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20

Public Policy

Issues

Key Findings

4

Understanding

Startups

10

Hiring Talent

16

12

Business

Environment

33

U.S. Versus

U.K. Startups

Startup Outlook

2013 Report

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Executive Summary Key Findings 2013 Survey Respondents 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

Part 1: Overview

Part 2: Detailed Findings

1 4 7 10 12 16 20 20 24 26 28 33

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1

Part 1: Overview

“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

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.

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“Excess federal regulation and fiscal uncertainty has a

chilling effect on the business environment.”

CFO, Medical Device Startup

“Help find more ways to allow creative minds to explore and

“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

“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.”

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Executive Summary

(con’t.)

Yet for all of our optimism about the technology sector, this year’s Startup Outlook again shows that we’re not doing what we need to do to help this important part of our economy thrive. Nine in 10 startups plan to hire new employees, but an equal number say it is challenging to find workers with the skills they need. Sixty percent of software executives think business conditions in 2012 were better than 2011, but the number who think business conditions were worse doubled year-over-year, from six percent to 13 percent. And the critically important healthcare sector remains challenged, with a majority of healthcare executives believing business conditions in 2012 were the same or worse as 2011 and one in 10 seeing them as much worse. Startups don’t want or need a lot of help. Entrepreneurs are remarkably versatile and solutions-oriented. But they do need a few things from government — like an education system that teaches students about science, technology, engineering and math (the so-called “STEM” skills); an immigration system that welcomes people who bring talent and energy to our economy; an intellectual property system that rewards invention, not litigation; and a tax system that provides certainty, predictability, and an incentive to

invest in real companies, doing real things. And they need government to avoid misguided policies — like the new 2.3 percent tax on the topline revenues of medical device companies, including device startups that aren’t yet profitable.

We publish the Startup Outlook survey annually to help give startups a voice. We hope that if people see firsthand the opportunities and challenges entrepreneurs face, they will recognize the immense potential startups offer to our country. We hope they’ll also see how short-sighted or seemingly benign policies can hurt the companies we need to drive our economy in the coming decade.

In the end, we think good business decisions and good public policy both come down to a few things. We need to base decisions on facts. We need to embrace the right kinds of risks. We need to invest in the underpinnings of a strong economy, such as infrastructure and basic research and development. And we need to focus on creating a better future, not entrenching the status quo. We hope this year’s Startup Outlook promotes this kind of forward-looking, fact-based discussion and provides new insights to policymakers and business leaders. We look forward to participating in those discussions and doing what we can to help innovative companies thrive.

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Key Findings

Understanding Startups: A Few Facts

▶ Most startups don’t earn a profit. That’s true even when they earn significant topline revenues, and even in capital-efficient sectors (like software) 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. Tech Economy Continues to Perform as the Economy Stabilizes

▶ Startups have performed well in 2012 with 58 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

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

▶ Respondents are even more likely than in past years to say they’re hiring, with nearly nine in 10 executives say they will hire new employees in 2013. ▶ 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 businesses. Software and hardware executives face the greatest challenges.

The Impact of Public Policies on Startups 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

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▶ Overall, about half of all executives say they think IP is an important asset and worth the cost, but views vary dramatically by sector. Two in three hardware, healthcare and cleantech executives share this view, while software executives are much more likely to focus on non-legal means to create their competitive advantage.

Tax Reform

▶ When asked which federal tax change would best promote their company’s near-term success, startups focus first on using the tax code to provide incentives to invest in startups (23 percent agree with this).

▶ Helping startups preserve scarce dollars to invest in their growth (remember, most startups aren’t profitable) comes in second, 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.

U.S. Manufacturing

▶ Just over one in three startups (35 percent) either currently manufacture or plan to start manufacturing in the next 18 months. And a great deal of this activity will occur in the United States. Eighty percent of respondents say they will do at least some manufacturing in the U.S. When deciding where to locate manufacturing facilities, the number one factor for startups is the availability of workers with the necessary skills.

▶ Manufacturing has the potential to create middle class jobs. Approximately two in three of these jobs require some combination of high school education, experience, and training, but not a college diploma.

Medical Device Tax

▶ 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.

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U.S. Versus U.K. Startups: Similarities and Differences

▶ 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.

▶ 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 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 non-legal 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.

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7

2013 Survey Respondents

Startup Outlook 2013 is Silicon Valley Bank’s fourth annual survey of the views of executives at startup companies across the United States. We’ve defined “startups” as high-growth technology and healthcare companies with less than $100 million in revenues and fewer than 500 employees.

We retained an independent, third-party market research 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.

