# Based on feedback from users of prior annual reports, we are pleased > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/agency%3Asec%3Aeb026694d23ee7bc ## Record - **Collection:** Agency decision - **Document type:** Agency decision ## Text Annual Report FISCAL YEAR 2023 INTERACTIVE VERSION Based on feedback from users of prior annual reports, we are pleased to offer this interactive version. The content here is the same as in the print version, but the clickable Contents menu throughout allows users to navigate easily between sections. Entrepreneurs continue to face a considerable gap in accessing capital through every stage of the business cycle. While there have been some advances in identifying and addressing barriers to accessing capital, there is much more work to do. EWING MARION KAUFFMAN FOUNDATION.1 SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | ii Contents MISSION: Who We Are 1 DATA: State of Capital Formation 4 21 Small and Emerging Businesses and Exempt Offering Data Mature and Later-Stage Businesses 30 Initial Public Offerings and Small Public Companies 39 50 Women Founders and Investors Diverse Founders and Investors 63 65 Natural Disaster Areas Rural Communities POLICY: Recommendations 70 72 Expand educational resources Private offering changes 80 Support emerging fund managers 78 Avenues connecting businesses and investors 83 Scale and harmonize small public company requirements ADVOCACY: What We Do COMMITTEE: Highlights 86 94 ENDNOTES: All the Details OFFICE: Meet the Team 102 121 Contents MISSION | Who We Are Introduction DATA | State of Capital Formation POLICY | Recommendations ADVOCACY | What We Do COMMITTEE | Highlights ENDNOTES | All the Details OFFICE | Meet the Team MISSION Who We Are T he Small Business Advocacy Office is an independent office that was established in January 2019 via the bipartisan SEC Small Business Advocate Act of 2016 to advance the interests of small businesses and their investors at the SEC and in the capital markets, from early-stage startups raising initial capital, to later-stage private companies whose founders and investors are seeking liquidity, all the way to smaller public companies. The Office proactively works to identify and address unique challenges faced by women-owned, diverse, rural, and natural disaster area small businesses and their investors. We advocate for small businesses and their investors in raising capital by Contents MISSION | Who We Are Introduction DATA | State of Capital Formation POLICY | Recommendations ADVOCACY | What We Do ANALYZING capital-raising trends, including the impact of rules and regulations COMMITTEE | Highlights ENGAGING through outreach and education HELPING navigate securities laws and other issues via education and policy recommendations We engage with small businesses and their investors from around the country to hear their perspectives on issues facing the small business ecosystem, from policy, to changing trends in raising capital, to the complexities of the capital-raising regulatory framework, to unique challenges and opportunities of different demographic groups and geographic regions. The insight we gain from our events and conversations with small business ecosystem participants provides timely, practical feedback to inform the Commission’s policymaking as well as the Office’s further outreach and educational efforts. SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 1 ENDNOTES | All the Details OFFICE | Meet the Team Contents MISSION | Who We Are DATA | State of Capital Formation Introduction Small and Emerging Businesses and Exempt Offering Data Mature and Later-Stage Businesses Initial Public Offerings and Small Public Companies Women Founders and Investors Diverse Founders and Investors Natural Disaster Areas Rural Communities POLICY | Recommendations ADVOCACY | What We Do COMMITTEE | Highlights ENDNOTES | All the Details DATA State of Capital Formation SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 2 OFFICE | Meet the Team ANALYZING capital-raising trends, including the impact of rules and regulations Why data? We seek to provide a comprehensive snapshot of the state of U.S. small business capital formation, bringing together many important pieces of the capital formation story into one resource to aid in evaluating the current flow of capital between investors and small businesses. Data reflecting the successes and challenges small businesses face in capital-raising supplements the feedback and other anecdotal evidence our Office receives throughout the year. Informed by this data, we can better identify what tools, strategies, and approaches would be most helpful in crafting policy solutions. The data provided in this Report is derived from public filings with the SEC, as analyzed by the SEC’s Division of Economic and Risk Analysis (DERA), and is supplemented with data and analysis from third parties. Contents MISSION | Who We Are DATA | State of Capital Formation Where to start? Introduction To allow small businesses, investors, and market participants to find the data that is most relevant to them, we have organized this report by life cycle stage of the business. Small and Emerging Businesses and Exempt Offering Data TOP INDUSTRIES RAISING CAPITAL2 BUSINESS STAGE COMMON FUNDING SOURCES LIFE CYCLE STAGE Mature and Later-Stage Businesses Initial Public Offerings and Small Public Companies Women Founders and Investors Small and emerging businesses Mature and later-stage businesses Self-funding Grants Loans Friends and family Crowdfunding Angel investors Incubator/Accelerator Pre-seed and seed VC funds Corporate venture capital Family offices Businesses range from small businesses creating local jobs to high-growth startups raising capital to launch prototypes and products. These businesses are generally growing and looking for larger amounts of capital to fund operations of scale, ventures into new product lines, and preparation for public markets. Small public companies Diverse Founders and Investors Natural Disaster Areas Initial public offering (IPO) Other registered offerings Exempt offerings (e.g., private placements or offshore offerings) Rural Communities POLICY | Recommendations ADVOCACY | What We Do These later-stage businesses have access to a larger pool of capital, enhanced liquidity, reputational benefits and are subject to rigorous SEC reporting requirements. COMMITTEE | Highlights ENDNOTES | All the Details OFFICE | Meet the Team Given the wide ranging options for funding, the top industries vary based on funding source. Software, commercial products and services, pharma and biotech, health care, consumer goods and services, IT hardware and energy. Health care, business services, technology, manufacturing, banking and financial services, and hospitality, retailing, and restaurants. SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 3 Small and Emerging Businesses and Exempt Ofering Data T his segment of companies includes both small businesses that create local jobs but may not fit the high-growth model that is the typical target of venture capital (VC) investments as well as high-growth startups that may ultimately fit the VC model but are still seeking capital to get off the ground and launch early prototypes.3 Why is access to capital for small businesses so important? Contents MISSION | Who We Are DATA | State of Capital Formation Introduction Small and Emerging Businesses and Exempt Offering Data Mature and Later-Stage Businesses Small businesses are critical to the overall economy. Initial Public Offerings and Small Public Companies 43.5% OPEN 99.9% of all businesses are small businesses (33.2 million businesses).4 Small businesses created Women Founders and Investors Diverse Founders and Investors of the U.S. GDP is created by small businesses.5 Nearly 1 in 5 adults Natural Disaster Areas Rural Communities POLICY | Recommendations ADVOCACY | What We Do 63% COMMITTEE | Highlights of net new jobs (17.3 million) from 1995-2021.6 “ is founding a business or has done so in the past 3½ years.7 ENDNOTES | All the Details OFFICE | Meet the Team Capital is the lifeblood of business. REIMAGINE MAIN STREET 8 SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 4 Early-stage entrepreneurs report financial challenges and need support to access capital to build their companies. An increasing percentage of small businesses continue to experience financial challenges.9 Contents MISSION Who W e Are MIS SION | Who We 94% 81% 64% 85% DATA | State of Capital Formation Introduction 66% Small and Emerging Businesses and Exempt Offering Data Mature and Later-Stage Businesses 2018 2019 2020 2021 2022 Access to capital remains a barrier to entry and growth for entrepreneurs. Initial Public Offerings and Small Public Companies Women Founders and Investors 90% of new businesses with employees need external capital at the start.10 78% of small business owners are concerned about their ability to access capital.11 Access to Capital Over 50% of small businesses seeking capital needed less than $50,000.12 55% of small business owners found it harder to access capital than in prior years.13 3.7x more startups failed in 2022 due to lack of financing or investors than in 2020.14 SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 5 Diverse Founders and Investors Natural Disaster Areas Rural Communities POLICY | Recommendations ADVOCACY | What We Do COMMITTEE | Highlights ENDNOTES | All the Details OFFICE | Meet the Team Small businesses need resources, knowledge, and connections to operate and grow their business; however, many startups struggle to find each of these critical pieces.15 Financial Resources sional Profes ctions Conne 70% of startups experience financial challenges Know l and K edge now-H ow 76% o f star ex Contents MISSION | Who We Are ups t of star dvice 22g% find a o t le g stru ls mode or role perien tups ce ch with f inding allenges s or res ource upport s DATA | State of Capital Formation Introduction Small and Emerging Businesses and Exempt Offering Data Mature and Later-Stage Businesses Aspiring entrepreneurs often seek advice and support from family or friends.16 Initial Public Offerings and Small Public Companies Family members 61% Women Founders and Investors Diverse Founders and Investors Friends or acquaintances 55% Established business leaders Natural Disaster Areas 20% Rural Communities Other business professionals 24% POLICY | Recommendations Entrepreneurial support organizations, like accelerators and incubators, are designed to provide resources to early-stage, and rapid-growth startups.17 ADVOCACY | What We Do COMMITTEE | Highlights ENDNOTES | All the Details Funding opportunities, including “demo day” events, investor introductions, grants, and equity financing18 Network building and connections to mentors, as well as opportunities to be a part of an entrepreneurial community19 Guidance and resources such as education, training, advisory and legal counsel, and physical space20 SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 6 OFFICE | Meet the Team Where do small and emerging businesses turn for capital when facing financial challenges?21 Personal funds 53% Businesses with 4 or fewer employees are more likely to use Cash reserves 53% personal savings compared to small businesses with more than 20 employees.22 External financing (with repayment) 42% Grants or donations 18% Of the small businesses that sought external financing, only 8% sought equity investments.23 Small businesses continue to struggle to shore up their capital needs. Each year, 14% of established businesses need additional capital, but nearly half of them do not apply for it.24 50% of small businesses report that they have delayed plans to grow their business in response to higher interest rates.25 Contents MISSION | Who We Are DATA | State of Capital Formation Introduction Small and Emerging Businesses and Exempt Offering Data Mature and Later-Stage Businesses Initial Public Offerings and Small Public Companies Women Founders and Investors Diverse Founders and Investors Natural Disaster Areas Rural Communities 40% of small businesses applied for a loan, line of credit, and/or cash advance. About half of those were fully funded, while roughly 21% did not receive any funding.26 POLICY | Recommendations None 21% COMMITTEE | Highlights Most 13% ADVOCACY | What We Do ENDNOTES | All the Details Some 13% All (53%) SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 7 OFFICE | Meet the Team Angel investors remain a significant source of early-stage capital, despite a drop in deal volume and size. Angel investors are generally high-net-worth individuals who invest their own money directly in emerging businesses, typically in early funding rounds. Most angel investors are accredited investors, and many are current or former entrepreneurs themselves. 