DLA PiPer TechNOLOGY LeADers FOrecAsT surveY FALL 2012

DLA PiPer TechNOLOGY LeADers FOrecAsT surveY q1 2012

execuTive summArY In the face of global economic headwinds and amid a high-stakes 2012 presidential election, technology leaders ever focused on the promise of the future are seeking clarity on the economic, regulatory and political landscape. This was the pervasive theme throughout DLA Pipers fifth Technology Leaders Forecast survey, which was developed in conjunction with the firms 2012 Global Technology Leaders Summit. Will greater economic certainty follow the outcome of Novembers election? What is the direction of tax policy? Will the next administration ease regulations or increase the regulatory burden? How will Chinas role in technology development and financing evolve? Will the IPO market cool down or heat up? What are the most promising and challenging areas for the technology economy? These are just a sampling of the issues addressed in DLAPipers latest survey of the major trends, challenges and oppor tunities confronting the technology industry. By a 3 to 1 margin technology leaders believe PresidentObama will be re-elected on Nov. 6th. However, most are very skeptical that another term under his administration would be a positive development for the industry. In fact, half of technology leaders who think President Obama will earn re-election think it would be a negative development for the sector. Most 64 percent believe that Mitt Romneys election would be better for the technology industry. This stands in stark contrast to the 2008 survey when the majority (60 percent) of technology executives signaled that a Barack Obama victory would be a positive development for the technology industry. These executives and investors, however, have more on their minds than just politics. There are underlying concerns about global economic conditions and the added burden of growing regulation that hinder their ability to access capital and build new businesses. Economic uncer tainty was listed as the most significant barrier facing the IPO market and was a significant factor in impeding the success and formation of technology star t-ups. Despite these challenges, technology leaders expectations for growth are cautiously optimistic, with most expecting moderate sales and hiring growth. Most subscribe to a belief in a new normal for growth steady, but slow. Key highlights of the survey include:

What would a second-term President Obama mean for the tech industry? Most respondents think voters will re-elect President Obama, but 60percent doubt that his policies will impact thetechnology industry in a positive way. Sixty-four percent of respondents think Mitt Romney would positively impact the technology sector, while just 41 percent of respondents think a second-term President Obama would positively impact it. is private equity destined for more regulation? A strong majority (78 percent) of respondents think the 2012 political debate has hur t the reputation of the private equity industry, and most (65 percent) think it likely will result in more regulation of the industry. Would federal tax increases hurt tech investment and sales? A majority (60 percent) of respondents think the expiration of the Bush-era tax cuts will hur t investments in the technology industry;

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DLA Piper Technology Leaders Forecast Survey Q1 2012

while very few (seven percent) think it will help. However, perhaps counter to conventional wisdom, a significant minority (33 percent) think the Bush-era tax cuts will have no direct impact on investments and growth in the technology industry.

What is the outlook on hiring and sales? Tech executives still think their companies will experience sales growth and plan to hire new employees during the next 12 months, albeit at a moderate rate compared to historical growth. Bigger technology companies are even more conservative in estimations of both their sales and hiring. What are the most promising opportunities for tech entrepreneurs and investors? Respondents pegged mobile computing, cloud computing and big data as the most promising technologies for investors and entrepreneurs. Venture capital executives were more likely than other tech executives to rank big data as promising and tended to rank gaming as less promising.

should privacy policies be regulated? More than 80 percent of technology executives say the government should not get involved in regulating privacy policies, with 50 percent saying the industry should take the lead in developing consensus and policies on privacy. can china transition to an innovation economy and impact the global technology sector? Most respondents observed that China is transitioning away from a production-only economy towards an economy oriented towards both the production and consumption of goods, including technology. However, there are continued mixed signals regarding the countrys ability to evolve into a hub for innovation and technology development. Only 10 percent of respondents expect China to be a major contributor to technology development within the next three years.

