Article from Fenwick & West LLP.
Overview of Fenwick & West Results
- Up rounds exceeded down rounds in 3Q11 70% to 15%, with 15% of rounds flat. This was an increase from 2Q11 when up rounds exceeded down rounds 61% to 25%, with 14% of rounds flat. Series B rounds were exceptionally strong, comprising 38% of the relevant rounds (Series A rounds aren’t included as there is no prior round for comparison purposes), and 89% of the Series B rounds were up rounds. This was the ninth quarter in a row in which up rounds exceeded down rounds.
- The Fenwick & West Venture Capital Barometer™ showed an average price increase of 69% in 3Q11, a slight decrease from the 71% increase registered in 2Q11. However, we note that one internet/digital media company had a 1,500% up round, and that if such round was excluded the Barometer would have been 54%. This was also the ninth quarter in a row in which the Barometer was positive.
- Interpretive Comment regarding the Barometer. When interpreting the Barometer results please bear in mind that the results reflect the average price increase of companies raising money this quarter compared to their prior round of financing, which was in general 12‑18 months prior. Given that venture capitalists (and their investors) generally look for at least a 20% IRR to justify the risk that they are taking, and that by definition we are not taking into account those companies that were unable to raise a new financing (and that likely resulted in a loss to investors), a Barometer increase in the 30-40% range should be considered normal.
- The results by industry are set forth below. In general internet/digital media was the clear valuation leader, followed by software, cleantech and hardware, with life science continuing to lag.
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After 2Q11 there was reason to believe that the venture environment was improving, but the results were more mixed in 3Q11. While the amount invested by venture capitalists in 3Q11 was healthy, the amount raised by venture capitalists was significantly off the pace set in the first half of the year. As a result, venture capitalists are continuing to invest significantly more than they raise, an unsustainable situation (and one that perhaps provides increased opportunities for angels and corporate investors). IPOs also decreased significantly in 3Q11, although M&A activity was up. The internet/digital media industry continued to lead, while life science continued to lag.
However there are some clouds on the horizon, as the Silicon Valley Venture Capital Confidence Index declined for only the second time in 11 quarters, there are reports of a number of IPOs being recently postponed and the world financial environment is undergoing substantial turbulence.
Detailed results from third-party publications are as follows:
- Venture Capital Investment. Venture capitalists (including corporation-affiliated venture groups) invested $8.4 billion in 765 deals in the U.S. in 3Q11, a 5% increase in dollars over the $8.0 billion invested in 776 deals reported for 2Q11 in July 2011, according to Dow Jones Venture Source (“VentureSource”). The largest Silicon Valley investments in 3Q11 were Twitter and Bloom Energy, which were also two of the three largest nationwide. Northern California received 38% of all U.S. venture investment in 3Q11.
The PwC/NVCA MoneyTree™ Report based on data from Thomson Reuters (the “MoneyTree Report”) reported slightly different results – that venture capitalists invested $7.0 billion in 876 deals in 3Q11, a 7% decrease in dollars over the $7.5 billion invested in 966 deals reported in July 2011 for 2Q11. Investments in software companies were at their highest quarterly level since 4Q01, at $2.0 billion; investments in internet companies fell to $1.6 billion after the ten year high of $2.4 billion reported in 2Q11, and life science and cleantech investments fell 18% and 13% respectively from 2Q11.
Overall, venture capital investment in 2011 is on track to exceed the amount invested in 2010 according to both VentureSource and the MoneyTree Report.
- Merger and Acquisition Activity. Acquisitions (including buyouts) of U.S. venture-backed companies in 3Q11 totaled $13 billion in 122 deals, a 33% increase in dollar terms from the $9.8 billion paid in 100 deals reported in July 2011 for 2Q11, according to Dow Jones. The information and enterprise technology sectors had the most acquisitions, and the acquisition of PopCap Games by Electronic Arts for $750 million was the largest acquisition of the quarter.
Thomson Reuters and the National Venture Capital Association (“Thomson/NVCA”) also reported an increase in M&A transactions, from 79 in 2Q11 (as reported in July 2011) to 101 in 3Q11.
- Initial Public Offerings. Dow Jones reported that 10 U.S. venture-backed companies went public in 3Q11, raising $0.5 billion, a significant decrease from the 14 IPOs raising $1.7 billion in 2Q11. Perhaps of greater concern is that six of the IPOs occurred in July, with only four in the latter two months of the quarter, and half of the 10 companies went public on non-U.S. exchanges (one each on AIM, Australia and Tokyo, two on Taiwan). By comparison, all 25 companies going public in the first half of 2011 went public on U.S. exchanges.
Similarly, Thomson/NVCA reported that only five U.S. venture-backed companies went public in the U.S. in 3Q11 (they do not include offerings on foreign exchanges), raising $0.4 billion, a substantial decrease from the 22 IPOs raising $5.5 billion reported in 2Q11. This was the lowest IPO level in seven quarters. Of the five IPOs, four of the companies were based in the U.S. and one in China, and four were IT-focused and one was life science-focused. The largest of the IPOs was China-based Tudou, raising $0.2 billion.
At the end of 3Q11, 64 U.S. venture-backed companies were in registration to go public, an increase from 46 in registration at the end of 2Q11.
- Venture Capital Fundraising. Dow Jones reported that U.S. venture capital funds raised $2.2 billion in 3Q11, a significant decline from the $8.1 billion raised in the first half of 2011. 2011 is on track to be the fourth year in a row in which venture capital fundraising will be less than investments made by venture capitalists, and by over $30 billion in the aggregate.
Similarly, Thomson/NVCA reported that U.S. venture capital funds raised $1.7 billion in 3Q11, a substantial dollar decrease from the $2.7 billion reported raised by 37 funds in 2Q11.
- Venture Capital Returns. According to the Cambridge Associates U.S. Venture Capital Index®, U.S. venture capital funds achieved a 26% return for the 12-month period ending 2Q11, less than the Nasdaq return of 31% (not including any dividends) during that period. Note that this information is reported with a one quarter lag.
- Sentiment. The Silicon Valley Venture Capitalist Confidence Index® produced by Professor Mark Cannice at the University of San Francisco reported that the confidence level of Silicon Valley venture capitalists was 3.41 on a 5 point scale, a decrease from the 3.66 result reported for 2Q11, and the second quarter of decrease in a row. Venture capitalists expressed concerns due to the macro economic environment, the uncertain exit environment, high company valuations and regulatory burdens. The divergence between the internet/digital media industry, which has performed well, and the lagging life science industry, was also noted.
- Nasdaq. Nasdaq decreased 13% in 3Q11, but has increased 10% in 4Q11 through November 14, 2011.
- Venture Capital Investment. Venture capitalists (including corporation-affiliated venture groups) invested $8.4 billion in 765 deals in the U.S. in 3Q11, a 5% increase in dollars over the $8.0 billion invested in 776 deals reported for 2Q11 in July 2011, according to Dow Jones Venture Source (“VentureSource”). The largest Silicon Valley investments in 3Q11 were Twitter and Bloom Energy, which were also two of the three largest nationwide. Northern California received 38% of all U.S. venture investment in 3Q11.
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