Archive for May, 2013

Background—We analyzed the terms of venture financings for 118 companies headquartered in Silicon Valley that reported raising money in the first quarter of 2013.

Overview of Fenwick & West Results

Although a healthy 68% of Silicon Valley financings in 1Q13 were up rounds, both the average and median percentage change in share price declined noticeably from 4Q12. In short, the up rounds were “up” by less. For example, 43% of up rounds in 4Q12 were up by more than 100%, while only 23% of up rounds in 1Q13 were up by more than 100%. Here are the more detailed results:

  • Up rounds exceeded down rounds in 1Q13, 68% to 11%, with 21% of rounds flat. This was a slight decline from 4Q12 when up rounds outpaced down rounds 71% to 8%, with 21% of rounds flat.
  • The Fenwick & West Venture Capital Barometer™ showed an average price increase of 57% in 1Q13, a healthy result but a decline from the 85% recorded in 4Q12.
  • The median price increase of financings in 1Q13 was 14%, a significant decline from the 41% recorded in 4Q12.
  • The results by industry are set forth below. In general the internet/digital media and software industries lead, with hardware and cleantech following, and life science trailing significantly.

Overview of Other Industry Data

Third party reports on the first quarter of 2013 showed weakness in the venture environment.

  • The amount of venture investment was the lowest quarterly amount since 3Q10.
  • The number of IPOs was the second lowest quarterly amount since 4Q09.
  • The number of venture-backed companies acquired was the lowest since 2Q09, and the amount paid in acquisitions was the lowest amount since at least 4Q09.
  • Although the dollar amount of VC fundraising was up from 4Q12, the number of funds raising money was the lowest since 3Q03.

There were certainly positive signs as well, with VC sentiment improving, angel investing strong, Nasdaq up and, as mentioned above, venture valuations reasonably healthy, but the overall venture environment is currently tough.

    • Venture Capital InvestmentDow Jones VentureSource (“VentureSource”) reported that venture capitalists (including corporation affiliated venture groups) invested $6.4 billion in 752 financings in the U.S. in 1Q13, a 3% decline in dollars but a 3% increase in deals from the $6.6 billion invested in 733 financings in 4Q12 (as reported in January 2013). This was the lowest dollar amount invested since 3Q10.

The PWC/NVCA MoneyTree™ Report based on data from Thomson Reuters (the “Money Tree Report”) reported $5.9 billion invested in 863 deals in 1Q13, an 8% decline in dollars and an 11% decline in deals from the $6.4 billion invested in 968 deals in 4Q12 (as reported in January 2013).

The MoneyTree Report also reported that despite the overall investment decline, investment in software companies was up 8% to $2.3 billion in 1Q13, while investment in internet companies, life science and cleantech all declined. It also reported that venture capital investment in first time financings was down 20% in 1Q13, with investment in first time life science financings falling to the lowest amount since 3Q96.

    • IPO ActivityDow Jones reported that 9 U.S. venture backed companies went public in 1Q13 and raised $643 million, compared to 8 IPOs raising $1.2 billion in 4Q12.

Similarly, Thomson Reuters and the NVCA (“Thomson/NVCA”) reported 8 IPOs raising $672 million in 1Q13, which was a 52% decline in the amount raised and a flat number of deals from 4Q12.

This was the second lowest number of IPOs in a quarter since 4Q09. Six of the IPOs were IT and all were for U.S. based companies.

    • Merger and Acquisitions ActivityDow Jones reported that acquisitions (including buyouts) of U.S. venture backed companies totaled $4.9 billion in 94 deals in 1Q13, a 47% decline in dollars and a 17% decline in deals from 4Q12 (as reported in January 2013).

Similarly Thomson/NVCA reported only 77 acquisitions in 1Q13, a 19% decline from the 95 reported in 4Q12 (as reported in January 2013). This was the lowest quarterly number of acquisitions since 2Q09.

    • Venture Capital FundraisingThomson/NVCA reported that 35 U.S. venture capital funds raised $4.1 billion in 1Q13, a 17% decline in the number of funds but a 25% increase in dollars raised compared to the 42 funds that raised $3.3 billion in 4Q12 (as reported in January 2013).