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eLecTiON 2012: TechNOLOGY LeADers cAsT Their vOTe The DLA Piper Technology Leaders Forecast Survey found a strong majority, 76 percent, of technology business leaders think voters will re-elect PresidentObama in November. These results are echoed by Intrade, a predictions marketplace, which also has President Obama as roughly a 3-to-1 favorite to capture re-election. However, most technology business leaders are very skeptical that a second term for the Obama administration would be a positive development. Almost60 percent of respondents do not feel PresidentObamas re-election would have a positive impact on the technology economy, and two-thirds of those executives believe the impact would be negative. Bycomparison, 64 percent of respondents think MittRomney would positively impact the technology sector. The par tisan tables have turned since the 2008 election, when the survey found that nearly 60 percent of technology executives believed that, then Senator, Barack Obama would have a more positive impact on technology development and investment than would his Republican challenger, Senator John McCain. It is wor th noting that, during the US mid-term elections in 2010, these same technology leaders accurately predicted the Republican takeover of the House of Representatives.
24%

Who do you believe will win the 2012 Presidential election?

76%

Barack Obama Mitt Romney

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DLA Piper Technology Leaders Forecast Survey Q1 2012

TO WhAT exTeNT DO YOu AGree Or DisAGree WiTh The FOLLOWiNG sTATemeNTs:

250

200

46 61 43 45 40 74

150

100

50 46 0
If President Barack Obama wins a second term, it will be a positive development for the technology industry.

55 14 8
If Governor Mitt Romney wins the White House, it will be a positive development for the technology industry.

Agree Somewhat Agree Neutral

Somewhat Disagree Disagree

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recurriNG cONcerNs ON TAxATiON, DeFiciTs AND reGuLATiON Regardless of the elections outcome, it seems clear that what technology leaders want out of Washington is greater cer tainty about regulation and tax policy. Those concerns, par ticularly on regulation, surfaced repeatedly throughout the survey. Depending on who controls the White House, and the composition of Congress, after the November elections, the Bush-era tax cuts could be extended, made permanent, or rolled into a broader tax reform package. Most respondents, 60 percent, think allowing the Bush-era tax cuts to expire would negatively impact investments in the technology sector. However, perhaps counter to the conventional wisdom, a notable minority (33 percent) of technology business leaders think expiration of the Bush-era tax cuts will have no direct impact on investments and growth in the technology industry. Eight percent think the expiration would have a positive impact, presumably thinking that it would positively impact federal fiscal stability and deficit reduction. In a previous survey, when asked directly, 30 percent of technology executives said that they believed increased government revenues generated via the expiration of these tax cuts would help reduce deficits and improve general economic confidence.

Marginal personal tax rates are not a primary factor that guide technology investment decisions. Technology leaders are more concerned with thelikely stability and potential of an investment, the corporate tax rate, and the broader economic and regulatory environment. Of course, evaluating the tax impact does come into the equation, but ultimately people invest in technology companies because they think they can achieve a positive return. Peter Asitz

4%

3% 15%

33%

What impact would the expiration of the Bush-era Tax Cuts have on technology industry investment?

44%

Significant negative impact Somewhat negative impact Neutral/no impact

Somewhat positive impact Significant positive impact

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DLA Piper Technology Leaders Forecast Survey Q1 2012

When given the oppor tunity to comment about the technology environment in general, respondents sounded off about the burdens brought about by regulation, and the cost of compliance, more than any other issue.

WhaT are The BiggesT legal or regulaTory issues faCing TeChnology ComPanies?:

regulations regulatory
sarbanes sox
uncertainty

reporting

rules

Taxes

immigration h1B Visas investment

The potential of having to manage to various state data security requirements

over-regulation

lawsuits Patent Trolls security

The following verbatim responses illustrate the regulatory and compliance burden expressed by business leaders across the technology sector:

Cost of regulatory compliance Dodd Frank requirements Cost of legislated health care requirements: Too many public repor ting requirements Far too high burden of compliance Sarbanes Oxley is still too onerous

A strong majority (78 percent) of respondents also believe that the presidential campaign dialogue centered on private equity has damaged the reputation of the private equity and venture capital industry, and 65percent predicted this focus could lead to new regulation. Among private equity managers and venture capitalists specifically, the concern is even deeper: 93 percent think the presidential race has damaged the reputation of their industry.