367,945 active angel investors Contents MISSION | Who We Are (1.2% increase from 2021) 27 DATA | State of Capital Formation 62,325 entrepreneurial ventures received angel funding (9.8% decrease from 2021)28 $22.3 billion in total angel investments (23.7% decrease from 2021)29 $356,650 average angel funding round Introduction Small and Emerging Businesses and Exempt Offering Data Mature and Later-Stage Businesses Initial Public Offerings and Small Public Companies (15.4% decrease from 2021)30 Women Founders and Investors 17.7 deals on average per angel group (up from 17.1 in 2021)31 Angel investment in 2022 Diverse Founders and Investors Natural Disaster Areas Rural Communities 21% of seed capital came from angel investments (compared to 32% in 2021)32 POLICY | Recommendations ADVOCACY | What We Do 3.4 jobs are created per angel investment (down from 4.4 jobs per deal in 2021)33 1 in 4 chance of an entrepreneur securing an angel investment (in 2022, the yield rate increased to 26.7% from 24.1% in 2021)34 First time CEOs constituted 73% of leaders funded by angel deals (up from 70% in 2021)35 83% of angel deals and investments are in seed (63%) and Series A (20%) rounds36 SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 8 COMMITTEE | Highlights ENDNOTES | All the Details OFFICE | Meet the Team What were the top industries supported by angel investments in 2022?37 Contents Software Retail Healthcare Services/ Medical Devices MISSION | Who We Are 16% 17% 24% Biotech 9.3% Industrial/ Energy-Clean Tech 9.1% FinTech 7% Angel investors are allocating a lower portion of their investments within their region than in 2022, shifting more funding outside their region.38 DATA | State of Capital Formation Introduction Small and Emerging Businesses and Exempt Offering Data Mature and Later-Stage Businesses Northeast 67.9% New York 44.7% (down from 89.5%) (down from 59.8%) Northwest 80.8% Women Founders and Investors (down from 95.0%) Great Plains 51.5% (down from 86.8%) California 62.7% (down from 75.7%) Initial Public Offerings and Small Public Companies Diverse Founders and Investors Great Lakes 74.2% (down from 81.0%) Southwest 68.8% Mid-Atlantic 67.5% (down from 79.6%) (down from 91.3%) Southeast 76.7% (down from 87.3%) Natural Disaster Areas Rural Communities POLICY | Recommendations Texas 60.5% (down from 75.6%) ADVOCACY | What We Do COMMITTEE | Highlights ENDNOTES | All the Details OFFICE | Meet the Team SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 9 What is happening with seed fundraising? A pre-seed or seed round is typically a company’s first funding round.39 This round may include funding from friends and family, angel investors, or early-stage funds. Capital at this stage is often used for product development and market research.40 Businesses in an angel or seed round are the furthest from the public market, which insulates from many macroeconomic challenges experienced in later stages.41 Seed activity has slowed in both overall deal value and count from its peak in the first half of 2022, echoing trends seen throughout the venture life cycle.42 1,982 1,980 2,230 2,223 2,287 MISSION | Who We Are DATA | State of Capital Formation 3,490 3,328 3,209 Contents Introduction 2,585 2,386 1,810 Small and Emerging Businesses and Exempt Offering Data Mature and Later-Stage Businesses $5.4B $4.3B $5.0B $5.1B $5.6B $5.9B $8.8B $9.8B $14.0B $10.0B $6.6B H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 2019 2018 2020 2021 Deal Value 2023 2022 Deal Count Alpha Prototype 20% No Product 35% Women Founders and Investors Diverse Founders and Investors Early-stage businesses successful in raising pre-seed and seed funding are at different stages of product readiness.43 Pre-Seed Initial Public Offerings and Small Public Companies Launched Product 29% Beta Prototype 16% Natural Disaster Areas Rural Communities POLICY | Recommendations ADVOCACY | What We Do Seed Alpha Prototype 21% No Product 25% No Product Alpha Prototype Beta Prototype 14% Beta Protoype Launched Product 40% Launched Product Since 2021, pre-seed fundraising has remained competitive for founders as the investor-friendly climate has grown more entrenched.44 Investors Founders Less time engaging with pitch decks More pitch decks sent per week 11.5% 16% SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 10 COMMITTEE | Highlights ENDNOTES | All the Details OFFICE | Meet the Team Many early-stage investors seek equity – the amount of equity dilution to founders varies in pre-seed, seed, and Series A rounds. Contents When investors take an ownership interest in a company, it dilutes or reduces the portion that founders own, so this funding is often called dilutive capital. In addition, with a funding round companies often reserve some equity for employee compensation.45 Median equity dilution Preseed 19.9% Seed 18.6% Series A 14.6% ution equity dil Average as w l a e d el in an ang in 2022 46 9.3% .6% in 2021). Other Equity 34.0% 12.6% m 13 (down fro Employee Equity Reserve Fundraising timeframes can be highly variable; the average fundraising time fell in 2021 but has risen since.47 21 20.5 Average number of weeks to fund pre-seed and seed rounds Pre-seed Seed 18.5 15.6 2020 2022 2023* While seed activity has slowed, when seed rounds have closed, the deal values of those rounds have continued to rise. 0.3% 1.6% 8.1% 0.3% 2.2% 9.4% 0.5% 2.9% 12.7% 1.2% 0.7% 4.7% 5.1% 16.4% 16.4% Average and median seed deal values49 $4.6M Average Deal Value $25M+ $10M-$25M 44.9% 45.3% 44.4% 49.3% 45.9% 45.5% $5M-$10M $4.2M 15.4% 14.2% 31.3% 29.4% 29.6% 2018 2019 2020 $500K-$1M 11.6% 10.2% 10.0% 23.0% 21.5% 22.3% 2021 2022 2023* $2.8M $2.5M $1.7M $1.8M $1.8M $2.6M 2019 2020 POLICY | Recommendations ADVOCACY | What We Do COMMITTEE | Highlights OFFICE | Meet the Team $2.1M Median Deal Value 2018 Rural Communities $2.9M $2.8M Under $500K *As of June 30, 2023 Initial Public Offerings and Small Public Companies ENDNOTES | All the Details $3.3M $1M-$5M 15.3% Mature and Later-Stage Businesses Natural Disaster Areas *As of June 30, 2023 0.3% 1.4% 6.8% Small and Emerging Businesses and Exempt Offering Data 13 2021 Distribution of deals by size48 Introduction Diverse Founders and Investors 11.5 2019 DATA | State of Capital Formation Women Founders and Investors 16 16 15 13.5 MISSION | Who We Are 2021 2022 2023* *As of June 30, 2023 SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 11 Seed businesses face an uphill battle moving from a successful seed round to Series A.50 The median time after a seed stage ofering before raising a Series A has increased. 2014 2023 14 months 25 months Contents MISSION | Who We Are DATA | State of Capital Formation Introduction Many seed investors are expanding their geographic reach. In 2022, the median distance skyrocketed to Median distance between company and lead investor in a seed deal (miles)51 591.3 miles. 591.3 Small and Emerging Businesses and Exempt Offering Data Mature and Later-Stage Businesses Initial Public Offerings and Small Public Companies Women Founders and Investors Diverse Founders and Investors 401.5 Natural Disaster Areas Prior to 2019, the median distance was under 100 miles. 94.9 2018 151.4 2019 Rural Communities 187.4 2020 2021 2022 POLICY | Recommendations ADVOCACY | What We Do While the median distance between lead investor and company has increased, distance continues to be an added barrier that companies in small markets, and in markets far from venture hubs, face when they need to raise capital.52 SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 12 COMMITTEE | Highlights ENDNOTES | All the Details OFFICE | Meet the Team Micro fund closings fall below pre-pandemic levels.53 664 48% of total fund counts but only about 4% of all capital raised. Contents Micro funds represent 527 MISSION | Who We Are 398 293 306 294 342 DATA | State of Capital Formation 344 Introduction 241 171 125 $2.3M $2.9M $3.2M $3.2M $4.1M $5.0M $5.1M $5.0M $8.7M $6.1M $1.2M 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023* Capital Raised Fund Count *As of June 30, 2023 Small and Emerging Businesses and Exempt Offering Data Mature and Later-Stage Businesses Initial Public Offerings and Small Public Companies Women Founders and Investors Diverse Founders and Investors What is a micro fund? A micro fund is a fund that raises $50 million or less. In recent years, micro funds have strengthened seed funding.54 A majority of micro funds are raised by emerging managers.55 Natural Disaster Areas Rural Communities POLICY | Recommendations ADVOCACY | What We Do “ Micro funds mainly raise capital from family ofces and wealthy individuals, such as GPs in VC funds and successful startup founders. Because of this, their LP base tends to be more fckle than that of larger frms, which is more geared towards institutional capital. MARINA TEMKIN, PITCHBOOK56 SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 13 COMMITTEE | Highlights ENDNOTES | All the Details OFFICE | Meet the Team What regulatory pathways are companies and pooled funds using to raise capital?57 Rule 506(c) General Solicitation Oferings Contents These oferings allow companies and pooled funds to raise unlimited capital by broadly soliciting investors who meet certain wealth thresholds or have certain professional credentials.58 MISSION | Who We Are DATA | State of Capital Formation $169B Rule 506(b) Private Placements Introduction ($750,000 median) $2.7T Small and Emerging Businesses and Exempt Offering Data ($1.2M median) These oferings allow companies and pooled funds to raise unlimited capital from investors with whom the company has a relationship and who meet certain wealth thresholds or have certain professional credentials. A company cannot use general solicitation in a 506(b) private placement.61 Mature and Later-Stage Businesses Rule 504 Limited Oferings $258M Flows into Registered Funds ($250,000 median) $8.8T These oferings allow companies to raise up to $10 million in a 12-month period, in many cases from investors with whom the company has a relationship.59 Flows into registered funds (companies registered under the Investment Company Act) refects the estimated amount of capital invested in registered open-end mutual funds, exchange-traded funds, and money market funds.60 Regulation A Initial Public Offerings and Small Public Companies Women Founders and Investors Diverse Founders and Investors Natural Disaster Areas Rural Communities $1.5B ($1.6M median) POLICY | Recommendations These oferings are sometimes called a "mini-IPO" and allow eligible companies to raise up to $20 million in a 12-month period in a Tier 1 ofering and up to $75 million in a 12-month period in a Tier 2 ofering through a process similar to, but less expensive than, a registered ofering.65 ADVOCACY | What We Do COMMITTEE | Highlights Crowdfunding $352M ($100,000 median) Regulation Crowdfunding oferings allow eligible companies to raise up to $5 million in capital in a 12-month period from investors online via a registered funding portal.62 Other Exempt Oferings $1.3T Other exempt oferings includes estimated amounts raised under Regulation S (ofshore oferings) and Rule 144A (following a private placement by a company, purchasers may use this exemption ro resell their securities to qualifed institutional buyers).63 Initial Public Offerings ENDNOTES | All the Details $17B ($17M median) OFFICE | Meet the Team Initial public offerings (IPOs) provide an initial pathway for companies to raise unlimited capital from the general public through a registered offering. After its IPO, the company will be a public company with ongoing public reporting requirements.64 Other Registered Oferings $1.1T ($300M median) These oferings allow companies to raise unlimited capital and selling shareholders to obtain liquidity through public oferings using a registration statement fled with the SEC.66 Contents MISSION | Who We Are DATA | State of Capital Formation Introduction Small and Emerging Businesses and Exempt Offering Data TE O N N RSIO E V E IV s been T a h C e A g a R this p INTE n o n o i t or a age f orma f p n s i u e o i h T the prev h t i w merged rience. e p x e r iewe better v Mature and Later-Stage Businesses Initial Public Offerings and Small Public Companies Women Founders and Investors Diverse Founders and Investors Natural Disaster Areas Rural Communities POLICY | Recommendations ADVOCACY | What We Do COMMITTEE | Highlights ENDNOTES | All the Details OFFICE | Meet the Team SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 15 How are U.S. companies (excluding pooled funds) raising capital from investors?67 What pathways are U.S. public and private companies using to raise capital? illion Registered Offerings $874B b Only $4.6 nt was u o m a of this raised by lic small pubies n a p com red in registe erings. equity off Contents U.S. public companies are raising more capital than U.S. private companies. MISSION | Who We Are DATA | State of Capital Formation U.S. public companies raised Introduction $1.0 trillion or 61% of the capital raised by U.S. companies. U.S. private companies raised Small and Emerging Businesses and Exempt Offering Data $662 billion or Mature and Later-Stage Businesses 39% of the capital raised by U.S. companies. Other Exempt Offerings $548B Initial Public Offerings and Small Public Companies Rule 506(c) $16B Regulation A $1.4B Rule 506(b) $266B Regulation Crowdfunding $0.4B Women Founders and Investors Rule 504 $0.2B Diverse Founders and Investors 17,082 Natural Disaster Areas U.S. Public Companies U.S. Private Companies Rural Communities $874B Deal Value Deal Value Ofering Count Ofering Count $385B 1,900 $163B 704 37 225 $6.7B $0.5B $2.5B $3.8B $3.3B Registered Other Rule Offerings Exempt 506 (b) Offerings 18 $0.02B $4.8B Rule Regulation 506 (c) A 2,229 306 $1.4B $16B $3.8B $3.3B $259B 485 $2.5B Other Exempt Offerings Rule 506 (b) POLICY | Recommendations ADVOCACY | What We Do 919 $0.4B $4.8B 354 $0.2B Rule Regulation Regulation Rule 506 (c) A Crowdfunding 504 COMMITTEE | Highlights ENDNOTES | All the Details OFFICE | Meet the Team SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 16 How are different industries using the top 3 offerings pathways to raise capital (excluding pooled funds)?68 Banking and Financial Services $477B Technology $143B Health Care $132B Energy $137B Manufacturing $105B Hospitality, Retailing, Restaurants $43B $219M $39B $18M Contents MISSION | Who We Are $30B $23M DATA | State of Capital Formation $7B $75M Introduction $4B $149M $75B Real Estate $29B Business Services $59B Small and Emerging Businesses and Exempt Offering Data $557M Mature and Later-Stage Businesses $3B $337M Initial Public Offerings and Small Public Companies $35B $5B $32M Registered Oferings Regulation D Women Founders and Investors Regulation A Diverse Founders and Investors What is happening with Regulation Crowdfunding offerings? Crowdfunding has continued to support many diverse companies across the U.S. through small checks from many different investors.69 25.2% $428,486 $1,578 average investor check size of offerings in Q3 2022 had at least one founder of color average raise in 2022, down 5.9% from 2021 $506.7M in 2022 capital commitments, down 10.2% from 2021 Rural Communities POLICY | Recommendations ADVOCACY | What We Do COMMITTEE | Highlights 71.5% of offerings in 2022 exceeded minimum funding targets Natural Disaster Areas 70% 28.5% of oferings in Q3 2022 had at least one woman founder of capital is distributed outside the top 10 capital hubs SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 17 ENDNOTES | All the Details OFFICE | Meet