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Silicon Valley Venture Survey – Third Quarter 2013

November 20, 2013

Background
We analyzed the terms of venture financings for 128 companies headquartered in Silicon Valley that reported raising money in the third quarter of 2013.

Overview of Fenwick & West Results
Valuation results in 3Q13 showed a noticeable increase over 2Q13, including the greatest difference between up and down rounds in over six years. The software industry was especially strong, not only valuation-wise, but also in the number of deals.

Here are the more detailed results:

  • Up rounds exceeded down rounds 73% to 8%, with 19% of rounds flat. This was a significant increase from 2Q13 when up rounds exceeded down rounds 64% to 22% with 14% flat, and the best quarter (measured by amount by which up rounds exceeded down rounds) since 3Q07.
  • The Fenwick & West Venture Capital Barometer™ showed an average price increase of 65% in 3Q13, an increase from the 62% reported in 2Q13.
  • The median price increase of financings in 3Q13 was 43%, a noticeable increase from the 19% and 14% reported in 2Q13 and 1Q13, respectively.
  • The results by industry are set forth below. In general internet/digital media slightly edged out software for best valuation performance, although there were significantly more software deals than internet/digital media, as software deals were 53% of all deals, the highest amount since we began tracking results by industry in 1Q10. Life Science fell to 10.2% of all deals, the lowest percentage since 1Q10.
  • The percentage of financings with participating liquidation preference was 27%, the lowest amount since we began our survey in 2002 and an indication of an entrepreneur friendly environment.

Overview of Other Industry Data
Overall the venture environment improved in 3Q13, but due to a slow start 2013 lags 2012 in some categories.

  • Venture investing in 3Q13 increased, bringing the first three quarters of 2013 approximately even with 2012, although trailing 2011.
  • IPOs were again strong in 3Q13. Although 2013 is expected to be the best year for venture backed IPOs since 2007, much of the increase through the first three quarters has been focused in the life science sector.
  • M&A improved noticeably in 3Q13, but 2013 is on track to have the lowest number of acquisitions of venture backed companies since 2009.
  • Venture fundraising improved over a weak 2Q13, but 2013 was on track to be the lowest fundraising year since 2010.
  • Corporate venture capital participation continued to increase.
  • Angel financing results were mixed. And with new more liberal regulations regarding public solicitations and crowd funding, the angel financing world is likely in for some changes.
  • Venture capitalist sentiment hit the highest level since the 2008 recession.

The more detailed results follow: http://www.fenwick.com/publications/Pages/Silicon-Valley-Venture-Survey-Third-Quarter-2013.aspx?WT.mc_id=2013.Q3_VCS_BK

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FENWICK & WEST

AUTHORS:
Barry J. Kramer
Michael J. Patrick

SECOND QUARTER 2013

Venture Capital Survey

Set forth below is the link to our 2Q13 venture survey.
Second Quarter 2013 Silicon Valley VC Survey

We hope you find this information useful and would be happy to answer any questions you might have regarding the survey.

Please note that in an effort to provide additional value to our readers, we are including links to some of the most interesting articles and reports that we reference in our survey.

In this regard we would like to express our appreciation to the Venture Capital Journal for allowing us to provide to our readers certain of their articles that are behind a “pay wall” and that would otherwise require a subscription to read. For more information about the Venture Capital Journal, please click link.

Regards,
Barry Kramer
Michael Patrick

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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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Seed Finance Survey 2012

March 25, 2013

Seed Financing Survey 2012
Internet/Digital Media and Software Industries
Background

In early 2011 we published our first Seed Financing Survey (for 2010) in recognition of the growing importance of seed financing to entrepreneurs and the venture capital environment, especially in the internet/digital media and software industries.

This is the third such survey. In addition to providing information for 2012, this survey also offers comparative information with 2011 and 2010 to facilitate the identification of trends.

The information contained in this survey is based on 61 transactions in 2012, 56 transactions in 2011 and 52 in 2010. The vast majority of these transactions were for companies based in Silicon Valley, with some from the Seattle, Los Angeles and New York regions. Most of these transactions are those in which our firm was involved, and we believe is representative of transactions handled by large Silicon Valley law firms, but may not be representative of the larger, geographically dispersed, seed financing environment.