We received responses from 758 executives of U.S. based, high growth technology and healthcare startups — approximately three times as many responses as in the 2012 survey. Eighty-seven percent were C-level executives, with 81 percent either CEOs or CFOs. The responses by sector were as follows:

Software: 433 responsesHealthcare: 220 responsesHardware: 50 responsesCleantech: 63 response

As in previous years, we received the largest number of responses from software company executives. In order to provide more meaningful insights into this segment, in this year’s survey we distinguished between two types of software companies: consumer internet companies and enterprise software companies. Of the 433 software executives who responded to the survey, 158 (36 percent) were from consumer internet companies and 274 (64 percent) were from enterprise software companies. Due to the small sample size for hardware and cleantech companies, survey responses from these executives are directional and are not compared statistically to other groups.

Survey Respondents by Industry Segment

Software Life Science Hardware Cleantech 2010 2011 2012 2013 44% 32% 14% 6% 55% 22% 17% 7% 49% 27% 12% 7% 57% 29% 7% 8% 0 0.1 0.2 0.3 0.4 0.5 0.6

“We cannot produce more than China but we can

innovate more than the rest of the world.”

President/CEO, Software Startup

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2013 Survey Respondents

(con’t.) 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, Delaware, North Carolina, Nevada, Maryland, Missouri, the District of Columbia, Louisiana, Connecticut, Indiana, Maine, Michigan and Virginia all accounted for 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. On the revenue front, we saw an increase in the number of companies that are not yet earning revenues — 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).

Percentage of Respondents by Region

48% 9% 7% 20% 3% 4%4% 2% 1% California Southwest Southeast Northwest Northeast Mid Atlantic Midwest Mountain West Outside of U.S. 750 startup executives from across the US responded to the Silicon Valley Bank survey

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Annual Trailing Revenues (By Industry) Cons umer Intern et Enter prise Softw are Healt hcare Hard ware Clea ntech 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% $50M or more $25M to less than $50M $10M to less than $25M $5M to less than $10M $1M to less than $5M Less than $1M Pre-revenue 34% 55% 30% 42% 24% 32% 11% 5% 12% 4% 2% 1% 0% 2% 0% 7% 2% 12% 6% 13% 9% 14% 6% 11% 6% 8% 8% 15% 10% 12% 19% 27% 16% 22% 18% Annual Trailing Revenues

25% 20% 19% 10% 14% 8% 5% 29% 14% 18% 13% 16% 7% 3% 36% 24% 14% 8% 11% 6% 1% 0% 5% 10% 15% 20% 25% 30% 35% 40% 2011 2012 2013 Pr e-reven ue Less than $1M $1M to < $5M $5M to <$ 10M $10M to < $25M $25M to < $50M $50M or m ore Number of Employees (By Industry) 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Consumer Internet Enterprise Software

Healthcare Hardware Cleantech 250+ 100-249 50-99 25-49 10-24 Fewer than 10 56% 17% 9% 10% 7% 1% 4% 0% 0% 2% 10% 4% 10% 8% 14% 15% 20% 17% 16% 16% 16% 24% 19% 25% 26% 13% 37% 40% 28% 37% Number of Employees 2010 2011 2012 2013 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% Fewer than 10 10 to 24 25 to 49 50 to 99 100 to 249 250 or more 34% 33% 20% 20%20% 34% 42% 27% 20% 17%17% 15% 16%16%14% 8% 11% 7% 7% 2%2% 12% 6% 1%

“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.”

President/CEO, Cleantech Startup

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Understanding Startups

High-growth startups have an outsized long-term impact on the U.S. economy, generating revenues equal to an estimated 21 percent of U.S. GDP and creating roughly 11 percent of all U.S. private sector jobs.

(Venture Impact: The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy, 6th Ed. (2011)).

In order to reach this size and scale, however, these companies need to make significant investments for an extended period of time. To better understand the relationship between size and profitability, we asked revenue-generating respondents in this year’s survey whether they expected to be profitable in 2012. As the following charts illustrate, whether one looks by sector

or revenue level, most startups don’t earn a profit — even when they earn significant to topline revenues, and even in capital-efficient sectors (like software) where the cost to start a company has declined meaningfully in recent years.

This year we added two survey questions to determine who is creating startups. The data indicate that women remain under-represented among startup founders (with only about one in four startups having one or more women on their founding team), while people born outside the United States are an important overall part of the startup ecosystem (with about half of all startups having one or more foreign-born person on their founding team).

Part 2: Detailed Findings

“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.”

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Founding Team Composition (By Place of Birth per Industry)

Cons umer Intern et Enter prise Softw are Hard ware Clea ntech Healt hcare 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Both Represented on Founding Team Only Persons Born Outside U.S. on Founding Team

Only Persons Born in U.S. on Founding Team 60% 19% 21% 28% 30% 31% 41% 21% 14% 23% 10% 51% 56% 46% 49% Founding Team Composition (By Gender per Industry)

Cons umer Intern et Enter prise Softw are Hard ware Clea ntech Healt hcare 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Both Men and Women on Founding Team Only Women on Founding Team

Only Men on Founding Team 75% 3% 23% 17% 23% 15% 13% 2% 2% 2% 6% 81% 72% 83% 85% Startups’ Profitability (By Revenue Level)

22% 32% 35% 78% 68% 65% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% < $5M Revenues $5.0 - $24.9M Revenues $25.0 - $99.9MRevenues No Yes Startups’ Profitablity (By Industry) 28% 32% 17% 29% 17% 72% 69% 83% 71% 83% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Consumer Internet Enterprise Software

Healthcare Hardware Cleantech No Yes

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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 the past two years but meaningfully better than in the depth of the recession.

