on naturally-occurring nitro-fatty-acids. Complexa’s lead compound CXA-10 is expected to receive IND status and enter into human trials 2013.

www.modcloth.com CEO: Eric Koger

Investors: Accel Partners, First Round Capital, Floodgate,

Harrison Metal, StubHub Founder Jeff Fluhr, Norwest Venture Partners

ModCloth, Inc.

ModCloth’s mission is to democratize the fashion industry. ModCloth seeks to do so by empowering its community of shoppers through a social commerce platform that brings products to market with customer feedback and validation. Programs like Be the Buyer™ allow customers to vote items from emerging designers into production. In just several years, ModCloth has grown from its humble beginnings in a Carnegie Mellon University dorm room to “America’s Fastest-Growing Retailer.”

www.nowaitapp.com CEO: Ware Sykes

Investors: Birchmere Ventures, Sand Hill Angels,

Innovation Works, Alphalab

NoWait, Inc.

NoWait is aiming to become the OpenTable for restaurants that don’t take reservations. The Pittsburgh company, which helps would-be diners fi nd out wait times in advance and get text messages when a table is ready, has seated more than 9.2 million patrons to date.

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www.redzone.com CEO: Michael Lach

Investors: ABF Capital Partners, FourWinds Capital

Management, Smithfi eld Trust, Innovation Works

RedZone Robotics, Inc.

RedZone Robotics simplifi es wastewater management by providing municipal clients with the information and tools necessary to address their most valuable wastewater assets – their sewer pipes. RedZone delivers high performance pipeline inspection products and services for municipalities, contractors and engineering fi rms across North America.

www.theresumator.com CEO: Don Charlton

Investors: Birchmere Ventures, Rincon Venture Partners,

ff Venture Capital, Innovation Works, Alphalab

The Resumator

The Resumator is a Pittsburgh-based software company that develops Web 2.0 recruiting software. Featured on TechCrunch, Mashable and CNET, the company’s software empowers growing businesses with fun-to-use recruiting tools they’ve never had, but have always needed. The Resumator helps employers extend the reach of their jobs and makes reviewing resumes very effi cient.

www.vocitec.com CEO: Anthony Gadient

Investors: BlueTree Allied Angels, Innovation Works,

Pittsburgh Equity Partners

Voci Technologies

Based on 8 years of research conducted at Carnegie Mellon University, Voci’s mission is to enable enterprises to extract intelligence from voice data. Voci’s patented technology provides a unique combination of superior accuracy, lowest operating costs and ability to extract emotional-sentiment from voice data allowing enterprises to obtain business intelligence and hear the tone of their customers in real-time.

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The data in this report comes from a combination of the Dow Jones VentureSource database and private company data from Innovation Works, Inc. The investment rounds tracked in these datasets were completed by companies in the Pittsburgh region from January 1, 2008 to December 31, 2012. For the purpose of this report, both equity and convertible note investments were counted as “venture” investment. The geographic boundary of the Pittsburgh region used in this report corresponds to the Pittsburgh Metropolitan Statistical Area, as utilized by the U.S. Census Bureau. Throughout this report, the terms “deal” and “round” are used interchangeably, and refer to a single reported round of funding. Companies may complete more than one fundraising round in a single year, in which case each round is counted as a separate “deal.”

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Ernst & Young LLP is a client-serving member fi rm of Ernst & Young Global Limited operating in the US.

Innovation Works, Inc. (IW) invests capital, business expertise and other resources into high-potential companies with the greatest likelihood for regional economic impact in the Pittsburgh region. IW is the single largest investor in seed-stage companies in this region and is one of the most active seed-stage investors in the United States. Three-quarters of all recent

venture-funded companies in the Pittsburgh region had previously received funding from IW. Innovation Works is an initiative of the PA Department of Community and Economic Development and is funded by the Ben Franklin Technology Development Authority.

For more information, please visit:

www.innovationworks.org

Methodology

About Ernst & Young

About Innovation Works

13 April 2013

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This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither Innovation Works, Inc, Ernst & Young LLP nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

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