Overview of 2012 Seed Financing Survey Results

We saw the following trends in our 2012 survey:

  • Of the companies funded in 2011, 27% had raised a Series A financing by the end of the following year (2012), while 45% of the companies funded in 2010 had raised a Series A financing by the end of the following year (2011).
  • Conversely, 23% of the companies funded in 2011 raised follow-on seed financing by the end of the following year, while 12% of the companies funded in 2010 had raised a follow on seed by the end of the following year.
  • The percentage of companies in our survey receiving seed funding that were software companies increased from 25% in 2011 to 34% in 2012, while the percentage of such companies that were internet/digital media companies declined from 75% to 66%.
  • The percentage of seed financings led by venture capital investors increased from 27% in 2011 to 34% in 2012.
  • The use of a preferred stock structure increased from 59% in 2011 to 67% in 2012.
  • The average investment size increased for preferred stock deals from 2011 to 2012, and declined for convertible note deals over the same period.
  • The median pre-money valuation in preferred stock financings increased from $3.8 million in 2011 to $4.6 million in 2012.
  • The median size of preferred stock deals increased from $1.0 million in 2011 to $1.36 million in 2012, while the median size of convertible note deals decreased from $1.0 million to $0.9 million.
  • The median valuation cap on convertible notes decreased from $7.5 million in 2011 to $6.0 million in 2012.

The more detailed results of our survey are set forth below, after the “Overview of Seed Financing Environment” section.

Overview of Seed Financing Environment

The seed financing environment has become very dynamic, and has undergone significant changes, in the past few years.  Some of the trends that we are seeing are:

    • The Increasing Institutionalization of Seed Financing.

This is evidenced by the increasing participation of venture capitalists in seed financings, the growth of accelerators and “matchmaker” platforms, and the use of venture capital-like structures in seed financings.

    1. The increased involvement of venture capital funds in seed investing.  Dow Jones VentureSource reported that U.S. seed financings by venture capital firms increased from 173 in 2009 to 388 in 2012, and the amounts invested in such financings increased from $119 million to $287 million during that period.  Similarly, CB Insights reported that venture capital investment in seed deals increased from 143 deals in 2009 to 617 deals in 2012, and that the percentage of all seed deals in which venture capitalists invested increased from 30% in 2009 to 35% in 2012.  This trend is supported by the results of our Survey, which found that the percentage of seed deals that were led by venture capitalists increased from 26% in 2010 to 27% in 2011 to 34% in 2012.
    2. The growth of accelerators.  Accelerators provide structure to the formation of seed companies by providing formalized mentoring, a network of contacts and in some cases small amounts of financing.  This is unlike the prior generations of early stage companies that were more likely to have less formal guidance and structure during their pre-seed and seed period.  Since Y Combinator, the first of the current generation of accelerators, was founded in 2005, the number of accelerators has grown to over 130 in 33 countries, per research by Jed Christiansen, founder of Seed-DB, as reported in AllThingsDigital. And accelerators tracked by Seed-DB that provide funding to their companies have increased the number of companies they have funded from 243 in 2010 to 1137 in 2012.
    3. The growth of platforms that match entrepreneurs and investors.  Matchmaking platforms are becomingly increasingly important in seed financing, and with the passage of the JOBS Act are likely to continue to grow in importance.  These platforms have provided further structure to the seed financing process that did not exist even a few years ago.  For example, accelerators like 500 Startups and Rock Health now require all their applicants to submit their applications through AngelList (which was only founded in 2010).  And AngelList has recently teamed with Second Market to permit (accredited) investors to easily invest small amounts in some of the companies listed on AngelList. 
    4. The use of more traditional deal structures in seed financings.  As venture capitalists and professional seed funds become more involved in seed financings, we are seeing indications of the increased use of traditional venture capital deal structures in seed financings.  This is supported by our Survey, which shows that the use of preferred stock structures (versus convertible note structures) increased from 2011 to 2012, and that of those financings that used a convertible note structure, there was an increase in the use of valuation caps.  However, note that seed round preferred stock valuations increased overall from 2011 to 2012, so the increased use of preferred stock is not necessarily a trend that favors investors at the expense of entrepreneurs, but rather reflects the more traditional preference of venture capitalists to set valuations at the time an investment is made.
  • Increase in Seed Financings and the Series A Crunch.
    1. Rapid growth in seed financings compared to Series A.  The number of seed financings increased from 472 in 2009 to 1749 in 2012, while the number of Series A rounds only increased from 418 to 692 during the same period, as reported by CB Insights.  Additionally, Xconomy reported that the number of seed investments has grown from 15% to 31% of the total number of venture capital deals.  This has caused many to question whether too many seed deals are being funded, and opine that many of the seed funded companies will be unable to raise a Series A financing.  CB Insights estimates that only approximately 40% of seed funded companies will raise follow-on financings, and that as a result it projects that over 1000 companies that received seed funding in the past year will be unable to raise Series A funding.  This is consistent with our Survey data which found that while 45% of companies receiving seed funding in 2010 had received venture financing by the end of 2011, only 27% of companies receiving seed funding in 2011 had received venture financing by the end of 2012.
    2. Follow-on seed financings.  Further evidence of this trend is what appears to be a growth in follow-on seed financings, which provide a company with a longer runway to hopefully demonstrate the traction necessary to obtain Series A financing.  This is supported by our survey results which found that while only 12% of our 2010 class of seed funded companies received a follow-on seed financing by the end of 2011, 23% of our 2011 class have already received such financing.  Anecdotally, the growth of “acqui-hires” also seems to be increasing, supporting the idea that while many seed-funded companies have had difficulty in raising Series A financing, their ability to put together talented teams has led to acquisitions of these companies due to the value of their personnel.
    • The Seed Financing Universe is Expanding Geographically and by Industry.