This was the lowest number of funds raising money since 3Q03, and the five new funds that raised money was the lowest number since 4Q06. Over half of the total amount raised ($2.2 billion) was raised by just four funds.

Similarly, Dow Jones reported $4.2 billion raised in 1Q13, the lowest first quarter total since 2009.

More money was invested in venture backed companies than was raised by venture capitalists for the fifth year in a row. Although 2012 data was incomplete, the excess aggregated $22 billion during the 2008-11 time frame, and while individuals and corporate investment likely made up part of the difference, it was unlikely to have made up a significant amount. (Venture Capital Journal, JoAnne Glasner, January 14, 2013).

It also appears that more hedge funds and private equity investors are doing later stage “venture” deals, which provides additional capital, but also creates more competition for venture capitalists (VentureWire, Shira Ovide and Pui-Wing Tam, March 7, 2013). The interest of these alternative investors is likely driven by the increased time to IPO, and increased amount being raised prior to IPO, by some of the most promising venture-backed companies. For example, the median time from initial equity to IPO increased to 9.4 years in 1Q13, and the median amount raised increased to $105 million, both the highest amounts in at least eight years (VentureSource).

  • Angels and AcceleratorsThree of the six largest venture capital investors in 1Q13 (by number of deals) were seed focused funds (500 Startups, Y Combinator, First Round Capital) (VentureSource). For a discussion of trends in seed financing see our 2012 Seed Survey at www.fenwick.com/seedsurvey.
  • Crowd FundingCrowd funding is growing substantially, despite regulatory delays in implementing some of the related provisions of the JOBS Act. Massolution reports that $1.6 billion was raised in North America by crowd funding in 2012, up 81% from 2011. And the recent partnership between AngelList and Second Market (described below) bears watching. There are even indications that seed funds might use crowd funding to raise money for their funds (Venture Wire, Chernova and Kolodny, April 10, 2013).
  • Secondary MarketsAlthough the Facebook IPO put a significant dent in the volume of trading on secondary market exchanges, the industry has been active.Nasdaq and SharesPost have recently announced a joint venture, the Nasdaq Private Market, to facilitate the buying and selling of private company shares, and to provide liquidity to early investors, founders and employees.And AngelList and Second Market have partnered to facilitate investing in early stage companies, by allowing investors to pool their investment through Second Market, so that they can each invest relatively small amounts of money into companies listed on AngelList.
  • Venture Capital ReturnCambridge Associates reported that the value of its venture capital index increased by 1.15% in 4Q12 (1Q13 information has not been publicly released) compared to -3.10% for Nasdaq. For longer time frames, the venture capital index surpassed Nasdaq for the 3 and 5 year period, and 15 years and longer, but trailed for the 1 and 10 year periods.
  • Venture Capital SentimentThe Silicon Valley Venture Capitalists Confidence Index® by Professor Mark Cannice at the University of San Francisco reported that the confidence level of Silicon Valley venture capitalists was 3.73 on a 5 point scale in 1Q13, an increase from 3.63 in 4Q12 and the third consecutive quarterly increase in the index. Reasons given for the increase were a stabilizing macro environment, continued easy money, a reduction in “frothiness” in internet/digital media, and the growth of cloud based, web centric software innovations.
  • NasdaqNasdaq increased 5.7% in 1Q13, and has increased 5.2% in 2Q13 through May 13, 2013.

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Here’s the 5-year-old whose pitch won over 20 VCs

This is 5-year-old Rhett, who is being treated for acute leukemia and made a special pitch that convinced more than 20 VCs to auction themselves for a lunch to benefit the Bay Area Leukemia & Lymphoma Society. Click here to watch his video, “Dear Mr. VC.”

Senior Technology Reporter- Silicon Valley Business Journal

Your average Silicon Valley VC probably hears hundreds of pitches a month but none more effective than this one made by a 5-year-old named Rhett.

His video plea to, “Help get the bad guys out of my body,” is surely enough to melt even the most jaded viewer on Sand Hill Road.

Young Rhett was diagnosed with acute leukemia after suddenly falling ill watching the San Francisco Giants win the 2010 pennant on their way to becoming World Series Champions. After many treatments since then his prognosis is good. His biggest dream, besides beating cancer, is to meet the Giants.