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TO WhAT exTeNT DO YOu AGree Or DisAGree WiTh The FOLLOWiNG sTATemeNTs: The DiscussiON surrOuNDiNG The PrivATe equiTY iNDusTrY iN This YeArs PresiDeNTiAL eLecTiON:

250 3 200 50 72 18 26 41 89 100 92 43 22 10

Will make future regulation of the industry more likely

18 40

150

74 67

50

32 9 6
Has had a negative impact on perceptions of the industry

59

74

Has had no impact on the industry

Has had a positive impact on the industry

Agree Somewhat Agree Neutral

Somewhat Disagree Disagree

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DLA Piper Technology Leaders Forecast Survey Q1 2012

cONFiDeNT ON The FuNDAmeNTALs, BusiNess LeADers see sTeADY BuT sLOW GrOWTh AheAD Despite the aforementioned concerns, technology leaders are cautiously optimistic on the fundamentals of their own businesses. The industry leaders surveyed overwhelmingly expected both sales and hiring to increase, but generally at very moderate rates. The wild gyrations on revenue expectations and staffing that were seen in the 2008 and 2010 surveys with technology leaders are no longer present. In October 2008, at the very outset of the financial crisis and ensuing Great Recession, 75 percent of respondents repor ted that their businesses had been adversely affected by receding economic conditions, and almost 70 percent of respondents expected revenues to decline as a result. In October 2010, respondents were shifting their priorities and expectations. Guarding against the harmful effects of recession was quickly becoming less impor tant. Instead, they were focusing on growth amid an environment that was rife with risks and uncer tainty, but also with oppor tunities upon which to capitalize. Now, in the 4 th quar ter of 2012, respondents seem to have developed a broad consensus they are settling in for a period of steady but slow growth. Seventy-two percent of technology executives expect their sales to increase over the next 12 months, with 55percent specifically estimating moderate sales growth. Another 16 percent repor ted that they expect no change in their sales in the next year, which appears to fur ther signal the reserved nature of expectations for growth. Software company executives today are the most optimistic on sales, according to the survey, with

47percent of them expecting a significant sales increase. Companies of $1 billion or more were more conservative in their sales forecasts, with 66 percent expecting only moderate increases. Revenue expectations, of course, impact staffing decisions. In 2008, almost two-thirds of respondents said they expected their revenues to decline as a result of that years economic environment. That year, respondents, especially those from large companies, were predicting layoffs. Since 2010, expectations for hiring have floated at moderate levels. Of note, the percentage of respondents who said their firms planned no hiring has decreased substantially, while the percentage of respondents who said their firms plan to hire moderately ticked upward. In the 2012 survey, 50 percent of executives repor t plans for moderate hiring increases over the next 12 months and 10 percent are planning for significant increases, par ticularly at smaller enterprise and software companies. Twenty-seven percent expect no notable changes in their staffing levels. Again, larger companies were more restrained in their plans for hiring. For ty-ninepercent areplanning moderate increases in hiring, and 10 percent are planning moderate decreases in hiring. The impact of these moderate expectations in the tech sector says volumes about job growth in the larger economy: most net job creation for the past 30 years has come from star tup firms.

Star tups arent everything when it comes to job growth. They are the only thing. They are the engine of innovation and the tech economy, said Rich Scudellari, par tner, DLA Piper.

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1% 7% 5%

16%

16%

fall 2012:
how do you expect your companys sales to trend over the next 12 months?

55%

Significant increase Moderate increase No change

Moderate decrease Significant decrease Unknown

5% 12%

12%

5%

16%

23%

spring 2012:
how do you expect your companys sales to trend over the next 12 months?

fall 2010:
how do you expect your companys sales to trend over the next 12 months?

70% Expect strong increase Expect moderate increase Expect no change

55%

Significant increase Moderate increase No change

Moderate decrease Significant decrease Unknown

Expect moderate decrease Expect strong decrease

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DLA Piper Technology Leaders Forecast Survey Q1 2012

1% 5% 8%

10%

fall 2012
27% how do you expect your companys staffing/hiring to trend over the next 12 months?

