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Small Cap Focused Growth Portfolio Manager Commentary

4th Quarter 2016

2016 - Rock & Roll Investing in small cap secular growth stocks provides investors with the prospect of very good long term investment returns. However, along with it comes the expectation that there will be ups and downs along the way. The year 2016 did not disappoint on either front. The market started off with a swoon in January and February, as the consensus opinion was that the U.S. had not only entered a recession, but a severe one. The Russell 2000 Growth index was down 22% less than 6 weeks into the year reflecting extreme fear and the resulting sell-off by hedge funds experiencing redemptions and liquidations.

We adhered to our investment discipline through the downdraft, and the portfolio enjoyed substantial gains from February until the election. On November 8th, consensus expectations (including yours truly) were foiled again as Donald J. Trump was elected President. In the wake of the election, there was a swift and significant market rotation out of the secular growth areas typically represented in the Focused Growth portfolio. Investors flocked to cyclicals, banks, energy, and other stocks expected to benefit from lower taxes, higher interest rates, less regulation, and a potential boost to GDP. This rotation hurt the portfolio's 4th quarter performance, both absolute and relative. Nonetheless, I'm pleased with both our execution and the results that the Focused Growth strategy posted for the year overall. The Small Cap Focused Growth composite returned 17.8% for the year, compared to the benchmark's 11.3%.

----------Annualized------------ 4Q2016 2016 3-Year 5-Year Since Inception Small Cap Focused Growth – Net of Fees -3.5% 17.0% 2.5% 16.9% 12.4%

Russell 2000 Growth 3.6% 11.3% 5.1% 13.7% 7.8%

Below I discuss the portfolio highlights for the each period, our thoughts on the macro environment, and how the portfolio is currently positioned. The Year - 2016 was a Good One For 2016, we had good stock selection in most sectors, accentuated by a number of stocks that were acquired, and the portfolio outperformed most of its peers. But it was far from a perfect year. The most notable misstep was our large position in The Advisory Board (ABCO), which hurt performance in both the year and Q4. More on ABCO below, but first a look at what helped make the year a good one.

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What helped 2016 Significant factors aiding performance in 2016 were strong stock selection and an overweight in Technology. The portfolio benefited from three Technology buyouts in the first half of 2016:

• Demandware (DWRE): An e-commerce software vendor purchased by Salesforce.com.

• Opower (OPWR): A cloud-based platform that helps utilities connect with consumers and reduce overall energy consumption was bought by Oracle.

• Cvent (CVT): Event marketing solutions was purchased by private equity firm Vista Equity Partners.

Outside of these buyouts, standouts include:

• EBIX Inc. (EBIX): Vendor of software and services solutions to the insurance industry. EBIX shares climbed steadily during the year on strong earnings growth. We continue to hold a position in EBIX, although we have pared it back due to its current risk/reward.

• Wix.com (WIX): Leading cloud-based web development platform with a proven freemium model boasting more than 97 million registered users and 2.3 million paid subscribers worldwide. WIX share price rose on strong user growth, conversion metrics, and free cash flow generation. Similar to EBIX, we continue to have a position in WIX, although we have trimmed some due to the stock's strong appreciation.

• Impinj (PI): RFID semiconductor solutions for a variety of end markets. The stock price rose substantially as the company executed on its plan, and as more investors became aware of and enthusiastic about the opportunity for Impinj's RFID chips to transform industries that include retail, medical supplies, luggage, and restaurants. We maintain a large position in PI.

Consumer Staples benefitted from our investment in SodaStream: • SodaStream International Ltd (SODA): SodaStream makes and sells home carbonated-

beverage systems. SODA shares rose strongly based on robust sales in most geographies for both SodaStream machines, and importantly, canister refills. The company also demonstrated good expense controls. Given the run-up, we've cut back our position.

Also aiding the portfolio was its very low exposure to healthcare, a sector that underperformed post-election due to reimbursement fears as well as the aforementioned rotation to other sectors. What Hurt 2016 As noted in the opening section, the most significant factor hurting performance in 2016 was our large investment in The Advisory Board.

• The Advisory Board (ABCO): Provides best practices research and IT tools for two industries, healthcare and higher education. ABCO shares have been particularly volatile over the past two years since the company's large acquisition of Royall in late 2014. Royall, which serves the higher education industry, posted disappointing sales results in mid-2015 – its first selling season following its acquisition by Advisory Board. Coming into 2016, we held a large position

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in ABCO, as our work led us to conclude that the changes being made at Royall would result in better-than-expected sales and earnings in that division in the second half of 2016. While this acceleration did occur, unfortunately it coincided with Advisory Board's core health care business slowing materially. There is a cloud of uncertainty of how the new administration’s policies will affect Advisory Board's healthcare business. We have exited our position but will continue to monitor the company and the stock for potential investment in the future.