The “Dear Mr. VC” video he made convinced more than 20 of the top VCs in the region to offer themselves in auctions for lunch dates to benefit the Bay Area Leukemia & Lymphoma Society. Reportedly none who saw the pitch turned it down.

Click here to learn more about who those VCs are and how to make a bid to pitch to them. But be forewarned, you will have a hard time topping young Rhett.

Watch Rhett’s plea in the video attached to this story or you can go to YouTube to watch it by clicking here.

Cromwell Schubarth is the Senior Technology Reporter at the Business Journal. His phone number is 408.299.1823.

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One of the most emotion-evoking photos I’ve ever seen. The photo below was taken at the National Cemetery in Minneapolis on a June morning as it appeared in the Minneapolis Star/Tribune. It has been said that a picture is worth a thousand words. This photo proves it.

It says everything without a single word.

This should become an official Memorial Day, 4th of July and/or Veterans Day remembrance photo;

“Our Nations symbol standing guard, over those who gave their lives guarding our Nation”.

Marine Corps motto “Semper Fidelis”  (Always Faithful)… seems fitting!


photo by Frank Glick-MSP

This lone bald eagle seems to say “Many may have forgotten you; but I never will”.

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Above the Crowd

Grubhub and Seamless: Effecting The Elusive Private-Private Merger

Today, Seamless and Grubhub announced the signing of a definitive agreement to merge two of the nation’s premier services for ordering takeout online. As Benchmark is a large institutional investor in Grubhub, we were actively involved in the merger process, and we are quite excited about the potential of the two companies coming together. There are many synergies – different geographic strengths, different core customer bases, and different product strengths. And of course, we are afforded the advantage of greater scale.

Despite that there may be many obvious reasons for any two companies to combine, most private-private mergers (where both companies are private entities) never come to fruition. Public-public, and public-private are actually much easier to consummate. There are many reasons why private-private is so difficult, but allow me to highlight three specific challenges that seem quite prevalent.

 1)    Structural Challenges

Private companies typically have capitalization structures that are very complex. There are common stock, common options, and as many as three to five different layers of preferred stock, each with a specific liquidation preference. Finding a way to meld two complex capital structures is non-trivial, and may require compromise from many parties involved. But institutional investors are loath to give up previously negotiated rights, and this can be especially true when the investor in a competitive company is the one bringing the request. Even melding two separate option programs can be challenging. There are numerous techniques for bringing together two such structures, but none of them are remotely elegant, and they all involve spending many, many hours with lawyers. At the end of the day, structure is not a show stopper, but it creates a very high bar for consideration – you have to really want to make it happen to be able to sit down and sort through the complexity.

 2)    People Challenges

Prior to a merger, you have two separate management teams (with two separate cultures), and in order to merge, you have to agree on who is going to do what, and what each executive’s new title will be. It should come as no surprise that executives are fairly sensitive when it comes to topics of reporting structure and titles. Plus, you have the natural tendency to view any discussion as an “us versus them” type argument, which is not a frame of mind that is conducive to collaboration. The bottom line is that it is very hard to merge two management teams, especially when you consider the contracted time window typically associated with such a discussion. It’s speed dating. As a result, only if you have two teams with a shared vision for the future, and minds that are open to compromise could you ever hope to be successful. Some pretty high-profile mergers have fallen apart because of this issue.

3)    Investor/Founder Mindset Challenges

Most founders and investors typically think about their personal stakes in a private company in terms of “ownership percentage.” An investor may say “we own 22% of the company”, or a founder may note, “I still own 31% of my company.” These same constituents think about the overall company value in terms of dollars. As an example you might hear someone say, “we closed the last round at $100 million post.” When two private companies began discussions on merging, these overall corporate values are often debated. I call this the “dueling blowfish” problem. Private company valuation techniques are particularly specious (this contrasts with a public company that every day has a definitive market capitalization). Anyone can create any number they want (within reason), as there is no one specific formula or metric for such work. Most models are also based on forward forecasts, which offers another avenue for inflation. Basically, everyone uses loose finance arguments to over-inflate their own company’s valuation so that they can demand a bigger slice of the pie of the new company.