▶ About as many executives expect to miss 2012 targets as hit them (41 and 43 percent, respectively).

▶ Executives in this year’s survey are substantially less likely to predict they’d exceed targeted revenues than in previous surveys.

▶ 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.

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

▶ 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 — less likely to say business conditions are better, and more likely to say they are worse. ▶ Looking toward 2013, hardware and software

companies are the most upbeat, and

healthcare companies are the most downbeat. By and large, startups continued to meet their

revenue targets in 2012. Interestingly, executives were substantially less likely to say their company would 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.

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Performance Against Revenue Targets (By Number of Employees)

34% 47% 43% 55% 39% 35% 12% 14% 21% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Above Target Revenues about on Target Below Target Under 10

Employees Employees10 - 49 Employees50 - 499 Performance Against Revenue Targets (By Company Size in Revenue)

Pr e-Reve nue < $5M Reve nues $5 - $24.9 M Reve nues $25 $99.9 M Reve nues 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Above Target Revenue About on Target Below Target 28% 44% 53% 33% 65% 39% 34% 33% 7% 16% 13% 34%

Performance Against Revenue Targets (By Industry) Cons umer Intern et Enter prise Softw are Healt hcare Hard ware Clea ntech 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Above Target Revenue about on Target Below Target 43% 42% 34% 56% 49% 45% 40% 50% 30% 45% 10% 18% 15% 14% 6%

Performance Against Revenue Targets (By Year) 50% 38% 35% 42% 34% 39% 42% 43% 15% 24% 22% 15% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Above Target Revenues About on Target Below Targets 2010 2011 2012 2013

“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

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Highlights (con’t):

Roughly six in 10 executives continue to believe that conditions in 2012 are better than a year earlier, though we saw an uptick in the number who believe things are somewhat worse than they’d been. Interestingly, software executives are more likely than executives in other sectors to say that business conditions are better than a year ago (65 percent for

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

16% 18% 16% 25% 22% 24% 61% 59% 60% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Better Same Worse Under 10 Employees 10 - 49 Employees 50 - 499 Employees Business Conditions Compared to Last Year (By Company Size in Revenue)

Pre-Revenue < $5M Revenues $5 - $24.9M Revenues $25 - $99.9M Revenues 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 17% 16% 18% 10% 31% 16% 22% 33% 52% 68% 59% 58% Better Same Worse

Business Conditions Compared to Last Year (By Industry) Cons umer Intern et Enter prise Softw are Healt hcare Hard ware Clea ntech 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Better Same Worse 13% 13% 25% 17% 15% 21% 23% 28% 15% 33% 66% 64% 47% 68% 53%

Business Conditions Compared to Last Year (By Year) 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 2010 2011 2012 2013 Much Better Somewhat Better Same Somewhat Worse Much Worse 23% 38% 36% 35% 46% 19% 9% 4% 4% 9% 13% 8% 3% 3% 25% 27% 24% 27% 25% 26%

of software executives who say business conditions are somewhat worse more than doubled, from five percent to 12 percent. Healthcare executives are the most downbeat, with only 47 percent saying business conditions are better, 16 percent saying they are somewhat worse, and nine percent saying they are much worse.

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

9% 10% 6% 16% 19% 19% 75% 72% 76% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Better Same Worse Under 10 Employees 10 - 49 Employees 50 - 499 Employees Outlook on Business Conditions in 2013 (By Company Size in Revenue)

10% 8% 7% 6% 21% 14% 17% 24% Pre-Revenue < $5M Revenues $5 - $24.9M Revenues $25 - $99.9M Revenues 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Better Same Worse 69% 78% 76% 71%

Outlook on Business Conditions in 2013 (By Industry) Cons umer Intern et Enter prise Softw are Healt hcare Hard ware Clea ntech 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Better Same Worse 6% 5% 15% 6% 8% 17% 17% 23% 9% 20% 76% 78% 62% 86% 72%

Outlook on Business Conditions in 2013 (By Year) 8% 5% 9% 8% 18% 17% 19% 18% 74% 78% 72% 74% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Better Same Worse 2010 2011 2012 2013

By stage, smaller, pre-revenue companies are meaningfully less likely than their peers who’ve started earning revenues to say things are better, and more likely to say conditions are about the same. Overall, the largest companies in the survey (by revenue) are the least likely to see things as worse.