50%

Significant increase Moderate increase No change

Moderate decrease Significant decrease Unknown

3%

6%

8%

43%

9% 2%

24%

spring 2012
how do you expect your companys staffing/hiring to trend over the next 12 months? 41% 59%

fall 2010:
how do you expect your companys staffing/hiring to trend over the next 12 months? 4%

Significant increase Moderate increase No change

Moderate decrease Significant decrease Unknown

Expect strong increase Expect moderate increase Expect no change

Expect moderate decrease Expect strong decrease

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exAmiNiNG chALLeNGes TO TechNOLOGY sTArTuPs AND The iPO mArkeT According to a repor t by the US Census Bureau, the business star tup rate has fallen to a low of eight percent. Thats down from a high of 13 percent in the 1980s and a rate of 11 percent as recently as 2006. The study also found that firms from one to five years old now account for 35 percent of all businesses, as compared to approximately 50 percent in the 1980s. In the span of a decade, from the bursting of the Dot-com Bubble through the Great Recession and into this subsequent period of tepid economic growth, the operating environment for star tup tech companies and their investors has changed. Recent DLA Piper surveys have shown a solidifying opinion among technology leaders that there is a New Normal in the model for building and investing in star tup technology companies. Approximately two-thirds of executives surveyed believe the operating environment has been permanently altered in some significant way. Helping to drive that change are changes in the IPO market. In DLA Pipers April 2012 survey, nearly 75 percent of technology, venture capital and private equity leaders stated that they believe the IPO market will not return to the historical highs of the 1990s and 2000s. The reduction in IPOs has broader implications, reducing the number of dramatic home runs for venture capital investors and lowering overall returns. Fewer IPOs also means fewer small- and medium-size public technology companies which traditionally have been the acquirers for other technology companies, fur ther diminishing exit oppor tunities and returns. More than 60 percent of technology executives said the traditional venture capital model had been permanently altered as a result of these and other factors. Directly to this point, in the 2012 survey, when asked to assess the greatest challenges facing technology star tups,

respondents ranked access to capital as the primary challenge. Fifty-one percent ranked access to capital as a major concern, and only six percent did not see it as one of the major challenges. Concerns about the overall tepid economic environment and the availability of quality and experienced talent rounded out the top challenges for technology star tups. Entrepreneurs were more likely to rate access to capital as the top challenge, whereas the venture capital and private equity communities were more likely to describe the economic environment and demonstrating business value as the biggest challenges. Obviously, these barriers often feast on one another. Capital can be difficult to access precisely because of economic uncer tainty, and IPOs and venture investments can go awry when tough economic conditions prevail. rANk The BiGGesT chALLeNGe FAciNG TechNOLOGY sTArTuPs: 1. Access to capital: 2.49 2. Economic outlook: 2.56 3. Access to quality talent: 2.98 4. Uncer tainties regarding patent/IP enforcement: 4.23 5. Need to demonstrate valid business model: 2.74 rANk The BiGGesT chALLeNGe FAciNG The us iPO mArkeT: 1. Uncer tain economic conditions: 2.37 2. Recent lackluster performance of major IPOs: 2.43 3. More attractive M&A exits: 3.44 4. Over regulation: 3.90 5. Monetization challenges for Social Media and Mobile companies: 3.95 6. Competition from non-US exchanges: 4.91

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DLA Piper Technology Leaders Forecast Survey Q1 2012

The BiG OPPOrTuNiTies: cLOuD cOmPuTiNG, mOBiLe cOmPuTiNG AND BiGDATA Despite challenges, technology leaders are optimistic and forward-looking by nature constantly seeking the next big idea, the next big innovation. When asked what technology sectors hold the most promise for entrepreneurs and investors in the nearterm future, respondents ranked (1) mobile computing and (2) cloud computing as the most promising, followed by (3) big data. When asked to look fur ther out on the horizon, and comment on the most promising under the radar technologies, business leaders most often mentioned

mobile computing and technologies, big data, green energy technologies, security software and technologies, and nanotechnology. WhAT AreAs OF The Tech ecONOmY Are mOsT PrOmisiNG FOr eNTrePreNeurs AND iNvesTOrs? 1. Mobile computing: 2.32 2. Cloud computing: 2.51 3. Big data: 3.10 4. Enterprise software: 3.91 5. Social media: 4.49 6. Gaming: 4.64

WhaT under-reCognized TeChnology areas are likely To haVe The BiggesT imPaCT on The TeChnology seCTor in The nexT fiVe years?:

Big data mobile Connected devices

green

energy enterprise software

life sciences

nanotechnology
storage

Predictive analytics

security

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chiNAs PrOGressiON As A suPer POWer iN The GLOBAL TechNOLOGY iNDusTrY Recent DLA Piper surveys have uncovered a growing uncer tainty about how easily the Chinese economy can successfully transition beyond a strong manufacturingoriented economy to include a strong technology and innovation economy. In 2012, 41 percent of executives predicted that China will have difficulty transitioning to a technology and innovation economy, up from only just 18 percent two years ago. Technology leaders view China as indispensable to the manufacturing of technologies (91 percent repor ting); as a key market for technology sales (81 percent repor ting); and increasingly as a source for financing technologies (45 percent repor ting). However, respondents were less decisive on Chinas role as an innovator and developer of new technologies: 35

percent said within the next few years China would have a somewhat impor tant impact on global technology innovation and development, while 27 percent said they did not expect China to have any meaningful impact in the sector in the near-term. Only one in ten business leaders expect China to be a major contributor to technology development and innovation within the next few years. From the respondents perspective, stronger intellectual proper ty protections (83 percent repor ting) and a more robust infrastructure that suppor ts entrepreneurship (43percent repor ting) are needed for China to spur the growth of its technology sector. Chinas greatest assets to the development of an innovation economy are its sheer market size, large amounts of capital and a large, skilled workforce, according to these same leaders.

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DLA Piper Technology Leaders Forecast Survey Q1 2012

WhAT imPAcT WiLL chiNA hAve ON The GLOBAL TechNOLOGY iNDusTrY iN The NexT FeW YeArs WiTh resPecT TO:

250

200

24 73

19 75

150

132

91

100

57 62 65 53 13 3
Manufacturing

102

50

6
Development of new technologies

36 4
Financing of technology companies

26 6 2
Market for technology products and services

Very Important Somewhat Important Neutral

Not Very Important Not at all Important

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WhAT Are The BiGGesT ThreATs TO GrOWTh OF The TechNOLOGY secTOr iN chiNA? (check ALL ThAT APPLY.)

100

80

60 83

40 44 20 0
Global economic conditions Competition from the US

20

43 17
Concerns regarding intellectual property protection Perceptions of Chinese technology Technical proficiency of local talent

44

39

Infrastructure that fosters entrepreneurship

Free flow of capital

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DLA Piper Technology Leaders Forecast Survey Q1 2012

meThODOLOGY In late September and early October 2012, DLA Piper, the international law firm, distributed its Technology Leaders Forecast Survey via e-mail to a group of thousands of senior executives and advisors in the technology industry, including CEOs, CFOs and other company officers at technology companies, as well as to venture capitalists, entrepreneurs and consultants. The 2012 survey is the fifth such technology market analysis developed by DLA Piper, with the last surveyissued in the Spring of 2012 and the inaugural survey issued just prior to the recession in October2008.

Respondents were asked a series of questions and provided multiple possible responses; they were also given the oppor tunity to elaborate on their answers with direct commentary. Due to rounding, all percentages used in some questions may not add up to 100 percent. Percentages in some questions may not add up to 100 percent because respondents were asked to check all answers that applied. A few minor edits were made to verbatim responses to correct spelling mistakes, verb tense, and punctuation. For fur ther information on the study and its methodology, please contact [contact].

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ABOuT us DLA Piper is a global law firm with lawyers across the Americas, Asia Pacific, Europe and the Middle East. From the quality of our legal advice and business insight to the efficiency of our legal teams, we believe that when it comes to the way we serve and interact with our clients, everything matters.

FOr mOre iNFOrmATiON To learn more about DLA Piper, visit www.dlapiper.com or contact: Peter Astiz T +1 650 833 2036 peter.astiz@dlapiper.com

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DLA Piper is a global law firm operating through DLA Piper LLP (US) and affiliated entities. For further information please refer to www.dlapiper.com. Note past results are not guarantees of future results. Each matter is individual and will be decided on its own facts. Attorney Advertising. Copyright 2012 DLA Piper LLP (US) . All rights reserved. | OCT12 | 03915