The only way around this is to reverse your way of thinking. First, you have to focus on the dollar value of your new stake in the combined company instead of focusing on the specific percentage. Even in a 50/50 scenario, each ownership stake is half what it once was. Assuming the deal is accretive, this should be “no-brainer” math; your new stock in the combined company is worth more than it was before. However, the “ownership” focused mind has a real problem with their stake being reduced so dramatically. Second, you need to only negotiate in terms of percentages (versus dollar value). One company will get X% of the combined company, and one company will get 1-X%. Taking this approach is the only way around the dueling blowfish problem. Assuming both sides think the merger is a good idea (and accretive) the future value is obviously going to be higher. The real question is how do we split the company amongst the two players, and focusing on this out of the gate will save an incredible amount of time.

These are just the challenges that you meet on the way to the altar. Many mergers fail not in the deal process but in the implementation process, as integration is very difficult, especially when it’s a merger of equals. And the human and cultural issues outlined above continue to exist as you attempt to merge two companies into one. Getting the “deal done” is only the beginning.

Once again, I am quite excited about the Grubhub/Seamless merger, and tip my hat to Matt Maloney, Mike Evans, Jonathan Zabusky, and both the Grubhub and Seamless management teams. Had they not started from day one of our discussions with a partnership mindset, we would have never have reached this milestone. I look forward to working with them both, as well as the investors and independent directors from both sides to help take the merged company to new heights.

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Early Tumblr Investor Saw ‘Raw Talent,’ Capital Efficiency

One of Tumblr’s biggest fans is a venture capitalist who helped steer the blogging service from its earliest days to a deal to be acquired by Yahoo for $1.1 billion in cash.

Spark Capital

Bijan Sabet.

Bijan Sabet, a general partner at Spark Capital who is best known for leading the Boston firm’s investment in Twitter, said he first started using Tumblr when it was just one of several Web applications that founder and Chief Executive David Karp had developed while running a Web consulting company called Davidville.

Karp has “raw talent when it comes to design and user experience, and self-taught technical talent,” Sabet said in an interview Monday. With anything he built, “you could just tell it was a David Karp product.”

But Tumblr was what caught Sabet’s eye and he thought Karp should focus on a single product early on. Starting in the spring of 2007, Karp and Sabet spent several months talking about what it would take to turn Tumblr into a business before Karp, who was happy running his profitable, self-funded consultancy, agreed to go forward.

Spark and Union Square Ventures were among the earliest investors in the company and today are its largest venture shareholders, Sabet said, declining to disclose their ownership stakes. The two firms contributed to a $775,000 round in October 2007 and led a $4.5 million Series B round in December 2008. Tumblr has raised about $125 million from investors, who also include Greylock Partners, Insight Venture PartnersMenlo Ventures and Sequoia Capital. Its last round, in 2011, was said to be at an $800 million valuation.

What marked Tumblr from the start was its capital efficiency, operating with two people for the first 15 to 18 months and then four people for the next year. Karp concentrated on a series of constant improvements to perfect the Tumblr experience, Sabet said. Rather than trying to move the company quickly into the mainstream, the CEO was “more focused on delighting the users he had already signed up.”

Besides its slow, steady approach, another key to Tumblr’s success was its move from the Web, where it started, to mobile devices, Sabet said. “They were able to build a wonderful, compelling mobile experience in the last couple of years.” Well over half Tumblr’s users access the service via its mobile app, Sabet said.

Spark and Union Square, who are both Twitter investors, were in no rush to have Tumblr generate profits, although Sabet acknowledged that obviously is the ultimate goal. “We believe in profitable business models–I am a venture capitalist,” he said. Like Twitter, investors figured, Tumblr should concentrate first on building a big base of users.

“You’ve got to scale first and monetize second,” Sabet said.

The Tumblr acquisition will be Sabet’s second exit in a little over a year. In March 2012, Zynga acquired Spark-backed gaming company Omgpop for about $180 million. The company had raised about $16 million from investors.

Karp was one of the people who introduced Sabet to Omgpop founder Charles Forman. Sabet said the two companies had little in common except that both Karp and Forman have a “strong, strong affinity around design and technology.”

Write to Russ Garland at russell.garland@dowjones.com. Follow him on Twitter at @RussGarland

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