Looking forward, executives are about as likely as those in the previous two surveys to say business conditions for their companies will be better in the coming year. Hardware and software companies are

the most upbeat (with 85 percent and 78 percent, respectively, saying conditions will be better). Healthcare executives are again the most downbeat, with only 62 percent saying conditions will be better and 15 percent predicting they will get worse. And, as was true when comparing 2012 to 2011, pre-revenue companies are more likely than companies earning up to $5M to say conditions going forward will be the same, while revenue-generating companies (earning up to $5M) are more likely to believe conditions will be much better in the coming year.

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Startups Remain a Job-Creation

Engine … But Can They Find the

People They Need?

Highlights:

▶ Nearly nine in 10 startups (87 percent) plan to hire new employees in 2013, up from 83 percent in last year’s survey.

▶ Software, hardware, and cleantech executives are most likely to hire.

▶ While healthcare companies’ expectations are less robust than their peers, a substantial number of healthcare executives will be hiring.

▶ 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

the most critical job skill. Only one in five (17 percent) say management, marketing, and other non-STEM skills are most critical. ▶ 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.

▶ Software and hardware executives face the

▶ 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, we have tracked startups’ plans to hire. Every year, startups have been a bright spot in an otherwise dismal jobs landscape. But this year sets a new record for hiring expectations.

Nine in 10 (87 percent) of the respondents to this year’s survey plan to hire new employees in 2013, up slightly from last year’s survey (83 percent). Software, hardware, and cleantech executives are most likely to hire, at 91 percent, 90 percent, and 90 percent, 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 expectations by company size, although directionally the larger companies (by employees and revenues) seemed to have somewhat higher expectations for 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.

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Across sectors, executives are looking for workers with 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 management, marketing, and other non-STEM skills are most critical. Four in 10, or 42 percent, report 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)

Likely to Hire Neither Likely nor Unlikely Unlikely to Hire Cons umer Intern et Enter prise Softw are Healt hcare Hard ware Clea ntech 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 3% 6% 18% 6% 7% 5% 3% 5% 4% 3% 92% 91% 78% 90% 90% Plans to Hire in 2013 (By Year) 17% 11% 11% 9% 10% 6% 6% 4% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Likely to Hire Neither Likely nor Unlikely Unlikely to Hire

73%

84% 83% 88%

2010 2011 2012 2013

“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

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Highlights (con’t.):

What makes it challenging for startups to hire and retain workers with the skills they need?

Finding people with the right skills tops the list, particularly for enterprise software, healthcare and cleantech companies. (Interestingly, however, this is a less important issue in the Northern California market.) Competition for workers comes in second. We asked

HiringCompanies’ Most Critical Skills in 2013 (By Industry) Clea ntech Hard ware Healt hcare Cons umer Intern et Enter prise Softw are 38% 34% 45% 67% 39% 17% 15% 23% 4% 18% 45% 51% 32% 29% 43% 0% 20% 40% 60% 80% 100% 120% Both Equally Critical Management, Marketing, Sales, Operations and Other Non-STEM Skills STEM Skills

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

Not Very Challenging Somewhat Challenging Extremely Challenging Pre-Revenue < $5M in

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

30% 26% 36% 35% 55% 59% 57% 58% 15% 15% 7% 8% 0% 20% 40% 60% 80% 100% 120%

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

Not Very Challenging Some what Challenging Extremely Challenging 29% 31% 29% 53% 57% 63% 17% 12% 8% 0% 20% 40% 60% 80% 100% 120% Under 10 Employees 10 to 49 Employees 50 to 499 Employees

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

Enter prise Softw are Cons umer Intern et Healt hcare Hard ware Clea ntech Not Very Challenging Somewhat Challenging Extremely Challenging 35% 39% 17% 32% 23% 54% 54% 64% 56% 58% 10% 7% 20% 12% 19% 0% 20% 40% 60% 80% 100% 120%

generally — a distinct problem for consumer internet companies and in Northern California. The cost of salaries and benefits is also a factor, particularly for smaller companies with only a handful of employees. The survey results also demonstrate that startups are focused on access to workers with the skills they need — not immigration — as the true issue. Immigration reform is a necessary piece of solving the talent

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

3% 3% 2% 0% 10% 20% 30% 40% 50% Other Immigration Regulations Too Hard to Compete with Larger Companies Too Much Competition Generally

Cost of Salaries and Benefits

Finding People with the Right Skills 31% 46% 44% 32% 21% 18% 16% 14% 22% 8% 11% 12% 7% 6% 5% Under 10 Employees 10 to 49 Employees 50 to 499 Employees

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

28% 42% 46% 35% 46% 25% 18% 31% 26% 28% 30% 17% 10% 7% 13% 4% 7% 5% 9% 4% 3% 5% 1% 5% 0% 0% 10% 20% 30% 40% 50% Consumer Internet Enterprise Software Healthcare Hardware Cleantech Other Immigration Regulations Too Hard to Compete with Larger Companies Too Much Competition Generally

Cost of Salaries and Benefits

Finding People with the Right Skills Hiring Companies’ Most Critical Skills in 2013 (By Company Size in Revenues)