the Team The number of U.S. counties with crowdfunded companies has continued to increase, with new offerings not far from the 2021 and 2022 peaks. U.S. Counties with Crowdfunded Companies70 879 700 2021 220 Counties 2020 Contents New Crowdfunding Oferings71 344 465 841 778 707 388 262 173 MISSION | Who We Are 755 357 DATA | State of Capital Formation Introduction 137 Counties 2022 H1 273 Counties H2 H1 2020 H2 H1 2021 H2 H1 Small and Emerging Businesses and Exempt Offering Data 2023 2022 New Form C Filings New Form C Filings with Max Ofering Between >$1.07M to $5M Mature and Later-Stage Businesses Initial Public Offerings and Small Public Companies Where are companies using Regulation Crowdfunding to raise capital? The shading of each state shows the estimated total capital raised, and the number indicates the total number of offerings in that state.72 Women Founders and Investors Diverse Founders and Investors Regulation Crowdfunding WA 24 MT 3 OR 6 ID 6 NV 14 ND 1 MN 6 SD 1 WY 2 CO 31 CA 245 AZ 21 OK 0 NM 6 GU 0 NONE IN 8 IL 28 LA 5 OH 11 KY 2 PA 34 WV 0 MS 0 AL 8 VA 11 MD 14 MA 38 RI 5 CT NJ 13 21 DE DC 23 5 NC 17 TN 12 AR 0 GA 19 POLICY | Recommendations ADVOCACY | What We Do ENDNOTES | All the Details PR 2 $500,000 - $1 MILLION Rural Communities COMMITTEE | Highlights SC 12 FL 73 HI 2 LESS THAN $500,000 MI 21 MO 7 KS 2 TX 51 AK 2 IA 2 NE 1 UT 10 WI 0 NY 88 VT 1 NH 2 Natural Disaster Areas ME 2 $1 MILLION - $5 MILLION OFFICE | Meet the Team VI 0 OVER $5 MILLION SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 18 What is happening with Regulation D Offerings? Pooled Funds account for the majority of funds raised under Regulation D.73 11,624 13,393 10,972 8,695 8,050 10,569 12,055 11,946 9,703 11,351 8,689 7,640 $681B $86B $649B $107B H1 H2 $1,074B $1,060B $1,013B $181B $182B $149B $1,069B $134B H2 H1 H2 H1 2020 2021 MISSION | Who We Are s companie Operatingoffered only value 12% of gthuelation D of all Re up but make offerings e number 55% ofoth gs of fferin 6,200 5,051 Contents $1,527B DATA | State of Capital Formation Introduction Small and Emerging Businesses and Exempt Offering Data $165B H1 2022 2023 Amounts Raised by Pooled Funds Amounts Raised by Other Issuers New Oferings by Pooled Funds New Oferings by Other Issuers Mature and Later-Stage Businesses Initial Public Offerings and Small Public Companies Where are companies using Regulation D to raise capital? Women Founders and Investors The shading of each state shows the estimated total capital raised, and the number indicates the total number of offerings in that state.74 Diverse Founders and Investors Natural Disaster Areas WA 4,626 MT 53 OR 259 ID 118 NV 315 Regulation D ND 45 WY 213 MN 375 SD 40 IA 185 NE 83 UT 892 CO 1,046 CA 4,902 AZ 515 OK 119 TX 3,090 GU 0 NONE AK 19 LESS THAN $1 BILLION IL 1,000 IN 277 OH 523 KY 112 PA 757 WV 6 MS 41 AL 183 VA 559 MD 426 Rural Communities MA 1,501 RI 54 CT NJ 559 500 DE DC 1,370 205 GA 691 SC 176 PR 101 $1 BILLION - $5 BILLION $5 BILLION - $20 BILLION ADVOCACY | What We Do ENDNOTES | All the Details OFFICE | Meet the Team FL 1,995 HI 20 POLICY | Recommendations COMMITTEE | Highlights NC 640 TN 369 AR 116 LA 81 NY 4,592 MI 359 MO 222 KS 134 NM 50 WI 200 VT 192NH 62 ME 74 VI 2 OVER $20 BILLION SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 19 What is happening in Regulation A offerings? The overall amounts sought have declined since the peak in the second half of 2021, while the number of offerings has remained steadier.75 194 190 138 109 142 $2.5B 28 18 H1 H2 H1 2020 H2 How much are issuers seeking to raise? $10 million (median) $20 million (average) $2.0B 19 H1 2021 DATA | State of Capital Formation $2.8B $2.3B MISSION | Who We Are 149 145 $3.8B $1.7B $1.3B 165 166 Over 80% of offerings continue to seek to raise $50M or less 174 164 160 Contents 25 25 H2 H1 2022 Introduction Small and Emerging Businesses and Exempt Offering Data Legal fees to conduct the offering: $25,000 (median) $55,000 (average)76 Mature and Later-Stage Businesses 2023 New Initiated Offerings Seeking $50M or Less New Initiated Offerings Seeking Between >$50M and $75M Amounts Sought in Qualified Offerings New Initiated Offerings Initial Public Offerings and Small Public Companies Women Founders and Investors Where are companies using Regulation A to raise capital? Diverse Founders and Investors The shading of each state shows the estimated total capital raised, and the number indicates the total number of offerings in that state.77 WA 6 MT 0 OR 1 ID 1 NV 11 WY 4 MN 2 SD 0 CO 2 CA 33 AZ 3 WI 0 IA 0 NE 2 UT 3 OK 2 NM 0 GU 0 NONE LESS THAN $5 MILLION IL 3 IN 0 OH 1 KY 0 MS 0 AL 1 VT 0 NH 0 ME 0 PA 1 WV 0 VA 3 MD 2 MA RI 3 1 CT NJ 2 4 DE DC 1 6 NC 2 TN 1 AR 1 LA 0 NY 181 MI 3 MO 0 KS 0 TX 10 AK 0 Rural Communities Regulation A ND 1 Natural Disaster Areas GA 5 COMMITTEE | Highlights OFFICE | Meet the Team PR 0 $5 MILLION - $20 MILLION ADVOCACY | What We Do ENDNOTES | All the Details SC 1 FL 21 HI 0 POLICY | Recommendations $20 MILLION - $75 MILLION VI 0 OVER $75 MILLION SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 20 Mature and Later-Stage Businesses C Contents MISSION | Who We Are ompanies within this segment of the market are generally growing and looking for larger amounts of capital that can fund operations of scale, ventures into new product lines, and preparation for public markets. Most often, their investors are institutional in nature, whether VC funds, private equity funds, or crossover investors from the public market. DATA | State of Capital Formation Introduction While VC activity is still concentrated in a few states, VC funds are investing in growth startups across the U.S. The below map illustrates the concentration of estimated VC deal value in 2022, with the number of VC deals indicated on each state.78 WA 578 OR 182 MT 29 ID 38 NV 121 ND 9 WY 49 MN 184 SD 4 IA 52 NE 44 UT 220 CO 473 CA 5,503 AZ 172 OK 30 NM 29 GU 0 MI 194 IL 454 IN 194 MO 94 KS 45 TX 938 AK 11 WI 110 WV 9 AL 52 MD 219 NC 318 TN 169 MS 14 VA 275 GA 322 PR 30 Women Founders and Investors RI 40 CT NJ 171 271 DE DC 564 102 % decrea se fro m 2020.79 FL 767 HI 27 MA 1,064 The top 3 states accounte d for 63% of the VC deal value in 2 022 – a 12 SC 66 Mature and Later-Stage Businesses Initial Public Offerings and Small Public Companies ME 31 PA 423 OH 207 KY 68 AR 38 LA 41 VT 39 NH 55 NY 2,319 Small and Emerging Businesses and Exempt Offering Data Diverse Founders and Investors Natural Disaster Areas Rural Communities POLICY | Recommendations ADVOCACY | What We Do COMMITTEE | Highlights VI 6 ENDNOTES | All the Details Less than $100 MILLION $100 MILLION - $500 MILLION $1.5 BILLION - $20 BILLION OVER $20 BILLION $500 MILLION - $1.5 BILLION No data available SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 21 OFFICE | Meet the Team The distance between VCs and their portfolio companies continues to increase.80 Median distance (miles) between lead/sole U.S. investor and U.S. target company by funding round 1,229 1,088 Contents 955 739 694 654 512 315 594 527 283 415 384 92 26 95 32 95 45 2012 2013 2014 698 341 412 251 232 170 165 45 76 55 2015 2016 2017 Angel and Seed Series A and B 412 402 329 310 95 2018 151 2019 Series C and D 722 557 595 395 401 712 629 591 DATA | State of Capital Formation Introduction 187 2020 MISSION | Who We Are Small and Emerging Businesses and Exempt Offering Data 2021 2022 Mature and Later-Stage Businesses Series E and Up Initial Public Offerings and Small Public Companies What is the typical VC fund cycle?81 Women Founders and Investors Diverse Founders and Investors Fundraising VCs typically raise capital via capital commitments from their investors. The median size of a U.S. venture fund closed in 2022 was $40 million (down from $50 million in 2021).82 A fund’s closing is the time when investors – often called limited partners – commit to an investment in the fund. Investment How Venture Capital Works VCs tend to invest in earlystage, high-growth companies.83 Early-stage deals accounted for 70% of VC deals in 2022, but, given the prevalence of follow-on rounds, only 39% of VC investments.84 Natural Disaster Areas Rural Communities POLICY | Recommendations ADVOCACY | What We Do COMMITTEE | Highlights Re-investment The fund ends when proceeds from all investments have been distributed to fund investors. Many investors reinvest in new funds. In 2022, the average time between fundraises was 1.8 years—a decade low—and was only 1.6 years for general partners of billion-dollar funds.87 Company Growth Exit Many VC investors are actively engaged with the companies in which they invest – also called portfolio companies. The majority of portfolio companies are in contact with a VC investor at least once a week.85 The life span of a VC fund is typically 10 years. VCs typically retain 20% of proceeds, while returning 80% to the fund’s limited partners.86 SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 22 ENDNOTES | All the Details OFFICE | Meet the Team Beyond capital, how can a VC investment benefit a portfolio company? Portfolio companies may receive:88 Contents MISSION | Who We Are Strategic Guidance 87% Marketing 69% Introductions Operational Guidance 65% Board 58% Management Personal Guidance 46% DATA | State of Capital Formation Introduction Many VC investments are accompanied by a board seat for a VC investor.89 For a portfolio company, having VC directors with investments within the same industry is associated with:90 Small and Emerging Businesses and Exempt Offering Data Mature and Later-Stage Businesses Initial Public Offerings and Small Public Companies A higher probability of additional investment (raising 1.14 additional rounds) A higher probability of an IPO at a higher valuation (3.7 percentage point increase in IPO probability) A decreased probability of failure (12.5 percentage point decrease) Women Founders and Investors Diverse Founders and Investors Natural Disaster Areas Conversely, after losing a VC director:91 Rural Communities POLICY | Recommendations ADVOCACY | What We Do A startup is 17% less likely to raise another round and takes 4 months longer to close A lower probability of an IPO and an 18-month delay to reach a successful exit A higher probability of failure (increase of 6.7 percentage points over the next 3 years) COMMITTEE | Highlights ENDNOTES | All the Details OFFICE | Meet the Team SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 23 How is VC investment activity changing? Following historically high investment activity in 2021 and the first half of 2022, deal counts and investment volume have fallen closer to pre-2021 figures.92 9,485 9,505 6,418 6,066 7,051 6,826 6,570 7,657 6,751 6,514 MISSION | Who We Are $163B $62B $84B Contents 9,847 $79B $159B $95B $77B $73B $184B $88B DATA | State of Capital Formation $86B Introduction H1 H2 H1 2018 H2 H1 2019 H2 H1 H2 H1 2021 2020 Deal Value H2 H1 2023 2022 Small and Emerging Businesses and Exempt Offering Data Deal Count Deal volume and count for early-stage and later-stage deals continued to decline from 2021 peaks.93 Early-Stage (Series A and B) 5,393 Mature and Later-Stage Businesses Initial Public Offerings and Small Public Companies Later-Stage (Series C and Up) 5,617 5,108 5,306 Women Founders and Investors 3,856 3,657 3,749 Diverse Founders and Investors 4,015 3,516 $41B $45B $45B 2018 2019 2020 Deal Value 3,300 $88B 1,942 $71B $240B $94B $96B $115B 2018 2019 2020 Natural Disaster Areas $151B 2022 2023* Deal Count Rural Communities $59B $20B 2021 2,339 Deal Value 2021 2022 POLICY | Recommendations 2023* Deal Count . *As of June 30, 2023 While the size of seed rounds has continued to increase, the size of Series A, B, C, and D rounds has fallen from 2021 peaks.94 $21.8B $13.9B $26.8B $24.8B Average Series A and B Deal Size $15.0B Median Series C and D Deal Size $7.3B $21.9B $8.0B $9.2B $5.6B $5.5B $6.0B 2018 2019 2020 Median Series A and B Deal Size $21.2B $25.4B $18.2B $15.9B $11.7B $7.6B COMMITTEE | Highlights $39.1B Average Series C and D Deal Size $27.5B ADVOCACY | What We Do $10.0B $6.8B $8.0B $6.0B 2021 2022 2023* *As of June 30, 2023 SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 24 ENDNOTES | All the Details OFFICE | Meet the Team The need for capital in early-stage and later-stage VC deals exceeds the available supply.95 Series C and D capital demand nearing 3x available supply Capital demand-supply ratio in U.S. venture marketplace 2.9x 2.4x 2.0x Contents MISSION | Who We Are 1.9x DATA | State of Capital Formation 1.1x 0.7x Q1 1.0x 0.9x 0.6x 1.2x 1.2x 1.1x 1.1x 1.1x 1.1x 1.1x 0.8x 0.6x 0.7x 0.6x Q2 Q3 Q4 0.7x Q1 1.2x 1.5x 0.9x 0.8x 0.8x 1.0x 0.9x 0.9x 0.8x 0.6x Q2 Q3 Q4 2018 0.9x 0.7x Q1 2019 Q2 Q3 Q4 Q1 0.6x 0.6x 0.6x 0.5x 0.8x 0.6x 0.6x 0.6x Q2 Q3 Q4 2020 Q1 2021 Series A and B 1.1x Q2 Q3 Q4 1.6x 1.5x Series A and B capital availability is the lowest it has been since 2010 Q1 2022 Q2 2023 For companies that are closing VC rounds, how have market trends affected those deals? 