Beyond ABCO, the other stock/sector detractors were relatively minor.

• CoStar Group (CSGP): Provides commercial real estate information services and owns/operates Apartments.com. The stock fell in late October as management informed investors that 2017 results would be tempered by substantial investments by the company, and as investors grew concerned that the commercial real estate market is peaking. We maintain a significant position in CSGP shares. Our belief is that growth and earnings in 2017 will ultimately exceed expectations, and more importantly, the investments in 2017 will set up accelerating earnings growth for 2018 and beyond.

• SPS Commerce (SPSC): Leader in next-generation EDI software. SPSC saw its shares fall sharply in Q1 as it guided to slower growth for 2016. While the shares recovered almost all its lost ground, closing the year virtually flat, the stock underperformed. We believe the company's prospects remain excellent and the stock's risk/reward attractive; we continue to hold a substantial investment in SPSC shares.

• Financials also weighed on performance, due to a lack of exposure to banks and poor performance by Affiliated Managers Group (AMG), a holding company for boutique asset managers.

Finally, the portfolio faced a headwind by not owning Materials & Processing stocks, a sector that did well in 2016.

Q4 - Regime Change and a Rotation Out of Secular Growth In the wake of Donald Trump's unexpected election victory, the markets quickly moved to re-price assets that will benefit from the policies his administration and a Republican-controlled Congress are expected to implement. That is, stocks of companies that benefit from lower corporate and individual taxes, higher interest rates and infrastructure spending, and fewer regulations. The effect on the Focused Growth portfolio (which owned few such names) was exacerbated by the fact that many investors sold secular growth stocks to rotate into the stocks set to do well under the new policies. Below are more specifics on Q4: What helped Q4 Q4 was rough for the portfolio’s absolute and relative performance, so there was not much that "helped". The most significant positive was the portfolio’s nearly zero-weight in healthcare stocks which, as noted above, fell in the wake of the election. Also similar to the attribution comments above about 2016 as a whole, SODA and PI shares were both material positive contributors to Q4 performance.

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What Hurt Q4 Producer Durables was the biggest negative contributor in Q4, mostly due to declines in CSGP and ABCO shares for the reasons articulated above. Technology was the second biggest drag, both due to its overweight and poor stock selection. In particular, post-election declines in three cloud computing stocks hurt performance:

• Ultimate Software (ULTI): Payroll and human capital management software vendor whose shares declined due to fears that repeal of Obamacare (ACA) would reduce demand for Ultimate's ACA module. ACA is a small component of Ultimate's revenue and value proposition, and hence we believe these fears are overdone. We maintain a significant investment in ULTI shares.

• Ellie Mae (ELLI): Software for automating mortgages. ELLI stock declined as investors anticipate reduced activity for mortgage refinances and originations as interest rates climb. We share these concerns and have substantially cut back our position.

• Zendesk (ZEN): Web-based customer support platform. ZEN shares declined as the company is going through a transition in its sales management, sales force, and product offerings. We cut back the position substantially early in Q4 and that, combined with the stock price decline, has left us with a relatively small position. We believe the risk/reward is balanced at current levels.

Finally, stock selection was also negative in Consumer Discretionary, most notably due to Q4 weakness in the shares of 2U, Inc.

• 2U (TWOU): Provides a platform which enables traditional "bricks and mortar" universities to offer online graduate degree programs. While TWOU was a strong contributor for 2016 as a whole, the stock gave up ground in Q4 as investors rotated out of high-growth names, and despite the company reporting strong results. While we pared our position, we continue to hold a substantial investment believing that 2U's value-proposition, growth prospects, and earnings power will be rewarded by investors over time.

Portfolio Positioning and Outlook

Since the Global Financial Crisis (GFC), we've been in a relatively low-growth world. The Granahan Focused Growth strategy has been able to generate strong investment returns adhering to a philosophy focused on high-quality secular growth companies whose stocks have attractive risk/reward (see charts below). Have we now moved to a "higher growth" world? Perhaps. Perhaps not. Time will tell if, as Bridgewater's Ray Dalio predicts: a) the wholesale changes expected to be implemented by the incoming administration are in fact implemented (I’m guessing many will); and b) these changes will “ignite animal spirits" and meaningfully accelerate economic growth (I'm more dubious about this). That said, regardless of whether GDP growth is 2% or accelerates to 2.5% or even 3%, I remain a steadfast believer that our philosophy and process of carefully investing in the stocks of companies growing 15%-20%, or higher, will continue to generate attractive returns.