0% 20% 40% 60% 80% 100% 120% Both Equally Critical Management, Marketing, Sales, Operations and Other Non-STEM Skills STEM Skills Pre-Revenue < $5M in Revenues $25 - $99.9M in Revenues $5 - $24.9M in Revenues 52% 34% 35% 29% 10% 21% 22% 25% 38% 45% 43% 46%

Hiring Companies’ Most Critical Skills in 2013 (By Company Size in Employees)

0% 20% 40% 60% 80% 100% 120% Both Equally Critical Management, Marketing, Sales, Operations and Other Non-STEM Skills STEM Skills 48% 38% 30% 12% 18% 25% 40% 43% 45% Under 10 Employees 10 to 49 Employees 50 to 499 Employees

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

60% Other

Immigration Regulations Too Hard to Compete with Larger Companies Too Much Competition Generally

Cost of Salaries and Benefits

Finding People with the Right Skills 34% 49% 42% 26% 25% 24% 21% 7% 16% 8% 4% 12% 8% 7% 4% 3% 7% 2% 0% 20% 40% Northern CA Boston MA Other Regions

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

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

Immigration Regulations Too Hard to Compete with Larger Companies Too Much Competition Generally

Cost of Salaries and Benefits

Finding People with the Right Skills 40% 39% 41% 40% 27% 27% 17% 19% 13% 15% 24% 19% 8% 8% 14% 19% 8% 5% 3% 2% 4% 4% 1% 2% Pre-Revenue < $5M in Revenues $5 - $24.9M in Revenues $25 - $99.9M in Revenues

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The Impact of Public Policies

on Startups

In past surveys, we’ve asked startups how government policies affect their ability to succeed. This year, we decided to shift gears and dig deeper into a handful of policy issues. We asked about two of the issues that have consistently topped startups’ lists in prior surveys: intellectual property protection and 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.

Intellectual Property Protection

Highlights:

▶ Close to half of the respondents (46 percent) say IP is a “key strategic asset.” Hardware, healthcare and cleantech executives are much more likely to take this view than software executives, who are much more likely to see IP primarily as a defensive tool. ▶ 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.”

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21

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.

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 only 13 percent said it was not.

Yet how best to use a system of intellectual property 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 the current system is meeting their business needs.

Across the board, startups view intellectual property both as a strategic asset and a defensive tool. The mix, however, varies by industry, with software executives more likely to see it as a defensive tool than their colleagues in the healthcare, hardware and cleantech sectors.

We also found that nearly one in four startups — even very early-stage startups — face IP lawsuits. Healthcare startups are the hardest hit, with three in 10 respondents reporting that they face lawsuits.

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 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, healthcare companies are more likely to describe their suits as primarily as legitimate disputes with competitors.

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 View of Intellectual Property

(By Industry) 40% 43% 55% 47% 46% 15% 15% 6% 6% 6% 29% 34% 36% 43% 43% 16% 7% 3% 4% 5% 0% 20% 40% 60% Consumer Internet Enterprise Software Healthcare Hardware Cleantech Not Involved in IP Combination of Both Primarily a Defensive Tool Key Strategic Asset

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Highlights (con’t.):

these disputes are primarily suits by a non-practicing entity, a patent assertion entity, or a “patent troll.” While other regions largely echo this experience, Boston is a notable outlier, with executives less likely to report IP lawsuits and no executives reporting suits by a non-practicing entity, a patent assertion entity, or a “patent troll.” This may be a product of the relatively small sample size for Boston (55 respondents for this question), but given the magnitude of the difference we

views on how they think about IP within their broader business objectives. (Respondents were able to select multiple answers, so the totals exceed 100 percent.) Only about half (54 percent) say they think IP is an important asset and is worth the cost. Underlying this statistic, however, are two sharply different views. Just over one in three software executives say IP is worth the cost, while two in three healthcare, hardware and

Nature of IP Disputes (By Region) 0% 20% 40% 60% 80% 100%

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

73% 85% 78%

17% 0% 15%

10% 15% 7%

Northern CA Boston MA Other Regions Nature of IP Disputes (By Revenues) 0% 20% 40% 60% 80% 100%

Most IP Disputes are Legitimate Disputes with Competitors Most IP Disputes Brought by NPEs, PAEs, or Trolls Rarely or Never Face IP Disputes $25 $99.9 M in Reve nues $5 - $24.9 M in Reve nues s < $5M in Reve nues Pr e-Reve nue 77% 83% 71% 55% 9% 11% 20% 39% 14% 6% 9% 7% Nature of IP Disputes (By Number of Employees)

0% 20% 40% 60% 80% 100%

Most IP Disputes are Legitimate Disputes with Competitors Most IP Disputes Brought by NPEs, PAEs, or Trolls Rarely or Never Face IP Disputes 80% 77% 71% 11% 12% 22% 9% 10% 7% Under 10 Employees 10 to 49 Employees 50 to 499 Employees Nature of IP Disputes (By Industry) Cons umer Intern et Healt hcare Hard ware Clea ntech Enter prise Softw are 81% 81% 70% 74% 76% 16% 15% 12% 15% 10% 3% 4% 18% 10% 14% 0% 20% 40% 60% 80% 100%