19% of deals were down rounds (compared to 9% and 7% of deals in the second quarter of 2022 and 2021, respectively).96 Time between rounds is climbing. After a seed round, the months between rounds average:97 YEAR 1 Seed YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6 Mature and Later-Stage Businesses Initial Public Offerings and Small Public Companies YEAR 7 Diverse Founders and Investors Natural Disaster Areas Rural Communities In the second quarter of 2023, prior than the Small and Emerging Businesses and Exempt Offering Data Women Founders and Investors Series C and D nd: Down rouith a a round w ion at lower valu round Introduction YEAR 8 Series A POLICY | Recommendations ADVOCACY | What We Do COMMITTEE | Highlights ENDNOTES | All the Details OFFICE | Meet the Team 26 months average Series A Series B 28 months average Series B Series C 32 months average SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 25 How is VC fundraising activity changing? VC fundraising slowed from the record highs of 2021 and 2022 and is on pace to set a 6-year low.98 Contents The frst half of 2023 saw a 73% decrease in capital raised and a 44% decrease in the number of funds, each as compared to the frst half of 2022.99 MISSION | Who We Are Capital raised The amounts raised by VC funds varied across fund size.100 $1B+ $250M-$500M Fund Count Introduction $51B $100M-$250M 1,095 $85B $50M-$100M Small and Emerging Businesses and Exempt Offering Data Under $50M 913 784 DATA | State of Capital Formation $500M-$1B 1,443 $33B 772 Mature and Later-Stage Businesses $26B $25B 233 $18B $22B $9B $14B $14B $12B $15B $7B $5B $16B 2019 $72B $71B $91B $160B $167B $33B $13B $5B $5B 2018 2019 2020 2021 2022 2023* 2018 *As of June 30, 2023 $16B $23B $31B $1B $26B $27B $1B $6B $5B $9B $9B $8B $6B $10B $8B $6B $7B 2020 2021 2022 2023* $19B *As of June 30, 2023 Over the past five years, the amount of capital that VCs have ready to invest - often called "dry powder" - has continued to increase.101 While investments have slowed, record levels of dry powder could provide some insulation from the overall market volatility.102 $280B $220B 60.9% of this dry powder is concentrated in mega-funds – funds with $500M or more in commitments.103 2018 Women Founders and Investors Diverse Founders and Investors Natural Disaster Areas Rural Communities POLICY | Recommendations ADVOCACY | What We Do COMMITTEE | Highlights ENDNOTES | All the Details $184B $130B Initial Public Offerings and Small Public Companies $154B OFFICE | Meet the Team 2019 2020 2021 2022 SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 26 Fundraising continued to concentrate in large and established funds with the percentage of capital invested in emerging managers dropping to a new decade low.104 For most of the past decade, the number of emerging firms has outpaced established firms by more than 2-to-1. In 2022 and 2023, the number of emerging firms is roughly on par with established firms.105 MISSION | Who We Are 815 628 413 449 508 478 148 92 $12B $10B 2013 $27B 171 $27B 195 182 $32B $24B 276 268 $48B $40B 539 $16B $19B $22B $24B $31B 2014 2015 2016 2017 2018 2019 Introduction 545 $103B $129B $59B Small and Emerging Businesses and Exempt Offering Data 115 $57B $10B DATA | State of Capital Formation 550 374 349 251 504 $38B $31B 118 $27B $6B 2020 2021 2022 2023* *As of June 30, 2023 Experienced Firm Capital Raised Experienced Firm Count Emerging Firm Capital Raised Emerging Firm Count of emerging managers found fundraising difficult or very difficult106 Mature and Later-Stage Businesses Initial Public Offerings and Small Public Companies Women Founders and Investors Diverse Founders and Investors Natural Disaster Areas “ 91% Contents While there may be [an] appetite to invest with emerging managers, that's probably going to be the hardest area to raise capital, simply because people are having to make some very difcult choices and are prioritizing re-ups with proven managers who have long track records, in lieu of new relationships. FIONA ANDERSON WHEELER, BC PARTNERS107 Rural Communities POLICY | Recommendations ADVOCACY | What We Do COMMITTEE | Highlights ENDNOTES | All the Details What drives LPs to allocate funds to emerging managers? 108 Niche strategy options 29% Attractive return potential 28% Desire to access new talent 22% Added portfolio diversifcation More likely to negotiate better fees 16% 5% SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 27 OFFICE | Meet the Team Over the last decade, emerging managers have increasingly raised funds outside of the traditional venture hubs.109 2,153 Contents 63.7% 882 MISSION | Who We Are $81.0B $47.2B 2002 - 2012 2013 - 2023* Capital Raised Fund Count *As of April 17, 2023 of the capital raised since 2018 by firms headquartered outside of major markets has been by emerging managers.110 “ DATA | State of Capital Formation Introduction Small and Emerging Businesses and Exempt Offering Data Mature and Later-Stage Businesses Local capital is imperative to help scout and fund startups that launch outside of traditional capital hubs. A declining presence of emergingmanager-led funds could make it more difcult for startups to raise capital and may force them into larger ecosystems. MAX NAVAS, PITCHBOOK Initial Public Offerings and Small Public Companies Women Founders and Investors 111 How have nontraditional VC investors impacted fundraising?112 Although nontraditional VC investors—generally firms and institutions not called VCs—have assumed increased prominence over the past several years, their involvement in VC deals decreased year-over-year in 2022.113 Despite their decreased participation, nontraditional VC investors still participated in deals that accounted for about 75% of the total VC deal value.114 11,766 8,457 9,184 Natural Disaster Areas Rural Communities POLICY | Recommendations ADVOCACY | What We Do COMMITTEE | Highlights 8,895 7,224 4,437 4,682 $111B $113B $133B $35B $38B $39B 2018 2019 2020 4,027 11,337 Diverse Founders and Investors ENDNOTES | All the Details 6,167 4,673 $284B $64B 2021 $184B $62B 2022 1,841 $62B $23B 2023* *As of June 30, 2023 Traditional VC Investor Deal Value Traditional VC Investor Deal Count Nontraditional VC Investor Deal Value Nontraditional VC Investor Deal Count SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 28 OFFICE | Meet the Team There was a marked reduction in portfolio company exits in 2022 compared to previous years. Contents A reduction in exit activity reduces distributions from VC funds to their limited partners—in turn stemming reinvestments by those limited partners into VC funds.115 U.S. VC exit value declined 90% year-over-year in 2022.116 While exit numbers have declined dramatically since 2021, the overall exit ratios by funding stage have generally remained consistent.117 1,966 2023* 24% 31% 45% 2022 24% 33% 43% 2021 21% 32% 47% 2020 19% 36% 45% 2019 18% 41% 41% 2018 18% 42% 40% 1,319 1,255 1,346 1,258 $662B *As of June 30, 2023 Angel and Seed Early-stage Later-stage MISSION | Who We Are DATA | State of Capital Formation Introduction Small and Emerging Businesses and Exempt Offering Data Mature and Later-Stage Businesses Initial Public Offerings and Small Public Companies Women Founders and Investors Diverse Founders and Investors Natural Disaster Areas Rural Communities 471 $221B $179B $7B $57B $11B $54B $8B $7B In the first half of 2023, POLICY | Recommendations have generated the majority of exit value and have continued to account for about ADVOCACY | What We Do acquisitions COMMITTEE | Highlights $14B $230M $12B $61B $64B $62B $69B 2018 2019 2020 $102B 2021 $33B $5B $38B $5B 2022 2023* 72% OFFICE | Meet the Team *As of June 30, 2023 Acquisitions Buyouts Public Listings Deal Count ENDNOTES | All the Details of the overall exit volume.118 SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 29 Initial Public Oferings and Small Public Companies C Contents ompanies can access broad pools of investors when they conduct public offerings. This allows them to raise large amounts of capital to fund activities such as research and development, capital expenditures, or debt service. Public offerings also provide liquidity to earlier-stage investors and employees. MISSION | Who We Are DATA | State of Capital Formation Introduction What is happening with IPO activity? The volume and number of initial public offerings has fallen significantly since its peak in the first half of 2021.119 611 Mature and Later-Stage Businesses Initial Public Offerings and Small Public Companies 472 385 Small and Emerging Businesses and Exempt Offering Data Women Founders and Investors $189B Diverse Founders and Investors $129B $114B 111 132 75 $37B H1 H2 H1 2020 H2 2021 $17B $5B H1 H2 2022 Total IPO Proceeds Natural Disaster Areas 86 $11B Rural Communities H1 2023 POLICY | Recommendations Number of IPOs What are the top industries raising capital in IPOs (excluding pooled funds)?120 $4.6B Manufacturing Technology Banking and Financial Services Health Care Hospitality, Retailing, Restaurant Energy ADVOCACY | What We Do $18.3B COMMITTEE | Highlights $2.5B $22.1B $2.2B ENDNOTES | All the Details $7.5B OFFICE | Meet the Team $1.2B $3.2B $0.8B July 2022 – June 2023 July 2021 – June 2022 $1.7B $0.6B $0.5B SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 30 How are the dynamics changing for companies going public? IPOs by U.S. small companies, when compared to the fluctuations in IPOs by large companies and SPAC offerings, have been relatively stable.121 IPOs by Small Companies IPOs by Large Companies SPAC Oferings Contents MISSION | Who We Are 613 DATA | State of Capital Formation Introduction 354 $1B $4B $1B $0.5B $144B 198 2020 Mature and Later-Stage Businesses 2021 2022 $76B 39 46 55 2023* Deal Value of IPOs Small and Emerging Businesses and Exempt Offering Data 252 $155B $87B 116 66 $2B 2020 2021 $9B 29 $9B 2022 2023* 86 18 $12B 2020 2021 Numbers of IPOs 2022 2023* *As of June 30, 2023 Initial Public Offerings and Small Public Companies Women Founders and Investors Diverse Founders and Investors In 2022, the number of exchange-listed IPOs dropped to its lowest point since 2009.122 Natural Disaster Areas While the median age of an IPO issuer has generally become younger over time, since 2010, it has hovered between 8 and 12 years. Rural Communities POLICY | Recommendations Number of Exchange-Listed IPOs Median Age ADVOCACY | What We Do COMMITTEE | Highlights ENDNOTES | All the Details 15 13 12 14 13 11 10 9 8 OFFICE | Meet the Team 15 11 12 12 11 12 10 10 10 10 11 9 6 380 80 66 63 173 159 157 159 21 2000 2002 2004 2006 2008 41 91 2010 81 8 93 158 206 118 75 106 134 113 165 311 38 2012 2014 2016 2018 2020 2022 SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 31 While the percentage of IPO companies with VC-backing has varied, the link between VC-backing and preparation for an IPO remains.123 2015 65% 2000 64% 2010 44% 2005 28% Contents 2020 68% MISSION | Who We Are ked 0, VC-bac Since 200 counted for s ac companie 0% of Os and 7124 IP ll a f o . 54% s O y IP technolog 2022 37% DATA | State of Capital Formation Introduction Small and Emerging Businesses and Exempt Offering Data Mature and Later-Stage Businesses How does being VC-backed affect a company’s IPO chances? 125 The success of an IPO depends on many factors, including the quality and performance of the startup, the underwriting services of investment banks, and general market factors. For many IPOs, underwriters play a crucial role in the pricing, marketing, and distribution of IPOs.126 Initial Public Offerings and Small Public Companies Women Founders and Investors Diverse Founders and Investors Natural Disaster Areas Rural Communities IPOs by VC-backed portfolio companies attracted 11.7% more attention in the week of the offering than non-VC backed IPOs.127 VC firms with more underwriting relationships are more likely to take their portfolio companies public.128 VC firms that lose underwriter relationships experience a 22.3% decrease in the rate of portfolio company IPOs over the next 5 years.129 VC funds near the end of their lifespan had an even greater decrease in their portfolio company IPO rate after the loss of an underwriter.130 POLICY | Recommendations ADVOCACY | What We Do COMMITTEE | Highlights ENDNOTES | All the Details OFFICE | Meet the Team SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 32 How has the U.S. public market changed over time? While the number of exchange-listed companies has declined, small exchange-listed companies account for the vast majority of that decline.131 Contents Total Exchange-Listed Companies MISSION | Who We Are 6,342 5,677 4,756 1,036 DATA | State of Capital Formation 2,317 3,914 824 2,318 4,641 3,932 4,025 Small Exchange-Listed Companies 1980 1990 3,641 2,573 Large Exchange-Listed Companies 1,596 2000 Introduction 2010 1,068 2020 When taking into consideration mergers within and into the public markets, the listing gap is much smaller. The increased rate of mergers after 1997 accounted for about 2,500 fewer public companies (1,000 in public-public mergers and 1,500 in public company acquisitions of private companies).132 Small and Emerging Businesses and Exempt Offering Data Mature and Later-Stage Businesses Initial Public Offerings and Small Public Companies Women Founders and Investors Diverse Founders and Investors Natural Disaster Areas Rural Communities POLICY | Recommendations “ [R]egulatory cost itself is unlikely to explain the full magnitude of IPO declines in the U.S. over the past two decades. Non-regulatory factors, such as decline in business dynamism, shifting investment to intangibles, abundant private equity fnancing, changing economies of scale and scope, and changing acquisition behavior are likely to play a more important role. ADVOCACY | What We Do COMMITTEE | Highlights ENDNOTES | All the Details MICHAEL EWENS, ET AL.133 OFFICE | Meet the Team SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 33 How has the public market fared based on other measures of size? Contents The aggregate market capitalization of all public companies has grown exponentially to $43.6 trillion as of June 2023 (from $1.7 trillion in 1983).134 MISSION | Who We Are Public companies’ profits were 8.3% of GDP in 2021 – nearly double the proportion of profits to GDP in 1996.136 Public companies’ market capitalization was more than 2X GDP in 2021 (compared to less than half of GDP in 1990).135 DATA | State of Capital Formation Introduction Small and Emerging Businesses and Exempt Offering Data The portion of aggregate public company market capitalization represented by small exchange-listed companies, however, has declined by half each of the past four decades. From 1983 to the first half of 2023, it has fallen to 0.3% from over 13%.137 Mature and Later-Stage Businesses Initial Public Offerings and Small Public Companies Where are registered offerings – often called public offerings – being used to raise capital? Women Founders and Investors The shading of each state shows the estimated total capital raised, and the number indicates the total number of offerings in that state.138 Registered Offerings WA 30 MT 2 OR 10 ID 8 NV 28 ND 0 WY 0 MN 46 SD 1 IA 3 NE 16 UT 13 CO 35 CA 351 AZ 16 OK 12 NM 0 GU 0 NONE LESS THAN $1 BILLION IL 51 IN 23 OH 44 KY 9 WV 0 MS 2 AL 4 VA 39 Natural Disaster Areas ME 0 PA 62 MD 34 MA 113 RI 11 CT NJ 38 61 DE DC 12 5 NC 52 TN 31 AR 11 LA 2 NY 253 MI 195 MO 14 KS 2 TX 159 AK 0 WI 15 VT 1 NH 1 Diverse Founders and Investors GA 38 ADVOCACY | What We Do ENDNOTES | All the Details PR 2 $1 BILLION - $5 BILLION POLICY | Recommendations COMMITTEE | Highlights SC 1 FL 80 HI 2 Rural Communities $5 BILLION - $20 BILLION OFFICE | Meet the Team VI 0 OVER $20 BILLION SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 34 Small Public Companies While it is easy to group all public companies together, their experiences and challenges in the public markets differ considerably. The unique challenges that small public companies face tend to receive less coverage than those faced by larger companies. How many registered companies are small public companies?139 Small Public Companies 2,696 MISSION | Who We Are DATA | State of Capital Formation Introduction rred often refe mpanies,” o c re c a li , s b u ie "P pan rting com ents to as repo requirem g in rt o p re to , t s c subje report file certain erly, and and must rt a u q annual, n including the SEC o h it w , s rt o p re t 140 curren g basis. an ongoin Large Public Companies 2,989 Contents Small and Emerging Businesses and Exempt Offering Data Mature and Later-Stage Businesses Initial Public Offerings and Small Public Companies Women Founders and Investors Diverse Founders and Investors Top Industries of Small Public Companies Based on Number of Companies Natural Disaster Areas Rural Communities Health Care 716 Technology 403 Manufacturing 335 Banking and Financial Services 441 480 497 263 422 Business Services 176 195 Real Estate 121 259 POLICY | Recommendations ADVOCACY | What We Do COMMITTEE | Highlights ENDNOTES | All the Details OFFICE | Meet the Team Small Public Companies Large Public Companies SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 35 How are small public companies faring after exchange-listed IPOs? Companies may seek to go public for many reasons, but each company should consider the potential benefits and costs. In 2022, out of 91 small cap companies that conducted an IPO and listed their shares on certain exchanges for small cap stocks:141 92% Contents MISSION | Who We Are DATA | State of Capital Formation had a negative rate of return from their IPO price, with an average return of -65% 34% appeared on an exchange non-compliance list after their IPO 51% completed reverse stock splits before or after their IPO Introduction Small and Emerging Businesses and Exempt Offering Data Mature and Later-Stage Businesses Initial Public Offerings and Small Public Companies What is a A reverse stock split reduces the number of a company’s outstanding shares, while the aggregate reverse value of the shares remains the same. It can be stock split? viewed as a signal of a company in distress. 142 Women Founders and Investors Diverse Founders and Investors Natural Disaster Areas Rural Communities How are small public companies affected by instability in the financial system?143 Commercial banking and financial system stability is very important to small public companies. POLICY | Recommendations ADVOCACY | What We Do COMMITTEE | Highlights Losing a major creditor is more likely to cause more severe damage to small public company borrowers than their larger counterparts. Small public company borrowers are likely to suffer a heightened negative reaction following a bank failure and experience more negative returns longer term. SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 36 ENDNOTES | All the Details OFFICE | Meet the Team How much capital are U.S. small public companies raising through registered equity offerings?144 Average proceeds $37M Average proceeds $63M Average proceeds $29M 269 MISSION | Who We Are 246 249 236 199 102 H1 $11.9B $14.6B H2 H1 2020 $17.8B $4.9B H2 H1 2021 $3.1B $3.1B H2 H1 2023 2022 Total Proceeds DATA | State of Capital Formation apital is Raising c m a pri ary for objective 23% of lic small pub 145 . s companie 170 $4.8B Contents Average proceeds $13M Introduction Small and Emerging Businesses and Exempt Offering Data Mature and Later-Stage Businesses Initial Public Offerings and Small Public Companies Women Founders and Investors Number of Offerings Diverse Founders and Investors Despite the drop in the average offering size last year, the aggregate amount raised in registered equity offerings across the top industries by U.S. small public companies remained in line with the prior 12-month period.146 $1.3B Hospitality, Retailing, Restaurant POLICY | Recommendations ADVOCACY | What We Do $1.3B COMMITTEE | Highlights $509M Technology Banking and Financial Services Rural Communities $1.5B Business Services Manufacturing $1.9B $2.6B Health Care Natural Disaster Areas $552M $378M $220M ENDNOTES | All the Details July 2022 - June 2023 July 2021 - June 2022 $235M $526M $72M $78M SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 37 OFFICE | Meet the Team Costs of being public The costs associated with going public often garner much attention. However, the costs to operate as a public company may be even higher. CFOs estimated the average percentage of their total recurring incremental costs of being a public company.147 pliance Total com a median costs for mpany public co 2.1% to m vary fro 32% 22% 18% 16% 12% Incremental Audit Public/ Investor Relations, Human Resources, Information Technology Financial Reporting Legal Regulatory Compliance 6.3% t of marke n.148 io t a z capitali Contents MISSION | Who We Are DATA | State of Capital Formation Introduction Small and Emerging Businesses and Exempt Offering Data Mature and Later-Stage Businesses Small public companies and new public companies face high regulatory costs as a percentage of their size and profit. The regulatory costs for small public companies are disproportionate relative to their size because many costs are fixed.149 Small public companies place greater importance on increasing research coverage than large or mega-cap public companies.150 The average number of analysts covering a mega-cap public company is more than 4x higher than at small public companies.151 Small public companies prioritize targeting new investors.152 Initial Public Offerings and Small Public Companies Women Founders and Investors Diverse Founders and Investors Natural Disaster Areas Rural Communities POLICY | Recommendations ADVOCACY | What We Do 80% identify targeting new investors as a top priority COMMITTEE | Highlights ENDNOTES | All the Details 46% focus on enhancing engagement with current shareholders 39% prioritize increasing international share ownership SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 38 OFFICE | Meet the Team Women Founders and Investors Contents Women-Owned Business Formation and Ownership MISSION | Who We Are While the portion of businesses owned by women decreases as the businesses mature, their survival rate outperforms the average small business. DATA | State of Capital Formation 44.6% 25.0% 36.9% of non-employer small businesses are women-owned or equally women-and menowned, representing 11.5 million firms.153 Introduction Small and Emerging Businesses and Exempt Offering Data Mature and Later-Stage Businesses of employer small businesses are women-owned or equally women-and menowned, representing 2.1 million businesses.154 of VC deals in 2022 were with women-founded or co-founded companies, representing 4,372 deals and accounted for only 17.6% of all venture funding.155 Initial Public Offerings and Small Public Companies Women Founders and Investors Diverse Founders and Investors Natural Disaster Areas The two-year survival rate for women-owned employer businesses is 81%, besting the average small employer business survival rate of 79%.156 Rural Communities POLICY | Recommendations By share of employer firms, women owners remain underrepresented across demographic groups.157 ADVOCACY | What We Do COMMITTEE | Highlights 64.5% 54.7% 64.8% 57.3% 4.3% 13.6% 37.2% 30.9% 28.0% 26.6% African American/Black Native American/ Alaska Native Asian/Native Hawaiian/Other Pacific Islander Hispanic/Latino Women-owned Equally-owned 8.2% 14.3% 21.2% White 62.7% 10.7% Men-owned SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 39 ENDNOTES | All the Details OFFICE | Meet the Team Women are drawn to entrepreneurship, but many women founders feel their gender is holding them back.158 Contents 78% of women perceived entrepreneurship as a good career choice in 2022 (up from 64% in 2016).159 In 2020, on average 1,821 new businesses were started daily. Of those, 64% were started by women of color.160 34% of women 70% of female founders reported burnout (compared to 20% of men founders).161 founders felt their gender has held them back (up from 55% in 2019).162 As women advance in their career, they are increasingly disproportionately shouldering domestic responsibilities.163 MISSION | Who We Are DATA | State of Capital Formation Introduction Small and Emerging Businesses and Exempt Offering Data Mature and Later-Stage Businesses Percentage of men and women in each role doing the most household work and childcare in their family Initial Public Offerings and Small Public Companies Senior Manager and up Women Founders and Investors Men 13% Women 52% First level manager Men Natural Disaster Areas 21% Women 58% Rural Communities POLICY | Recommendations Entry level Men Diverse Founders and Investors 30% Women 58% ADVOCACY | What We Do COMMITTEE | Highlights ENDNOTES | All the Details OFFICE | Meet the Team Women founders turn to each other for support. More than ever, women founders seek a sense of community and connections with others who share their struggles and successes.164 SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 40 Capital-Raising Trends for Women-Owned Businesses Women business owners are more likely than men to seek financing to meet a critical operating need, while less likely to seek financing to grow or pursue a new opportunity.165 62.3% of women sought financing to meet operating expenses (compared to 54.6% of men). Contents MISSION | Who We Are DATA | State of Capital Formation 26.3% of women sought financing to expand, acquire assets, or pursue new opportunities (compared to 32.6% of men). Why seek financing? 18.4% of women sought financing to replace or repair assets (compared to 23.6% of men). Introduction Small and Emerging Businesses and Exempt Offering Data Mature and Later-Stage Businesses Initial Public Offerings and Small Public Companies A woman’s confidence, compensation, and feelings of support are all drivers in meeting growth targets that can determine access to financing.166 Women Founders and Investors Diverse Founders and Investors Natural Disaster Areas Rural Communities Confidence and feeling supported are positive factors in achieving cash flow break-even. Paying yourself as a founder in the first year can have a positive impact on cash flow break-even. The percentage of a woman founder’s household income coming from her business can have a positive impact on average monthly revenue. 2022 was a strong year for women entrepreneurs seeking angel capital.167 Women constituted Angel investors invested in POLICY | Recommendations ADVOCACY | What We Do COMMITTEE | Highlights ENDNOTES | All the Details 37.1% of entrepreneurs seeking angel capital in 2022 (up from 28.6% in 2021).168 25.6% of those investment opportunities brought to their attention (up from 19.7% in 2021, and mirroring the overall market increase from 24.1% in 2021 to 26.7% in 2022).169 SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 41 OFFICE | Meet the Team As VC funding contracted, the share of funding to women founders remains a fraction of the overall capital raised.170 Deals with Women-Only Founders Deals with Men-Only Founders Deals with Women and Men Founders 14,123 13,132 Contents MISSION | Who We Are DATA | State of Capital Formation 10,290 10,199 Introduction $288B $4B $4B $8B $5B 3,680 $1B 2,592 2,567 739 811 2019 2020 Deal Value 1,187 2021 1,133 2022 437 2023* $23B $22B 2019 2020 $203B 3,239 $125B $146B 1,094 $52B $38B 2021 2022 4,983 $62B $23B 2023* 2019 Deal Count 2020 2021 2022 2023* *As of June 30, 2023 Further, only 5% of that slice of the pie for all women founders went to Latina and Black women founders.172 Only 2% of all venture funding raised in 2022 was invested in startups led by all women founders.171 In 2022, both women-led and mixed founder teams received a declining percentage of overall deal value in each progressive funding round.173 Small and Emerging Businesses and Exempt Offering Data Mature and Later-Stage Businesses Initial Public Offerings and Small Public Companies Women Founders and Investors Diverse Founders and Investors Natural Disaster Areas Rural Communities POLICY | Recommendations ADVOCACY | What We Do Angel and Seed 5% 16% 79% COMMITTEE | Highlights Early Stage 2% 18% 80% ENDNOTES | All the Details 14% Later-stage OFFICE | Meet the Team 84% 1% Women-only founders Women and men co-founders Men-only founders SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 42 All-women teams faced strong headwinds raising capital.174 Similar to 2021, all-women teams continued to have more investor meetings in 2022 than all-men or mixed teams.175 However, all-women teams raised less per meeting ($14,300) than all-men ($25,000) or mixed ($27,900) teams.176 Contents MISSION | Who We Are DATA | State of Capital Formation All-women teams with diverse members had a 51% decrease in investor meetings (33% fewer meetings than their peers) and continued to be the only demographic to raise on average less than $1 million per raise.177 Introduction Small and Emerging Businesses and Exempt Offering Data On average, VCs spent 125% more time on all-women team slides and scrutinized different sections depending on the gender of the team members.178 All-Women Teams Most Scrutinized Slides All-Men Teams Most Scrutinized Slides Mature and Later-Stage Businesses Initial Public Offerings and Small Public Companies Women Founders and Investors Diverse Founders and Investors Team Slide Product Slide Natural Disaster Areas Rural Communities Business Model Business Model POLICY | Recommendations ADVOCACY | What We Do Business Traction Company Purpose COMMITTEE | Highlights ENDNOTES | All the Details OFFICE | Meet the Team SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 43 Women-founded companies continue to exit and