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As noted in my opening paragraph, investing in small caps carries the prospect of earning strong returns over time, but along with it comes the expectation of some volatility. Regular readers of my commentaries might recall that, in the Q2 letter, I noted how Warren Buffett frequently reminds his followers, “Volatility does not equal risk.” Yet investors can fall in the trap of confusing the two, and as a consequence they often pay a steep price in terms of lower returns. In 2007, prior to the GFC, Buffet put his money where his mouth was in the form of his famous $1 million 10-year bet. Updated figures for year-end 2016 are not yet available, but given that Buffett was leading 66% to 22% in May 2016, and that the S&P 500 beat most hedge funds once again in 2016, there is little doubt that Buffett's lead grew.

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Over the 30+ years of analyzing and investing in small caps, and almost 10 years of managing Focused Growth, I've seen plenty of volatility in small caps. Markets, investor psychology, style, and individual stock picks all ebb and flow. The recent selling pressure on our high growth stocks due to the market rotation, combined with the underlying companies’ continued excellent enterprise growth, has left valuations for many of these stocks attractively priced. Looking forward, growth prospects for our portfolio companies remain very good – there are no signs of weakness – and this growth is likely to occur and stand out regardless of which Trump policies take hold. Before closing, I thought I'd share recommendations on a few books. First, I think Thomas Friedman's Thank You for Being Late does an excellent job describing the fabric and inter-relatedness of the rapid acceleration of change both in and outside of technology. Next, I'm only halfway through but loving Michael Lewis' The Undoing Project, which chronicles the partnership of Amos Tversky and Nobel laureate Daniel Kahneman and their ground-breaking research/thinking in the field of behavioral economics. Kahneman also wrote Thinking Fast and Slow, which is certainly worth a read. Finally, I'll close where I opened – with Rock & Roll. I highly recommend Bruce Springsteen's autobiography, Born to Run. Beyond his exceptional talents as a musician, performer, and storyteller, there are lessons to be learned from the dedication, energy, and longevity the “Boss” has brought to his profession. While available in both hardback and digital forms, I urge you to download the audio version which is wonderfully read/performed by the author. Enjoy.

As always, on behalf of the entire team at Granahan Investment Management thank you for your interest and please don't hesitate to reach out if you have any questions. Andrew L. Beja, CFA dbeja@granahan.com 781 890-4412 Disclosure: The information provided in this commentary should not be considered a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in an account's portfolio at the time you receive this report or that securities sold have not been repurchased. The securities discussed do not represent an account's entire portfolio and in the aggregate may represent only a small percentage of an account's portfolio holdings.

It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein.

Life Cycle Diversification: Adds stability

Annualized Performance: Net of Fees

Graphs and Statistics are Supplemental Information.Please reference fully compliant GIPS Presentation on reverse side.

Small Cap Focused Growth Product December 31, 2016

GIM Small Cap Focused Growth Russell 2000 GrowthAs of December 31, 2016

Selected Portfolio Statistics

At a GlanceProduct Assets: $196 MillionMinimum Investment : $3 MillionStatus: OpenInception Date: August 1, 2007Benchmark: Russell 2000 GrowthCapitalization: Typically, $200 Mil - $2 Bil at purchasePortfolio Manager: Andrew L. Beja, CFATypical Number of Holdings: ± 40

Distinguishing Factors• By investing in businesses with sustainable growth,

we reduce the risk of significant capital loss.• We invest in exceptional businesses – those with

solid balance sheets, high incremental margins and strong customer value propositions.

• Our expected return methodology is a mechanism for mispricing and has proven successful over the course of several investment cycles.

• We believe conviction leads to outperformance, 60%-80% portfolio held in top 15 holdings.

Investment Philosophy Granahan Investment Management (GIM) believes that small dynamic companies provide excellent potential for superior long-term performance. GIM’s Focused Growth strategy is grounded in the belief that superior long term returns are best achieved through a select portfolio of smaller companies poised to grow at 15% or more.

Within this philosophy we seek to own companies with large open ended opportunities, a favorable competitive landscape, products or services providing a significant value proposition to the customer, and that have clean balance sheets.

This company analysis is combined with a rigorousvaluation discipline centered on a stock's expectedreturn and risk/reward. The net result is a portfolio of 40-50 attractively priced stocks of some of the most excitingand innovative companies in the economy, and aportfolio that has generated consistent, strong risk-adjusted returns over time.

Firm HistoryFounded in 1985, Granahan Investment Management,Inc. is a 100% employee-owned firm specializing insmaller cap equity investments for large institutions andwealthy individuals. The firm utilizes fundamental,bottom-up research to uncover and invest in fastgrowing companies under $6 billion in market cap. Thefirm manages $3 billion in institutional assets and thefounding principals are part of an investment team whichnow totals ten professionals.