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

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their competitors), rather than on IP rights, to create their competitive advantage. Smaller startups also appear more concerned about the cost of IP — and the need to divert resources from other more productive uses — than their larger counterparts. Larger companies, in contrast, appear to face a meaningful

Business Impact of IP (By Region)

IP Isn't Important to Our Company

The Cost of IP Protection Diverts Resources from More Productive Uses We Focus on Non-Legal Means to Create Competitive Advantage We Sometimes Settle Suits or License IP Because Litigation Is Too Expensive

IP is an Important Asset and Worth the Cost

0% 20% 40% 60% 80% 50% 63% 55% 49% 33% 45% 36% 24% 30% 8% 3% 8% 1% 2% 2% Northern CA Boston MA Other Regions Business Impact of IP (By Revenues)

IP Isn't Important to Our Company

We Focus on Non-Legal Means to Create Competitive Advantage We Sometimes Settle Suits or License IP Because Litigation Is Too Expensive

The Cost of IP Protection Diverts Resources from More Productive Uses

IP is an Important Asset and Worth the Cost 60% 51% 46% 50% 36% 51% 53% 48% 32% 34% 23% 36% 7% 6% 5% 23% 1% 1% 2% 5% 0% 20% 40% 60% 80% Pre-Revenue < $5M in Revenues $5 - $24.9M in Revenues $25 - $99.9M in Revenues Business Impact of IP (By Number of Employees)

IP Isn't Important to Our Company

We Focus on Non-Legal Means to Create Competitive Advantage We Sometimes Settle Suits or License IP Because Litigation Is Too Expensive The Cost of IP Protection Diverts Resources from More Productive Uses

IP is an Important Asset and Worth the Cost 51% 57% 53% 44% 46% 48% 37% 31% 22% 6% 7% 11% 2% 0% 3% 0% 20% 40% 60% Under 10 Employees 10 to 49 Employees 50 to 499 Employees Business Impact of IP (By Industry) 34% 42% 69% 64% 72% 59% 59% 27% 38% 36% 26% 36% 28% 33% 36% 9% 8% 7% 2% 5% 0% 20% 40% 60% 80% Consumer Internet Enterprise Software Healthcare Hardware

Cleantech IP Isn't Important to Our Company

We Focus on Non-Legal Means to Create Competitive Advantage We Sometimes Settle Suits or License IP Because Litigation Is Too Expensive The Cost of IP Protection Diverts Resources from More Productive Uses

IP is an Important Asset and Worth the Cost

“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

litigation-driven problem, with nearly one in four reporting that they sometimes settle lawsuits or license IP they otherwise wouldn’t because it’s too expensive to defend IP in a lawsuit. Regionally, Boston appears to remain a more IP-centered ecosystem than other markets.

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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 pre-profit companies to offset other taxes (such as employment taxes).

▶ 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. ▶ Larger companies were more likely to focus on

the overall corporate tax rate and on capital gains tax rates.

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 a credit for pre-profit companies to offset other taxes (such as employment taxes) so they can devote their available cash to growing — came in a close second. Promoting simplicity and certainty — specifically, “just 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

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25

Tax Policies to Promote Startups’ Growth (Top Six, by Revenues)

32% 27% 5% 4% 16% 21% 23% 12% 14% 15% 20% 14% 8% 13% 10% 10% 16% 10% 12% 18% 4% 6% 16% 14% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Pr e-Reve nue < $5M in R even ues $5 - $24.9 M in Reve nues $25 $99.9 M in Reve nues

Lower Corporate Tax Rate R&D Credit or Expenditure Make the Code Simpler Just Get It Done So We Have Certainty Tax Credit/Offset for Pre-Profit Companies Tax Incentive to Invest in Startups

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

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

Lower Corporate Tax Rate

R&D Credit or Expenditure Make the Code Simpler

Just Get It Done So We Have Certainty Tax Credit/Offset for Pre-Profit Companies Tax Incentive to Invest in Startups 32% 21% 9% 17% 20% 19% 14% 14% 20% 10% 10% 11% 12% 15% 13% 6% 7% 12% Under 10

Employees Employees10 to 49 Employees50 to 499

Tax Policies to Promote Startups’ Growth (Top Six, by Industry)

26% 21% 23% 17% 27% 22% 21% 18% 15% 11% 17% 18% 12% 15% 20% 12% 11% 7% 11% 9% 7% 8% 19% 21% 26% 8% 11% 5% 2% 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Cons umer Intern et Enter prise Soft ware Healt hcare Hard ware Clea ntech