return capital to investors faster than the overall market.179 Contents Median Time (Years) to Exit All VC-backed Companies 7.8 7.7 7.4 7.2 7.0 2018 6.7 2020 MISSION | Who We Are DATA | State of Capital Formation 7.2 7.0 2019 8.1 7.2 Women-founded Companies 2021 2022* Introduction Small and Emerging Businesses and Exempt Offering Data Mature and Later-Stage Businesses *As of June 30, 2022 Despite market headwinds, women founders do more with less. As time between VC rounds increased and raising equity became more challenging, managing cash and burn rate became critical.180 Women-founded companies use 25% less capital per month than men founders, extending their runways and demonstrating resiliency and resourcefulness amidst challenging economic conditions.181 Initial Public Offerings and Small Public Companies Women Founders and Investors Diverse Founders and Investors Natural Disaster Areas Rural Communities POLICY | Recommendations ADVOCACY | What We Do “ Women bring fresh insights and new strategies to solving problems, which the world needs more than ever. From climate change and social and economic inequity to the digitization of industry, there are an infnite number of complex challenges to address with innovative solutions and services. ARTI RAMAN, TITANIAM182 SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 44 COMMITTEE | Highlights ENDNOTES | All the Details OFFICE | Meet the Team Women in Leadership Roles Women remain dramatically underrepresented in corporate leadership roles.183 Women accounted for nearly half of all entry level positions. However, women’s representation in the C-suite was half that amount. Contents MISSION | Who We Are Only 1 in 4 C-suite executives in 2022 was a woman. DATA | State of Capital Formation Introduction However, only 1 in 20 C-suite executives was a woman of color. Women of color accounted for 1 in 5 entry level positions. Small and Emerging Businesses and Exempt Offering Data Mature and Later-Stage Businesses Initial Public Offerings and Small Public Companies Women are similarly underrepresented as founders in VC-backed companies.184 48% White African American/Black 6% 2% Hispanic/Latino 7% 1% Other 5% Diverse Founders and Investors Natural Disaster Areas Rural Communities 3% 14% Asian American 13% Women Founders and Investors Nearly ha lf of all VC-ba cked founders are White me n. 1% Men Women POLICY | Recommendations ADVOCACY | What We Do COMMITTEE | Highlights ENDNOTES | All the Details Only 1 in 5 founders in VC-backed companies is a woman. SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 45 OFFICE | Meet the Team While women remain underrepresented in board roles at VC-backed companies, the number of boards with at least one woman has increased in recent years.185 Content Cont ents s 68% 61% At least one woman on board MISSION | Who We Are 51% 4% of all directors are women of color and 28% 27% Independent seats held by women 20% 16% Women-held board seats 76% 2022 2021 2020 of company boards do not include a single woman of color.186 DATA | State of Capital Formation Introduction Small and Emerging Businesses and Exempt Offering Data 14% Mature and Later-Stage Businesses 11% Initial Public Offerings and Small Public Companies For the first time, women average 1 board seat per private-company board (while men average 6 seats). Men continue to hold: 88% an can “One wom nce.” iffere make a d N, N BOWE – SHARO , NYSE187 IR A CH 91% of investor-director board seats and of executive director seats. Women Founders and Investors Diverse Founders and Investors Natural Disaster Areas Rural Communities POLICY | Recommendations Many of these gains are driven by independent director seats. Women are most likely to occupy an independent director seat (53%) than an investor-director or executive director seat.188 The lack of diversity among investors and the entrepreneurs they back shapes the demographics and network of the boardroom.189 COMMITTEE | Highlights Private companies with gender diverse boards raise more capital and are more likely to conduct an IPO.190 Gender diverse boards raised an average of 16% more funding ($302 million), and ADVOCACY | What We Do were 10x more likely to have gone public. SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 46 ENDNOTES | All the Details OFFICE | Meet the Team Women represent only a fraction of the C-suite of small public companies; however women-led companies have more diverse boards than those led by men. Women CEOs make up 6.4% of all CEOs in the Russell 3000 (rising to 192 in 2023, from 163 in 2020).191 Companies led by women CEOs have more gender-balanced boards (35%) than those led by men (6%).192 Contents MISSION | Who We Are DATA | State of Capital Formation “ Introduction [W]hen women join the C-suite, they catalyze a shift in corporate thinking that may support new longer-term, internally cultivated value-creation strategies. For example, management teams become more likely to focus on R&D versus M&A and more open to change, yet less open to risk. JACKIE COOK, MORNING STAR.193 While more women now hold board seats at small public companies than they have historically, gender parity remains rare, and progress has slowed.194 Only 7% of Russell 3000 board seats are held by women of color. Women held Mature and Later-Stage Businesses Initial Public Offerings and Small Public Companies Women Founders and Investors Diverse Founders and Investors Natural Disaster Areas Rural Communities POLICY | Recommendations 29% 60% of the seats seats gained by women women wer were e added to the board board – not replacing replacing a man. Small and Emerging Businesses and Exempt Offering Data of the Russell 3000 board seats (up only 1% from 2022). ADVOCACY | What We Do COMMITTEE | Highlights In 2023, 37% of new directors were women (down from 40% in 2022). 55% ENDNOTES | All the Details of Russell 3000 company boards are gender-balanced or have 3 or more women on boards. OFFICE | Meet the Team Only 12% of boards achieved gender parity. SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 47 Trends in Women Investors in Small Businesses As a percentage of active investors, women angel investors reached a new record high in 2022. Contents 39.5% MISSION | Who We Are of angel investors in 2022 were women (an increase from 33.6% in 2021).195 DATA | State of Capital Formation Women investors lead on values-based investing.196 Introduction 51% of women invest Small and Emerging Businesses and Exempt Offering Data 45% of women invest in startups aligned with their values (compared to 39% of men). in startups to make the world a better place (compared with 23% of men). Although gender diversity continues to improve in the VC industry, women remain significantly underrepresented at senior levels.197 Mature and Later-Stage Businesses Initial Public Offerings and Small Public Companies Women Founders and Investors Diverse Founders and Investors 2016 45% 45% 45% 2018 2020 2022 47% Natural Disaster Areas 33% 25% Rural Communities 35% 28% 21% 23% 15% All Employees Junior-Level Investment Professional POLICY | Recommendations 26% Investment Professional 11% 14% 16% 19% Investment Partners ADVOCACY | What We Do COMMITTEE | Highlights ENDNOTES | All the Details “ [There remains] a huge imbalance in terms of who's managing the capital . . . [which amounts to] a hugely inefcient market opportunity . . . [A]t the end of the day we need allocators to actually allocate their capital to diverse managers. CHRISSIE CHEN PARISO, MPOWERED CAPITAL198 SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 48 OFFICE | Meet the Team Women constitute a distinct minority of investors with senior decisionmaking powers and control a fraction of total VC dollars.199 Contents 20% 25% 17% of firms’ investment committees are women (down from 21% in 2020). of deals were originated by women (up from 24% in 2020). of investment firm owners are women (down from 18% in 2020). MISSION | Who We Are DATA | State of Capital Formation Introduction Small and Emerging Businesses and Exempt Offering Data Despite hurdles, women-owned VC firms are growing. 150 22% investment firms were women-owned in 2022 (a 29% increase over 2021).200 of investment partners at firms founded within the last 10 years were women (up from 17% at firms founded over 10 years ago).201 Mature and Later-Stage Businesses Initial Public Offerings and Small Public Companies Women Founders and Investors Diverse Founders and Investors Women-owned firms often raise smaller funds and have a harder time raising capital from institutional investors than their male counterparts.202 These challenges are even more acute for African American/Black and Hispanic/Latina fund managers.203 Natural Disaster Areas Rural Communities Women-owned frms by race and ethnicity POLICY | Recommendations $45M median fund size target $75M median fund size target Hispanic/ Latina 7% White 49% 77% of African American/Black women, African American/ Black 22% $50M median fund size target Asian American 22% 43% of Asian American women, and ADVOCACY | What We Do COMMITTEE | Highlights 30% of Hispanic/Latina women ENDNOTES | All the Details were raising a first-time fund, OFFICE | Meet the Team 64% of White women while were raising a successor fund.204 $100M median fund size target SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 49 Diverse Founders and Investors D Contents iversity205 is the representation of various elements of identity, including race, ethnicity, nationality, gender identity, LGBTQ+ status, socioeconomic status, ability, religion, and age. Diversity often refers to the degree to which specific groups are represented in the workforce and leadership.206 MISSION | Who We Are DATA | State of Capital Formation Business Formation and Ownership Trends Introduction The proportion of diverse business owners is growing.207 Small and Emerging Businesses and Exempt Offering Data 2022 had the highest proportion of new business formation by founders of color.208 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% -30% 16.77% Founders of Color Mature and Later-Stage Businesses Initial Public Offerings and Small Public Companies -16.21% Diverse Founders and Investors White Founders 2020 2021 2022 Women Founders and Investors 2023* *Through June 30, 2023 People of color are increasingly creating new businesses, but need more support as those businesses grow and become more established. Natural Disaster Areas Rural Communities POLICY | Recommendations Over the last 10 years, diverse businesses accounted for over 50% of new businesses and created 4.7 million jobs.209 The top motivators for entrepreneurs of color include the desire to be their own boss (30%), dissatisfaction with corporate America (20%), and pursuit of passion (13%).210 Diverse Business Formation and Growth African American/Black and Hispanic/Latino adults intend to create new businesses at over 2.5X and 2X the rate of White adults, respectively.211 The rate of Hispanic/Latino adults starting or running a new business increased by about 10 percentage points (from 17% in 2021 to 27% in 2022).212 White adults continue to own established businesses at a higher rate than African American/Black and Hispanic/Latino adults.213 SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 50 ADVOCACY | What We Do COMMITTEE | Highlights ENDNOTES | All the Details OFFICE | Meet the Team Age People of color are more represented among young founders than among older founders.214 21-30 9% 10% 31-40 8% 9% 41-50 5% 8% 51-60 5% 5% 61-80 19% 10% 15% 8% 60% 20% 6% 60% 15% 6% of color Founders d 49% represente ar-old 0 ye of all 21-3 nd only a founders 1-80 17% of all 6unders. ar-old fo ye 69% 2% 3% 10% 2% African American/Black Contents 51% DATA | State of Capital Formation Introduction Small and Emerging Businesses and Exempt Offering Data 83% Hispanic/Latino MISSION | Who We Are Asian American Other White Mature and Later-Stage Businesses The COVID-19 pandemic has a lasting impact on diverse business owners. Business Earnings Losses During the COVID-19 Pandemic by Race and Ethnicity216 Initial Public Offerings and Small Public Companies Women Founders and Investors Diverse Founders and Investors Natural Disaster Areas COVID-19 negatively affected earnings of many small businesses, however, losses were disproportionately felt by diverse business owners.215 -15% Rural Communities -19% -21% POLICY | Recommendations White Hispanic/Latino Asian American -28% African American/Black ADVOCACY | What We Do COMMITTEE | Highlights “ The COVID-19 pandemic has impacted the ability of entrepreneurs to access the capital that they need to sustain (or grow) their businesses, especially among Black entrepreneurs, with the share of business whose fnancing needs are met declining. EWING MARION KAUFFMAN FOUNDATION217 SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 51 ENDNOTES | All the Details OFFICE | Meet the Team Precursors to Accessing Capital Discrepancies in wealth and income across demographic groups affect the financial starting line for many entrepreneurs of color.218 Contents Many founders rely on funds from personal savings, friends, or family to start their business.219 The nation’s significant wealth inequality across racial groups particularly affects African American/Black and Hispanic/Latino entrepreneurs’ ability to tap personal assets as a funding source.220 MISSION | Who We Are Share of U.S. Households Share of U.S. Net Worth 82% Black merican/ African A o nic/Latin and Hispa ts n e c ad 24 families h ite h W f o 1 $ for everywealth.221 family DATA | State of Capital Formation Introduction Small and Emerging Businesses and Exempt Offering Data 64% Mature and Later-Stage Businesses 12% White 14% 10% Other 5% African American/Black 10% 3% Hispanic/Latino Disparities in income also affect the ability of entrepreneurs of color to grow personal wealth and savings and self-fund a business. Household Income Distribution, by Race and Ethnicity222 Under $99,999 23% 13% $100,000–$199,999 Median Household Income by Race and Ethnicity223 Over $200,000 7% 6% 6% 22% 18% 16% Asian American $108,700 31% White $81,060 72% 76% 78% Hispanic/Latino $62,800 46% Asian American White Hispanic/ Latino Women Founders and Investors Diverse Founders and Investors Natural Disaster Areas Rural Communities POLICY | Recommendations ADVOCACY | What We Do 28% 59% Initial Public Offerings and Small Public Companies African American/ Black Native American and Alaska Native African American/Black $52,860 Native American/ Alaska Native $52,810 SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 52 COMMITTEE | Highlights ENDNOTES | All the Details OFFICE | Meet the Team Limited access to traditional financial systems and lending also serves as a barrier to funding a new business. Contents Over the last few years, while more diverse households have opened bank accounts, the overall unbanked rate has remained steady.224 18% 16% MISSION | Who We Are Despite progress, Hispanic/Latino and African American/Black households are 17% 3 to 5X more likely 14% 11% DATA | State of Capital Formation than White households to be 14% unbanked. 