Blog of Intellectual Capital

Article by Fenwick and West. For more information, please contact Barry Kramer and Michael Patrick (bkramer@fenwick.com).

“We analyzed the terms of venture financings for 117 companies headquartered in Silicon Valley that reported raising money in the fourth quarter of 2011.

Overview of Fenwick & West Results

• Up rounds exceeded down rounds in 4Q11, 70% to 16%, with 14% of rounds flat. This showed continued strong valuations in the venture environment, consistent with 3Q11, and was the tenth quarter in a row in which up rounds exceeded down rounds.
• The Fenwick & West Venture Capital BarometerTM showed an average price increase of 85% in 4Q11, an increase from 69% in 3Q11. Series B rounds were exceptionally strong, with an average increase of 164% since the last round.

Anecdotally, we attribute the Series B results in part to the increased number of smaller, relatively low valuation, Series A financings undertaken by micro VC firms. When the investee companies in these financings make good progress, it can result in a significant percentage increase in valuation in the Series B round – and if these companies do not make good progress, and do not raise a Series B financing, they will not appear in the Barometer statistics because there is no transaction to report, as described under “Methodology” below.

If Series B financings were excluded from the Barometer calculation (which we believe would be over compensating for this anomaly) the Barometer would have been 50%. Along these lines we note that Dow Jones VentureSource (“VentureSource”) reported that the three most prolific venture investors in 4Q11 were 500 Startups, SV Angel and First Round Capital, all early stage investors, with a combined 77 investments in 4Q11.

The results by industry are set forth below. In general, consistent with recent quarters, the internet/ digital media and software (which includes many of the “big data” and “cloud” companies) industries were the valuation leaders, and cleantech and life science lagged.

Overview of Third Party Data

In 2011 we saw a generally improving venture environment, with venture investment, fundraising, valuations, M&A and IPOs all up compared to 2010. But there were some anomalies:

• Fundraising by venture funds was up in dollar terms, but the number of funds raising money declined.
• Venture capitalists invested healthy amounts at healthy valuations, and showed gains in their portfolios, but venture capitalist confidence has been down three quarters in a row.
• Some industries are concerned about a bubble (internet/digital media and software), while others are having a tough time (cleantech and life science).
• Venture capitalists again raised significantly less money than was invested in venture-backed companies.
• Although 2011 was strong, the fourth quarter showed some weakness with venture investment and M&A down in 4Q11 compared to 3Q11.
• The number of venture funds is decreasing, while the number and importance of angel investors is increasing, and secondary market activity is expanding.

Venture Capital Investment. Highlights:

• Venture investment was moderately lower in 4Q11 than 3Q11.
• Venture investment was significantly higher in 2011 than 2010.
• Average deal size increased in 2011.
• Internet and software industries lead in 2011, although both saw declines in investment in 4Q11.
• Silicon Valley received 41% of all U.S. venture investment in 2011, and 46% in 4Q11.

Data:

Venture capitalists (including corporation-affiliated venture groups) invested $7.4 billion in 803 deals in the U.S. in 4Q11, a 12% decrease in dollars from the $8.4 billion invested in 765 deals in 3Q11 (as reported in October 2011), according to VentureSource. For all of 2011 venture capitalists invested $32.6 billion in 3209 deals, a 25% increase in dollars from 2010, when $26.2 billion was invested in 2799 deals (as reported in January 2011).

The PwC/NVCA MoneyTreeTM Report based on data from Thomson Reuters (the “MoneyTree Report”) reported similar results. Venture investment in 4Q11 declined 6% in dollars compared to the 3Q11 results (as reported in October 2011), with investment of $6.6 billion in 844 deals in 4Q11, compared to $7.0 billion in 876 deals in 3Q11. For all of 2011 venture capitalists invested $28.4 billion in 3673 deals, a 30% increase from 2010 when $21.8 billion was invested in 3277 deals (as reported in January 2011).

The MoneyTree Report also noted that the internet and software industries saw the largest increase in investment in 2011, increasing 68% and 38% respectively over 2010, although both saw declines in investment from 3Q11 to 4Q11. Silicon Valley received 41% of all venture funding in 2011, followed by New England and New York at 11% and 9.5% respectively.

Merger and Acquisition Activity. Highlights:

• M&A activity declined significantly in dollar terms in 4Q11 compared to 3Q11.
• M&A activity increased significantly in dollar terms in 2011 compared to 2010.
• Average deal size was up significantly in 2011, as the number of deals was flat to down.

Data:

Acquisitions (including buyouts) of U.S. venture-backed companies in 4Q11 totaled $9.4 billion in 107 transactions, compared to $13 billion in 122 transactions in 3Q11 (as reported in October 2011), a 28% decline in dollars, according to Dow Jones. For all of 2011, 477 venture-backed companies were acquired for $47.8 billion, compared to 468 acquisitions for $35.8 billion in 2010 (as reported in January 2011), an increase of 34% in dollar terms.
Thomson Reuters and the NVCA (“Thomson/NVCA”) reported 92 acquisitions in 4Q11 compared to 101 in 3Q11 (as reported in October 2011), and 429 in all of 2011, compared to 420 in 2010 (as reported in January 2011).

IPO Activity. Highlights:

• IPOs increased in both 4Q11 and 2011 overall. o    63% of IPOs were in the IT industry. o    Groupon and Zynga accounted for 31% of IPO money raised in 2011. Data:

Dow Jones reported 10 U.S venture-backed company IPOs raising $2.4 billion in 4Q11, close to 5x higher in dollars from the 10 IPOs that raised $0.5 billion in 3Q11. In all of 2011, 45 venture-backed companies went public raising $5.4 billion, compared to 46 IPOs in 2010 raising $3.3 billion, a 64% increase in dollar terms.
Similarly Thomson/NVCA reported a 5x increase in IPO dollars raised from 3Q11 to 4Q11, and a 41% increase in dollars raised from 2010 to 2011. Thomson/NVCA also reported that approximately 63% of the companies going public in both 4Q11 and 2011 overall were IT companies, and that 75% of the companies going public in 2011 were based in the U.S., with 54% of the U.S. companies based in California.

To read the complete report, please visit Fenwick & West website here.

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