Lower Corporate Tax Rate R&D Credit or Expenditure Make the Code Simpler Just Get It Done So We Have Certainty Tax Credit/Offset for Pre-Profit Companies Tax Incentive to Invest in Startups

Tax Policies to Promote Startups’ Growth

23% 19% 15% 10% 8% 8% 7% 5% 1% 3% 0% 5% 10% 15% 20% 25% Tax I ncen tive t o Inves t in S tartup s Cred it/Offs et for Pre-Pr ofit C ompa nies Just Get It Don e So We H ave C ertain ty Mak e the Cod e Simple r Perm anen t R&D Tax C redit Lowe r Cor porat e Tax R ate Keep Cap Gain s Rate at Cu rrent Leve l Gove rnme nt Inves tmen ts in R&D Incen tive f or D omes tic Man ufactu ring Othe r

“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

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U.S. Manufacturing

Highlights:

▶ Over one-third (35 percent) of executives are at companies who currently manufacture (21 percent) or plan to in the next 18 months (15 percent).

▶ A great deal of this activity is in the United States. ▶ Two-thirds of those who currently

manufacture (64 percent) say they 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. 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. Not surprisingly, manufacturing is centered in the healthcare, hardware and cleantech segments. Excluding software, 68 percent of these companies manufacture or plan to manufacture in the next 18 months, compared to only 10 percent in the software sector.

Notably, pre-revenue companies are much more likely Startups use various approaches to manufacturing: Plans to Manufacture (by Region) 28% 27% 42% 38% 47% 36% 34% 27% 22%

Northern CA Boston MA Other Regions

Currently Manufacture Plan to Manufacture in Next 18 Months No Plans to Manufacture 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Plans to Manufacture (by Revenues) Pr e-Reve nue < $5M in R even ues $5 - $24.9 M in Reve nues $25 $99.9 M in Reve nues Currently Manufacture Plan to Manufacture in Next 18 Months No Plans to Manufacture 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 28% 45% 45% 42% 24% 41% 50% 54% 49% 14% 5% 4% Plans to Manufacture (by Industry) Cons umer Intern et Enter prise Soft ware Healt hcare Hard ware Clea ntech 5% 8% 33% 50% 42% 2% 4% 31% 19% 30% 93% 88% 35% 31% 28% 0% 20% 40% 60% 80% 100% 120% No Plans to Manufacture Plan to Manufacture in Next 18 Months Currently Manufacture

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say they will begin manufacturing in the coming 18 months, although it is difficult to know what is driving those differences.

From a policy perspective, two of the most important questions to understand are: the factors that

drive startups’ decisions about where to locate manufacturing facilities, and the kinds of jobs these facilities create.

On the first, the question of talent and the availability of skilled workers again rises to the top. This is followed by two factors relating to the production process: the quality of available production facilities, and the speed of production. The next two factors again concern the workforce: the cost of salaries and benefits, and the ease/difficulty of managing workers (language,

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

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 these steps would be smart — for all Americans, not just for technology companies. A meaningful number of the manufacturing jobs that startups would create require only a high school diploma or relevant experience, and fewer than one in three of these jobs require a college education or above.

Education/Training Needed for Majority of Manufacturing Jobs

High School Highly Experienced Workers, Regardless of Education We Provided the Necessary Training A Combination of Above College or Above 21% 29% 21% 4% 24% 0% 5% 10% 15% 20% 25% 30% 35%

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

Avail abilit y of W orke rs with Need ed S kills None of th e Abo ve Othe r Energ y Cos ts Regu lator y Res trictio ns (Land Use , Env ., Lab or, E tc.) Tax I ncen tives /Refu nds Prox imity to M ajor Mark ets/C ustome rs Ease /Diffi culty of M anag ing Worke rs Regu latory C osts/ Delay s Salar ies an d Ben efits of Man ufactu ring W orke rs Spee d of P rodu ction Quali ty of Avail able Prod uctio n Fac ilities 44% 41% 35% 35% 32% 22% 19% 16% 14% 7% 11% 4% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

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

Currently Manufacture Plan to Manufacture in Coming 18 Months 64% 23% 14% 40% 16% 44% 0% 10% 20% 30% 40% 50% 60% 70% Mostly Domestically Mostly Overseas Both

Manufacturing: In House Versus Partners

33% 30% 37% 11% 45% 44% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% In House Through Partners Combination of Both Currently Manufacture Plan to Manufacture in Coming 18 Months

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The Medical Device Tax

Highlights:

▶ Executives at medical device companies are aware of the 2.3 percent revenue tax that started at the beginning of 2013.

▶ 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 will have an impact on their company’s long-term growth.

This year’s survey also digs into a critically important segment of the U.S. innovation economy: the medical device sector. There are a number of reasons why policymakers and ordinary Americans should care about the health of the device industry. Perhaps most importantly, new, innovative devices help improve patient outcomes and reduce costs. In addition, U.S. 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, impeding the discovery and commercialization of 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.