12% 9% Introduction Small and Emerging Businesses and Exempt Offering Data 9% 7% Mature and Later-Stage Businesses 5% 5% 3% Native American/ Alaska Native African American/ Black Hispanic/ Latino 2% 3% Asian American Multiracial 3% 3% 2% White Initial Public Offerings and Small Public Companies Women Founders and Investors Diverse Founders and Investors 2017 2019 2021 Natural Disaster Areas Entrepreneurs of color are less likely to receive all the funding they seek from sources such as loans, lines of credit, and cash advances. Rural Communities Share of Funding Received by Small Businesses by Race and Ethnicity225 African American/ Black 20% 30% POLICY | Recommendations 50% ADVOCACY | What We Do 44% COMMITTEE | Highlights Native American/ Alaska Native 36% Hispanic/Latino 38% 30% 32% Asian American 33% 37% 31% White 21% 58% All 25% Most/Some 18% None SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 53 ENDNOTES | All the Details OFFICE | Meet the Team Difficulty accessing capital can affect whether the business will seek capital for future needs.226 47% of businesses that needed capital did not apply. Of those businesses, the percentage that did not apply because they expected to be turned down varied by race and ethnicity: Contents 46% 32% MISSION | Who We Are 30% 29% 24% DATA | State of Capital Formation Introduction African American/Black Hispanic/Latino Asian American Native American/ Alaska Native White Lack of access to professional support and capital is a barrier for all entrepreneurs, but the challenge is heightened for entrepreneurs of color.227 Small and Emerging Businesses and Exempt Offering Data Mature and Later-Stage Businesses Initial Public Offerings and Small Public Companies Women Founders and Investors 35% of Asian American 30% of African American/ Black 29% of Multiracial 23% of Native American 22% of Hispanic/ Latino 18% of White entrepreneurs reported trouble finding professional support, advice, or role models in their network when starting and growing a business. A lack of access to financial resources is particularly problematic for some entrepreneurs of color.228 Diverse Founders and Investors Natural Disaster Areas Rural Communities POLICY | Recommendations ADVOCACY | What We Do COMMITTEE | Highlights 44% of Native American 42% of African American/Black ENDNOTES | All the Details 41% of Hispanic/Latino 35% of Asian American 32% of Multiracial 31% of White entrepreneurs cite a lack of access to financial resources as the primary reason they stopped pursuing starting their business. SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 54 OFFICE | Meet the Team Capital-Raising Trends The number of entrepreneurs of color seeking angel capital continues an upward trend, but underrepresentation persists. Founders of color constituted Contents Angel investors invested in MISSION | Who We Are 33.1% 15% DATA | State of Capital Formation Introduction of entrepreneurs seeking angel capital in 2022 (an increase from 12.8% in 2021 and 5.3% in 2020).229 of those investment opportunities brought to their attention (a slight increase from 30.5% in 2021).230 A majority of founders of color have seen increased interest from VCs.231 52% 50% of founders of color say they received increased interest from VCs in 2021-2022. Small and Emerging Businesses and Exempt Offering Data Mature and Later-Stage Businesses Initial Public Offerings and Small Public Companies Women Founders and Investors Diverse Founders and Investors of founders of color say they had an increase in conversations with VCs in 2021-2022. Natural Disaster Areas Rural Communities POLICY | Recommendations VC investors more heavily scrutinized particular sections of diverse teams’ pitch decks compared to decks of all-White teams. ADVOCACY | What We Do Teams with diversity experienced: 232 COMMITTEE | Highlights ENDNOTES | All the Details 25% more time on the team sections. For all-White teams, this was one of the least important slides. 28% more time on the traction section. 67% more time on the market size section. 55% more time on competition section. SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 55 OFFICE | Meet the Team Diverse founding teams face outsized challenges in securing VC investment, and the amounts invested are lower.233 t5 e firs Within th can/ an Ameri years, Africbusinesses raise ned from Black-ow as much about 1/3 s as d n fu l a apit 235 venture c rtups. other sta Racially and ethnically diverse teams raised 33% less on average in 2022 than all-white teams.234 While it is difficult to get accurate race and ethnicity statistics on the overall market, data providers have started to provide insight on VC funding raised by founders of color. Within that data, a meager MISSION | Who We Are DATA | State of Capital Formation Introduction Small and Emerging Businesses and Exempt Offering Data 6% of VC investments were categorized as Mature and Later-Stage Businesses the gender, race, or ethnicity of the business’s leadership team. Initial Public Offerings and Small Public Companies “Diversity Investments” based on Of those investments, only Contents 16% of funding went to racially and ethnically diverse founders (as identified or self-identified on the platform):236 Hispanic/Latino 6.7% Asian American/Pacific Islander 5.2% African American/Black 3.7% Middle Eastern/North African 0.1% nt of 3, the cou In Q1 202 u fo nders h diverse its deals wit reaching declined, nt Native American/Alaska Native 0.1% al cou lowest de020.237 Women Founders and Investors Diverse Founders and Investors Natural Disaster Areas Rural Communities POLICY | Recommendations ADVOCACY | What We Do since 2 COMMITTEE | Highlights As VC funding dropped between 2021 and 2022, African American/Black- and Hispanic/Latinofounded startups saw a disproportionately larger decline in their share of investments.238 Only 1.5% of VC dollars Only 1.1% of VC dollars was was invested in Hispanic invested in African American/ founders in 2022 (down from 2.5% in 2021). 239 Black founders in 2022 (down from 1.5% in 2021).240 SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 56 ENDNOTES | All the Details OFFICE | Meet the Team Diverse Founders in Leadership Roles African American/Black and Hispanic/Latino founders and executives remain underrepresented as compared to their share of the labor market.241 U.S. Labor Force Contents MISSION | Who We Are Founders Executives DATA | State of Capital Formation Introduction Small and Emerging Businesses and Exempt Offering Data 73% 63% 62% Mature and Later-Stage Businesses 18% 8% White 5% Hispanic/Latino 12% 18% 4% 6% African American/Black 14% 6% 2% Asian American 7% 4% Other Directors of color occupy 20% of seats on public company boards. Initial Public Offerings and Small Public Companies Women Founders and Investors Diverse Founders and Investors 242 Natural Disaster Areas Rural Communities 100% 80% White Black merican/ African A ighest h saw the directors hips, a rs to in direc increase 0% re than 9 3 rise of mo 23.24 0 19 and 2 0 2 n e e betw POLICY | Recommendations ADVOCACY | What We Do COMMITTEE | Highlights African American/Black (8.3%) ENDNOTES | All the Details Asian American/Pacific Islander (7.2%) 20% Hispanic/Latino (3.6%) Middle Eastern (0.9%) Native American/Alaska Native/Native Hawaiian (0.2%) SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 57 OFFICE | Meet the Team Diverse Investors and Allies Diversity increased among angel investors, although underrepresentation remains. 8.6% of angel investors in 2022 were MISSION | Who We Are racially or ethnically diverse (an increase from 4.1% in 2021 and 5.3% in 2020).244 DATA | State of Capital Formation The percentage of persons of color has increased at VC funds but they remain particularly underrepresented at senior levels.245 26% Junior-level Professionals 61% 7% Contents A 30% increase in diverse junior-level professionals (from 30% in 2018 to 39% in 2022). Introduction Asian American/Pacifc Islander Hispanic/Latino African American/Black White Small and Emerging Businesses and Exempt Offering Data Mature and Later-Stage Businesses Initial Public Offerings and Small Public Companies 6% Women Founders and Investors 22% Investment Professionals 69% 6% A 29% increase in diverse investment professionals (from 24% in 2018 to 31% in 2022). 5% 18% 75% Investment Partners 5% als rofession Diverse p s C V at employed for d te n u o c c a level ior39% of jun , but only nals professio stment f o 31% inveals and n professio estment 25% of invers. partn A 25% increase in diverse investment partners (from 20% in 2018 to 25% in 2022). Diverse Founders and Investors Natural Disaster Areas Rural Communities POLICY | Recommendations ADVOCACY | What We Do COMMITTEE | Highlights ENDNOTES | All the Details 4% OFFICE | Meet the Team Persons of color are also underrepresented among limited partner investors in VC funds.246 Hispanic/ Latino 6% Asian American 19% Other 2% White 69% African American/Black 4% SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 58 Most African American/Black and Hispanic/Latino investment partners are in firms that focus on seed and early stages.247 Seed stage Early stage 8% 5% e early-stag Seed and ave h n e ft o nts 248 investme ck size. 28% 7% he smaller c 25% Multi-stage 2%2% 22% Growth stage 0% 19% 9% MISSION | Who We Are DATA | State of Capital Formation 0% African American/Black Contents Hispanic/Latino Introduction Asian American Investors of color are more likely to invest in businesses with diverse founders.249 Women and people of color are the founding partners at 74% of the active seed funds whose investment criteria include founder diversity and are making ½ of their investments in underrepresented founders.250 ss of the succe in r to c fa may be “One ng teams ti s e v in e to invest divers ore likely m re a y e nders.” that th ented fou s re p e rr e 251 in und VEY AL SUR AN CAPIT – VC HUM Small and Emerging Businesses and Exempt Offering Data Mature and Later-Stage Businesses Initial Public Offerings and Small Public Companies Women Founders and Investors Diverse Founders and Investors While more investors and VCs are focused on diversity, equity, and inclusion, the enthusiasm that rose in 2020 for investing in diversefounded companies has waned. More VC frms have had their investors (LPs) request the frm’s diversity, equity, and inclusion details:252 Natural Disaster Areas Rural Communities More VC frms are focused on DEI at their portfolio companies.253 POLICY | Recommendations ADVOCACY | What We Do COMMITTEE | Highlights 36% 2018 41% 2020 47% 2022 19% 2018 30% 2020 38% 2022 However, some of the enthusiasm seen in 2020 to close the funding gap for founders of color has reverted to 2019 levels.254 32% of firms identified finding opportunities with diverse-founded companies as a top priority (down from 43% in 2020 and 33% in 2019).255 SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 59 ENDNOTES | All the Details OFFICE | Meet the Team LGBTQ+ founders report challenges raising capital. 40% of LGBTQ+ business owners cite raising capital as their greatest business challenge.256 93% of LGBTQ+ business owners note that access to capital is limiting their growth potential.257 Access to Capital for LGBTQ+ Founders LGBTQ+ founders are more likely to use cash reserves (61%) and personal funds (59%) than non-LGBTQ+ founders (52% and 53%, respectively).258 Only 20% of LGBTQ+ founders that applied for business loans were approved (compared to 50% of non-LGBTQ+ businesses).259 11% of LGBTQ+ and 17% of LGBTQ+ founders of color report experiencing anti-LGBTQ+ discrimination in banking or financial services.260 LGBTQ+ founders are raising less funding than non-LGBTQ+ founders, but creating more jobs, patents, and exits. 7.1% 8% of the U.S. population identify as LGBTQ+.261 of LGBTQ+ founders sought equity investments, which is in line with the average founder.262 0.5% of venture capital was raised by LGBTQ+ founders.263 16% less funding is raised by LGBTQ+ founders as compared to the average founder.264 LGBTQ+ founders create: 36% more jobs 114% more patents 86% of LGBTQ+ investors MISSION | Who We Are DATA | State of Capital Formation Introduction Small and Emerging Businesses and Exempt Offering Data Mature and Later-Stage Businesses Initial Public Offerings and Small Public Companies Women Founders and Investors Diverse Founders and Investors Natural Disaster Areas Rural Communities POLICY | Recommendations ADVOCACY | What We Do 44% more exits. 265 Many investors want opportunities to invest in LGBTQ+ equity and inclusion.266 45% of all U.S. investors Contents 76% of investors with an LGBTQ+ household member SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 60 COMMITTEE | Highlights ENDNOTES | All the Details OFFICE | Meet the Team Founders with disabilities often start businesses out of necessity.267 Contents 13.4% 9.5% 6.3% of the US population has a disability (roughly 44 million).268 of workers with a disability are self-employed vs 6.1% of those with no disability.269 of small businesses, or MISSION | Who We Are 2.1 million small businesses, are owned by a person with a disability.270 Founders with disabilities face challenges accessing capital.271 DATA | State of Capital Formation Introduction Small and Emerging Businesses and Exempt Offering Data Mature and Later-Stage Businesses Initial Public Offerings and Small Public Companies Women Founders and Investors 10% of adults with a disability are unbanked vs 5% of people who do not have a disability.272 84% of disabled entrepreneurs note that they do not have the same access to opportunities and resources as non-disabled entrepreneurs.273 61% of disabled entrepreneurs say they have to demonstrate superior knowledge to be taken seriously.274 Diverse Founders and Investors Natural Disaster Areas Rural Communities POLICY | Recommendations “ [As a disabled founder], it’s easier to build a satellite and send it to space than it is to raise money. ERIC275 Despite challenges accessing capital, entrepreneurs with disabilities have developed and launched innovative products and solutions. 