The current accelerator concept started in Silicon Valley, and was initially focused on mentoring internet-focused companies. This has changed.

    1. Geographically.  Of the approximately 140 accelerators tracked by Seed-DB, 45% are based outside of the United States  and even for those based in the U.S., many attract foreign entrepreneurs.  While it is unlikely to be representative of all incubators, we note that of the 33 companies in the most recent 500 Startups class, 57% are based outside of the United States, as reported in VentureBeat. Additionally, the Wall Street Journal reported that a significant number of accelerators being formed in Silicon Valley focus on nationals of specific countries, e.g. Australia, China, Denmark, Germany, Israel, Japan and Russia.  Their goal is to provide entrepreneurs from those countries access to Silicon Valley investors, and to provide those investors access to the markets of those countries.  And geographic growth is of course occurring in the US as well, with accelerators forming throughout the US, and with some accelerators, like Science in Los Angeles, explicitly focused on connecting their companies with Silicon Valley investors.
    2. Industry Diversification.  While the internet/digital media industry seems especially well suited for seed/accelerator financing, due to being less capital intensive and having a quicker time to market, accelerators are diversifying into other industries.  Examples are Lemnos Labs, Bolt and Haxlr8r (hardware), Rock Health, Blueprint Health and Healthbox (life science), Greenstart and Surge (energy/greentech) and Plug and Play (B2B).

Detailed Results of 2012 Financing Survey

  • Update on Companies Included in our Prior Seed Financing Surveys:

On average 30 months has passed since the companies funded in 2010 and included in our 2011 survey raised their seed round of financing, and on average 18 months has passed since the companies funded in 2011 and included in our 2012 survey raised their seed round of financing. Set forth below is information on what has happened to those companies during that time period.

Status of companies that raised their seed round of financing in 2010:

As of 12/31/2011

As of 12/31/2012

Raised venture capital financing:

45%

45%

Raised additional seed financing:

12%

14%

Still operating and have not raised additional financing:

21%

12%

Acquired:

12%

19%

Shut down:

4%

6%

No data available:

    6%

   4%

Total

100%

100%

Status of companies that raised their seed round of financing in 2010 versus those that raised their seed round in 2011, 18 months (average) after the seed round:

Status of 2010 companies as of 12/31/2011

Status of 2011 companies as of 12/31/2012

Raised venture capital financing:

45%

27%

Raised additional seed financing:

12%

23%

Still operating and have not raised additional financing:

21%

32%

Acquired:

12%

7%

Shut down:

4%

5.5%

No data available:

    6%

5.5%

Total

100%

100%

  • Other Survey Results
Industry breakdown:

2010

2011

2012

Internet/Digital Media:

71%

75%

66%

Software:

29%

25%

34%

Lead investor background:

Seed funds:

43%

46%

46%

Professional angels:

31%

28%

20%

Venture capital funds:

26%

27%

34%

Financing Structure:

Preferred Stock:

69%

59%

67%

Convertible Debt:

31%

41%

33%


Average Size of Investment

Below is the average size of investment for investors who invested at least $100,000, broken down by type of investor and between Preferred Stock financing and Convertible Note financing.