Trailing 5-years through December 31, 2016Quarterly Returns - Gross of Fees

Annualized Alpha 2.51%Upside Capture 119.10%Downside Capture 95.84%Tracking Error 11.31Information Ratio 0.34Beta 1.13

Source: eVestment

Characteristic Portfolio Russell 2000 Growth

Median Market Cap $1,376.5 mil $878.9 mil

Weighted Avg. Market Cap $2,516.7 mil $2,166.8 mil

Active Share 96.69% 0.00%

Est 3-5 Yr EPS Growth 18.8% 13.5%

Forward P/E Ratio 38.4x 22.3x

Dividend Yield 0.08% 0.82%

Price to Book 4.47x 4.09x

Granahan Investment Management, Inc.Small Cap Equity Specialist Since 1985

404 Wyman St., Suite 460, Waltham MA 02451 781-890-4412 www.granahan.com info@granahan.com

Holdings and Characteristics are Supplemental Information. Please reference fully compliant GIPS Presentation above.

December 31, 2016Small Cap Focused Growth Product

Source: FactSet

Top Ten Holdings

Security Percent of Portfolio

IMPINJ 6.9%

AFFILIATED MANAGERS GROUP 6.3%

IMAX CORP 6.2%

SPS COMMERCE 6.1%

WIX COM 5.3%

COSTAR CORP 5.3%

OSI SYSTEMS 4.3%

ULTIMATE SOFTWARE GROUP 4.1%

2U INC 3.9%

LIVEPERSON 3.8%

Composite FootnotesGranahan Investment Management claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report incompliance with the GIPS standards. Granahan Investment Management has been independently verified for the periods January 1, 1993 through December 31,2015. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2)the firm’s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. GIM is an independent, SEC-registered investment firm that oversees small and mid-cap equity portfolios for large institutions and wealthy individuals. The Small Cap Focused Growth productutilizes fundamental, bottom-up research and analysis to invest in companies in the small cap sector of the market that exhibit sustainable high earnings growth, witha focus on the technology services, internet, consumer, and business services sectors. The benchmark for the Small Cap Focused Growth product is the Russell2000 Growth. The composite, created in December 2011, is calculated by asset-weighting the performance of each account on a monthly basis. The compositeincludes returns from the portfolio manager’s prior firm, from inception of August 1, 2007 through December 31, 2011. Accounts are included beginning with the firstfull month under management and terminated accounts are included in the composite. Performance calculations, expressed in U.S. dollars, produce a total returnincluding cash and the reinvestment of dividends and interest. The dispersion is a standard deviation using equal-weighted total returns for accounts in the compositethe entire year. The three-year annualized standard deviation measures the variability of the composite and the benchmark returns over the preceding 36-monthperiod. Leverage is not utilized. Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. Returnsare gross of investment management fees, which when included, reduce investment returns. Beginning 10/31/2012, net returns are total returns reduced by actualinvestment management fees. Prior to 10/31/12 and for accounts which pay no management fee, the standard management fee applicable is applied to calculate thenet return. The standard fee for accounts managed in the Small Cap Focused Growth style is payable quarterly in arrears and is calculated by applying the ANNUALrate of 1.00% times the average value of the assets in the account on the last day of each month in the quarter. Fees are collected quarterly, which produces acompounding effect on the total rate of return net of management fees. Market value is based on trade date and security pricing is supplied by Telemet. A completelist and description of all of the firm's composites is available upon request. Past performance is no guarantee of future results.

Date Small Cap Focused Growth Composite

12/31/16Composite

Gross Return

Russell 2000 GrowthReturn

Composite Assets$ Mil

Composite# Accts

Composite3-Yr.

Std. Dev.

Russell 2000Growth

3-Yr. Std. Dev.

CompositeDispersion

CompositeNet Return

Non-Fee Assets

FirmAssets$ Mil

2016 17.82% 11.32% $196.5 5 19.72 16.67 NA 17.04% 0.5% $2,996.5

2015 -8.86% -1.38% $206.7 5 17.34 14.95 NA -9.38% 0.4% $3,041.7

2014 2.17% 5.60% $211.8 6 15.87 13.82 NA 1.61% 0.4% $3,516.6

2013 65.19% 43.30% $93.0 <5 16.73 17.27 NA 64.49% 1% $4,056.7

2012 24.55% 14.59% $26.5 <5 21.23 20.72 NA 23.36% 2% $3,049.4

2011 13.19% -2.91% $0.4 <5 23.12 24.31 NA 12.07% 100% $2,741.5

2010 30.06% 29.08% $5.4 8 29.56 27.70 0.15 28.81% 7%

2009 53.80% 34.47% $4.2 8 NA 24.85 0.06 52.33% 10%

2008 -46.34% -38.54% $1.9 6 NA 21.26 NA -46.91% 10%

2007* 18.24% 3.27% $.4 <5 NA 14.23 NA 17.76% 100%

NA – Dispersion information is not statistically meaningful due to an insufficient number of portfolios in the composite for the entire year; Standard deviation information has fewer than three years’ data. *Partial year performance: August 1, 2007 through December 31, 2007