58% of founders with a disability used their disability experience to develop and design products and services that others haven’t thought of.276 SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 61 ADVOCACY | What We Do COMMITTEE | Highlights ENDNOTES | All the Details OFFICE | Meet the Team Veteran founders report challenges raising capital. Contents 5.2% MISSION | Who We Are of small business are veteran-owned (1.7 million businesses).277 Veteran small business owners employ roughly 4 million people.278 DATA | State of Capital Formation Introduction Access to capital continues to be a barrier to veterans starting or growing a small business.279 49% 34% Lack of Financing n entrepren eurs feel that the c apital the y need is n ot readily available.280 Mature and Later-Stage Businesses 37% Lack of Access to Capital 40% of ve tera Small and Emerging Businesses and Exempt Offering Data 41% Initial Public Offerings and Small Public Companies Women Founders and Investors 20% Lack of Mentors Lack of Experience in Entrepreneurship 26% 18% Diverse Founders and Investors 2022 2021 25% 10% of veteran entrepreneurs sought an equity investment.281 Veterans remain underrepresented at VC firms. Natural Disaster Areas Rural Communities POLICY | Recommendations ADVOCACY | What We Do COMMITTEE | Highlights ENDNOTES | All the Details Only 3% of investment firm employees were veterans, the same percentage as in 2020 (compared to nearly 8% of the U.S. population).282 SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 62 OFFICE | Meet the Team Natural Disaster Areas Contents MISSION | Who We Are How do natural disasters affect small businesses? DATA | State of Capital Formation OPEN 14% CLOSED of small businesses experienced natural disaster related losses (up from 12% in 2021).283 1 in 4 Introduction Small and Emerging Businesses and Exempt Offering Data CLOSED Nearly 2/3 of small businesses in the Northeast that had disaster-related losses were forced to close, at least temporarily.284 Mature and Later-Stage Businesses employer firms owned by people of color reported experiencing disasterrelated losses.285 Initial Public Offerings and Small Public Companies Women Founders and Investors Natural disasters affect communities and their small businesses across the country. Diverse Founders and Investors Between October 1, 2022 and September 30, 2023, there were 29 natural disaster events with losses exceeding $1 billion.286 Severe hail and weather ated Total estim lated risaste re natural d xceeded the U.S. e 287 losses in billion. $11.5B Natural Disaster Areas Rural Communities Historic tornado outbreak $8.9B POLICY | Recommendations ADVOCACY | What We Do $109 Winter storm COMMITTEE | Highlights $10.5B ENDNOTES | All the Details The 2022 drought was the costliest on record. OFFICE | Meet the Team $22.9B Severe storms $46B SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 63 Capital from investors remains a small portion of funding for small businesses affected by natural disasters. Those affected by natural disasters use similar funding sources as all small and emerging businesses.288 Personal finances 65% Cash reserves 56% Percent of small businesses that applied for external capital and sought equity financing289 Firms that used external capital to cope with disaster losses290 59% of firms Affected businesses External capital (with repayment) 47% 10% Grants or donations 21% Unaffected businesses owned by persons of color 37% of 8% white-owned firms How does the percentage of the population affected by natural disasters compare to the share of capital from investors raised by affected businesses? 49% Of the total U.S. capital raised from investors over the last 3 years 46% of issuers 39% of capital Registered Equity Oferings by Small Public Companies $863B $55B $334B (39%) $26B (46%) Regulation A DATA | State of Capital Formation Introduction Small and Emerging Businesses and Exempt Offering Data Mature and Later-Stage Businesses Initial Public Offerings and Small Public Companies Diverse Founders and Investors Natural Disaster Areas supported a small business affected by a natural disaster.293 Capital raised by small businesses in areas affected by natural disasters varied under different offering pathways.294 Regulation D MISSION | Who We Are Women Founders and Investors 46% of offerings of the U.S. population291 lives in an area that was affected by a natural disaster during the three years ending June 30, 2023.292 Contents Regulation Crowdfunding $4.7B $0.8B $1.6B (34%) $0.5B (57%) d equity Registere by small offerings mpanies public counted for only acco ed apital rais 7% of the c registered across all er erings ov equity off . d o ri e rp this 3 yea Amount of total capital raised by all small businesses over 3 years Amount (percentage) of capital raised by disaster-afected small businesses over 3 years SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 64 Rural Communities POLICY | Recommendations ADVOCACY | What We Do COMMITTEE | Highlights ENDNOTES | All the Details OFFICE | Meet the Team Rural Communities Contents Small businesses are the economic backbone of rural communities, providing the majority of rural jobs. While 79% of rural small businesses each employ fewer than those businesses collectively account for 10 employees,295 MISSION | Who We Are DATA | State of Capital Formation Introduction Small and Emerging Businesses and Exempt Offering Data 54% Mature and Later-Stage Businesses of employment in rural counties (compared to 45.5% in metropolitan counties).296 Initial Public Offerings and Small Public Companies Women Founders and Investors Rural small businesses are located across the country, with the majority in the central U.S.297 The below map illustrates the distribution of rural businesses across the U.S. by region, as well as the percentage of businesses within each region that are rural. Diverse Founders and Investors Natural Disaster Areas Rural Communities East North Central 13% of U.S. Rural Small Businesses 18% of Small Businesses in the Region Pacific 13% of U.S. Rural Small Businesses 13% of Small Businesses in the Region New England 3% of U.S. Rural Small Businesses 8% of Small Businesses in the Region POLICY | Recommendations ADVOCACY | What We Do West North Central 17% of U.S. Rural Small Businesses 40% of Small Businesses in the Region Middle Atlantic 13% of U.S. Rural Small Businesses 9% of Small Businesses in the Region Mountain 8% of U.S. Rural Small Businesses 22% of Small Businesses in the Region COMMITTEE | Highlights ENDNOTES | All the Details South Atlantic 12% of U.S. Rural Small Businesses 7% of Small Businesses in the Region West South Central 13% of U.S. Rural Small Businesses 14% of Small Businesses in the Region East South Central 8% of U.S. Rural Small Businesses 18% of Small Businesses in the Region SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 65 OFFICE | Meet the Team Access to capital remains critical to building and strengthening rural entrepreneurial ecosystems.298 Small banks remain the most prominent financial services provider for rural small businesses.299 Contents MISSION | Who We Are DATA | State of Capital Formation Rural communities are 10X 62% more likely to be located in a banking desert.300 39% 25% 12% Small Bank Large Bank Introduction Non-Bank Financial Company Credit Union Small and Emerging Businesses and Exempt Offering Data 4% 3% Mature and Later-Stage Businesses None Other Initial Public Offerings and Small Public Companies The percentage of rural businesses seeking capital from investors is increasing, but it remains a very small portion of funding. Women Founders and Investors Diverse Founders and Investors 7% of rural small businesses seeking external capital sought equity financing (compared to 8% of urban small businesses).301 4% Up from of rural small businesses seeking external capital in 2021 (compared to 7% of urban small businesses in 2021).302 Natural Disaster Areas Rural Communities POLICY | Recommendations ADVOCACY | What We Do “ [T]he pandemic was very tough in many ways, but one of the benefts —and a tail wind to rural—has been its entering mainstream acceptance for remote working. It's gotten a lot easier to do business development networking . . . [and] to understand from an investment thesis standpoint, how you can build a scalable, very meaningful business, even in a small town in the U.S. JAY BOCKHAUS, CORI INNOVATION FUND303 SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 66 COMMITTEE | Highlights ENDNOTES | All the Details OFFICE | Meet the Team How does the rural population compare to the share of capital from investors raised by rural small businesses? Contents 18% 15% of small employer firms are located in rural areas.305 of the U.S. population lives in rural areas.304 MISSION | Who We Are DATA | State of Capital Formation Introduction Of the total U.S. capital raised from investors over the last 3 years Small and Emerging Businesses and Exempt Offering Data Mature and Later-Stage Businesses 3.6% of offerings 3.7% of issuers Initial Public Offerings and Small Public Companies 1.6% of capital supported rural small businesses.306 Women Founders and Investors Small businesses in rural areas raised a notably smaller portion of overall capital relative to the rural share of population during the three years ending June 30, 2023.307 Regulation D Registered Equity Oferings by Small Public Companies $863B $55B $14B (1.6%) $860M (1.6%) Regulation A Regulation Crowdfunding $4.7B $798M $54M (1.1%) $37M (4.7%) Diverse Founders and Investors Natural Disaster Areas Rural Communities POLICY | Recommendations d equity Registere by small offerings mpanies public counted for only acco ed apital rais 7% of the c registered across all er erings ov equity off . d o ri e rp this 3 yea Amount of total capital raised by all small businesses over 3 years Amount (percentage) of capital raised by disaster-afected small businesses over 3 years SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 67 ADVOCACY | What We Do COMMITTEE | Highlights ENDNOTES | All the Details OFFICE | Meet the Team Contents MISSION | Who We Are DATA | State of Capital Formation POLICY | Recommendations Introduction Expand educational resources Private offering changes Avenues connecting businesses and investors Support emerging fund managers Scale and harmonize small public company requirements ADVOCACY | What We Do COMMITTEE | Highlights ENDNOTES | All the Details OFFICE | Meet the Team POLICY Recommendations SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 68 HELPING navigate securities laws and other Issues via education and policy recommendations B ased on feedback we have received through our engagements with small businesses and their investors, the Office has developed the following policy recommendations for Congress and the Commission. We have distilled this feedback into five key areas for action to address the most significant issues raised about our capital-raising rules. We recognize that for any complex issue, including challenges surrounding capital formation, there are a multitude of potential approaches, and indeed we may need to combine multiple approaches to arrive at an effective solution. For each recommendation, we include background context, a discussion of particular impacts on demographic groups, notes on related developments, and our proposed solution. We welcome further engagement by Congress and the Commission to implement these solutions so that entrepreneurs and their investors together can continue to work together to bring innovations to market. Contents MISSION | Who We Are DATA | State of Capital Formation POLICY | Recommendations Introduction Expand educational resources Private offering changes Avenues connecting businesses and investors Support emerging fund managers e joined , our Offic 3 2 0 2 e n In Ju siness inority Bu the U.S. M y’s first nt Agenc e m p lo e v De orum usiness F B e rs e iv nts like annual D ation. Eve rm o F l a it p on Ca rtunities to vide oppo t these pro m though ctives fro e p rs e p d gain cesses an n the suc s leaders o ll busines cing sma fa s e g n e . chall investors and their Scale and harmonize small public company requirements ADVOCACY | What We Do COMMITTEE | Highlights ENDNOTES | All the Details OFFICE | Meet the Team SEC OFFICE OF THE ADVOCATE FOR SMALL BUSINESS CAPITAL FORMATION | FISCAL YEAR 2023 ANNUAL REPORT | 69 Entrepreneurs and their investors need accessible tools and educational resources to navigate complex securities laws. Background Context Throughout the last fiscal year, we met with entrepreneurs and investors from across the country with diverse capital-raising experience. We heard from many founders who have been able to fund their operations using personal savings, credit cards, retained business earnings, or grants. We also talked with many small businesses for whom those non-dilutive funding sources were unavailable or insufficient and who thus were looking to investors to help finance their operations and development. Others told us that they were in early exploratory stages and unsure how to start their funding journey or what options were available. Many of the entrepreneurs we met—no matter how business savvy or technologically sophisticated—noted that the capital-raising rules are complex and [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Asec%3Aeb026694d23ee7bc. Public record. Not legal advice.