Preferred Stock

2010

2011

2012

Professional angels:

$310,000

$163,000

$185,000

Seed funds:

$392,000

$423,000

$458,000

Venture capital funds:

$591,000

$516,000

$624,000

Convertible Notes

Professional angels:

$182,000

$244,000

$165,000

Seed funds:

$140,000

$424,000

$277,000

Venture capital funds:

$290,000

$501,000

$391,000

Analysis of Preferred Stock Seed Financings.

2010

2011

2012

  • Median pre-money valuation.

Internet/Digital media:

$3,400,000

$4,000,000

$4,400,000

Software:

$2,700,000

$3,500,000

$5,000,000

  • Median amount raised:

$1,056,000

$1,000,000

$1,360,000

  • Percentage using non-participating preferred liquidation preference:

90%

91%

85%

  • Percentage using participating preferred liquidation preference:

10%

9%

15%

  • Percentage in which investors received a board seat:

72.5%

70%

73%

Analysis of Convertible Note Seed Financings

2010

2011

2012

  • Median amount raised

$662,500

$1,000,000

$918,000

  • Median size of future financing in which note converts:

$1,000,000

$2,000,000

$1,750,000

  • Percentage of deals in which valuation on conversion is capped:

83%

82%

90%

  • Median valuation cap:

$4,000,000

$7,500,000

$6,000,000

  • Percentage of deals that convert at a discount to the next equity round valuation:

67%

83%

90%

  • Median initial discount:

20%

20%

20%

  • Percentage of deals with discount in which discount increases over time:

25%

5%

0%

  • Percentage of deals without discount that have a valuation cap:

100%

75%

100%

  • Percentage of deals having warrants:

0%

0%

0%

  • Treatment of note if company is acquired prior to an equity financing:

Receive return of investment plus a premium:

50%

61%

50%

Median premium:

0.75x original principal amount

1.0x original principal amount

1.0x original principal amount

Right to convert at an agreed upon valuation:

33%

65%

65%

Percentage that have neither conversion right nor premium:

17%

9%

5%

Percentage that have both conversion right and premium:

0%

35%

20%

  • Median interest rate:

6.0%

5.5%

5.5%

  • Median term:

18 months

18 months

18 months

  • Percentage in which notes are secured:

0%

4%

0%

  • Percentage in which investors received a
    board seat:

8.3%

4%

0%

Methodology and Definitions

For purposes of this survey we define a “seed” financing as the first round of financing by a company in which the company raises between $250,000 and $2,500,000, and in which professional investors play a lead role. Please note that this definition excludes financings led by “friends and family”, which terms may not be negotiated on an arms-length basis, and smaller financings where parties may not substantially negotiate terms. Due to the foregoing definition of a seed financing, and the fact that our firm had a connection with the transactions included in the survey, the survey may not be representative of all companies receiving early stage financing, as we are likely over-weighted to more promising companies funded by more established seed investors.

Please note the use of the following additional definitions:

i. a “Professional Angel” is an individual or group of individuals who regularly invest their own funds in early stage companies.

ii. a “Seed Fund” is a fund that primarily invests in the first round of professional financing of an early stage company.

iii. a “Venture Capital Fund” is a fund that invests in various stages of the growth of a private company.

Disclaimer

The preparation of the information contained herein involves assumptions, compilations and analysis, and there can be no assurance that the information provided herein is error-free. Neither Fenwick & West LLP nor any of its partners, associates, staff or agents shall have any liability for any information contained herein, including any errors or incompleteness. The contents of this report are not intended, and should not be considered, as legal advice or opinion.

Contact Information

For additional information about this report please contact Barry Kramer at 650-335-7278 | bkramer@fenwick.com or Steven Levine at 650-335-7847 | slevine@fenwick.com at Fenwick & West.

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Fenwick & West updates free online funding docs by Cromwell Schubarth Senior Technology Reporter- Silicon Valley Business Journal


Ted Wang of Fenwick & West is curator of the free open source legal documents it offers to startup entrepreneurs.

Fenwick & West this week updated the free online early stage funding documents it has posted to GitHub.

The Series Seed documents have been used many times since they were first posted in 2010, Fenwick lawyer Ted Wang said.

“The most valuable assets for early stage companies are time and money,” Wang said in a prepared statement. “Series Seed endeavors to save both for young companies.”

The new version uses GitHub to manage discussions and updates to the Series Seed documents.

GitHub is a popular site where engineers post software projects and highlight their work. Fenwick chose this as a natural location to offer documents for members of that community who are raising money for startups.

“One of our core beliefs at GitHub is to open source (almost) everything: the community benefits from having more resources available and the projects benefit from having the input of the greater community,” said Tom Preston-Werner, co-founder and CEO of GitHub, in a prepared statement.