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Familiarity with the Device Tax

75% 23%

2%

I know how it will impact my business I don't know how it will impact my business I have never heard of the device tax

Startups’ Responses to the Device Tax

21% 21% 13% 22% 30% 21% 25% 0% 5% 10% 15% 20% 25% 30% 35%

We will reduce staffing/forego new hires We will shift resources away from growing our business We will invest less in R&D for our existing products We will invest less in R&D for new products We will pass along most or all of the increased cost We will need to raise an additional round of capital We will focus on expanding overseas instead of domestically

Startups’ Predictions: Impact of the Tax

18% 34% 27% 21% 0% 5% 10% 15% 20% 25% 30% 35% 40% No meaningful impact

The tax will impact when we become profitable The tax will impact our ability to raise capital The tax will impact our chances of being successful

“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

Generally speaking, executives in the device industry were aware of the tax, although many were still working to understand how it would affect their business. 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 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.

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And, finally, the survey data illustrated that the headwinds facing the device industry threatens U.S. manufacturing jobs.

▶ About half of the device respondents (46 percent) currently manufacture devices. Ninety-three percent of these companies manufacture mostly in the United States.

▶ 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 require only a high school degree (28 percent) or hire based on experience regardless of education (28 percent). Only 16 percent require college or above. Other Respondents:

2012 Compared to 2011

13%

22% 65%

Worse than last year Same as last year Better than last year

Medical Device Companies: 2012 Compared to 2011

27%

32%

41% Worse than last year

Same as last year Better than last year

As the data in the earlier sections of this report shows, the device tax compounds other challenges that threaten to affect U.S. leadership in medical device innovation. Device companies were much more likely than startups in other sectors to say they fell far short of their 2012 revenue targets (17 percent versus nine percent for other segments). Device executives were also much less optimistic about business trends than 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 in medical care they are creating — are small, growing entities that aren’t yet profitable, and hence are highly vulnerable to a tax on topline revenues.

▶ Seventy percent of the companies had fewer than 25 employees. 98 percent had fewer than 100 employees.

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Medical Device Companies: 2013 Compared to 2012

15%

25% 60%

Will be worse in 2013 Will stay the same Will be better in 2013 Other Respondents: 2013 Compared to 2012 5% 16% 78% Will be worse in 2013 Will stay the same Will be better in 2013

Likelihood of Hiring: Medical Device Companies

17% 6%

77%

Not likely to hire Neither likely nor unlikely Likley to hire

Likelihood of Hiring: Other Respondents

6% 3%

91%

Not likely to hire Neither likely nor unlikely Likley to hire

“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

cost-effectiveness. Let the NIH and peer-reviewed guidances determine efficacy.”

President/CEO, Medical Device Startup

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“Extremely exciting times, looking forward to next year.

Looking forward to making a difference in peoples’ lives.”

President/CEO, U.K. Consumer Internet and Digital Media Startup

“I wish the government would help us to train the neets on engineering/coding

even if 1 in 10 were to succeed that would be a lot of new skilled people.”

President/CEO, U.K. Software Startup

“Immigration is the biggest barrier to growth in the tech industry and

the government has no immigration policy at the moment.”

President/CEO, Consumer Internet and Digital Media

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U.S. and U.K. Startups:

Similarities and Differences

In this year’s survey, we reached out to entrepre-neurs 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 across the pond, on the questions common to the two surveys.

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

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, with eight in 10 (83 percent) saying conditions in 2013 will be better than 2012, compared to seven in 10 (74 percent) of U.S. entrepreneurs.

▶ 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 one-quarter 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.

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“Better connections between tech city and Silicon Valley

investors will help UK startups.”

President/CEO, Consumer Internet and Digital Media

“Not enough early stage investors, most of whom seem to primarily be interested

in companies that are post-revenue and already have an audience.”

President-CEO, Consumer Internet and Digital Media

“Make entrepreneurship in the UK a policy focus rather than a talking point.

“After many conversations with investors and also startups raising money,

I think there is a lack of knowledge from both sides as to what it takes to

develop a strong partnership across the two.”

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Hiring (con’t.)

▶ 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 (89 percent) say it is “challenging” to find workers with the skills needed to grow their businesses. (Eighty-seven percent of U.S. executives said the same.)

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. 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).

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

▶ 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). Founding Teams

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

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About Silicon Valley Bank

Silicon Valley Bank is the premier bank for technology, life science, cleantech, venture capital, private equity and premium wine businesses. SVB provides industry knowledge and connections, financing, treasury management, corporate investment and international banking services to its clients worldwide through 27 U.S. offices and seven international operations. (Nasdaq: SIVB)

www.svb.com

About the Startup Outlook Survey

In addition to this comprehensive report, Silicon Valley Bank is publishing a series of more detailed reports focusing on different sectors and issues within the broader survey. For copies of these additional reports, as well as to access the Startup Outlook 2010, 2011 and 2012 reports, please visit us at

www.svb.com/startup-outlook-report

“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.”

(39)
(40)

References

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