The Series Seed documents can be found on GitHub by clicking here.

Read the blog describing the changes that have been made 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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Article from Fenwick and West Venture Capital Survey, by:

Barry Kramer
Michael Patrick

Background
We analyzed the terms of venture financings for 116 companies headquartered in Silicon Valley that reported raising
money in the fourth quarter of 2012.
Overview of Fenwick & West Results

  • Up rounds exceeded down rounds in 4Q12, 71% to 8%, with 21% of rounds flat.  This was an
  • improvement over 3Q12, when 61% of rounds were up, 17% were down and 22% flat, and was evidence
  • that those companies that are getting funded are receiving strong valuations.
  • The Fenwick & West Venture Capital Barometer™ showed an average price increase of 85% in 4Q12, a
  • slight increase from 78% in 3Q12.  Series B rounds continued to be the strongest rounds.
  • The median price increase of financings in 4Q12 was 41%, an increase over 23% in 3Q12.  There were four financings (three software, one hardware) that were up over 400% in 4Q12.
  • The results by industry are set forth below.  In general software, and to a lesser extent internet/ digital media, continued to be the strongest industries, with hardware solid and life science showing significant improvement, and cleantech lagging significantly.
  • The percentage of Series A rounds declined significantly, to 12% of all deals.
  • Further evidence of the strong valuation environment for those companies that are successful at raising
  • money is that the use of senior and multiple liquidation preferences have both declined significantly over the past year.

Overview of Other Industry Data

In 2012, we generally saw a weaker venture environment than 2011, especially during the last half of the year.
Venture investing and acquisitions of venture backed companies both declined compared to 2011, and while
IPOs and fundraising were both up, this was primarily a result of a strong first half of the year.  Some other
trends were:

  • Venture fundraising continues to trail venture investing, although the gap closed fairly significantly in
  • 2012.
  • The amount of money raised by venture funds continues to be concentrated in a relatively small number
  • of large funds.
  • Enterprise facing IT businesses appear to have attracted increased interest in 2012, while consumer
  • facing IT businesses (e.g., internet/digital media) appear to be a bit less attractive.
  • Cleantech and to a lesser extent life science continue to be weak, although they appear to be attracting
  • more corporate interest.trends in terms of venture financings in silicon valley—fourth quarter 2012 2
  • Accelerators and seed financings continue to be strong, but Series A (post seed) financings were often
    difficult to obtain.

Although venture capitalists believe that liquidity events will improve in 2013, they believe that
obtaining venture financing will be more difficult than in 2012, and that venture fundraising will
continue to be concentrated in fewer funds.

With Nasdaq up 16% in 2012 and continuing to increase in 2013, providing public companies more valuable
“currency” to make acquisitions, and with many corporations holding substantial cash reserves and public
company investors appearing to be more amenable to taking risk, there is good reason to believe that liquidity
options for venture backed companies will improve in 2013.

Venture Capital Investment.

Dow Jones VentureSource (“VentureSource”) reported that venture capitalists (including corporation
affiliated venture groups) invested $6.6 billion in 733 deals in the U.S. in 4Q12, a 4.6% decrease in dollars
and a 10.6% decrease in deals from the $6.9 billion invested in 820 deals in 3Q12 (as reported in October
2012).  For all of 2012 venture capitalists invested $29.7 billion in 3363 deals, a 9% decrease in dollars but
a 5% increase in deals compared to 2011, when venture capitalists invested $32.6 billion in 3209 deals (as
reported in January 2012).  In 4Q12 51% of U.S. venture investment went to companies based in California.
The PWC/NVCA MoneyTree™ Report based on data from Thomson Reuters (the “MoneyTree Report”)
reported similar results.  Venture investment in 4Q12 decreased 2% in dollars from 3Q12, with investment
of $6.4 billion in 968 deals compared to investment of $6.5 billion in 890 deals in 3Q12 (as reported in
October 2012).  For all of 2012 venture capitalists invested $26.5 billion in 3698 deals, a 7% decrease in
dollars from 2011, when $28.4 billion was invested in 3673 deals (as reported in January 2012).

The MoneyTree Report also reported that the strongest industry segment was software, where investment
increased by 10% in 2012 over 2011.  Life science was weak, with biotech investing down 15% and medical
device investing down 13%, and with life science first time financings at their lowest level since 1995.
Cleantech was down 28% and even internet investing was down 5% when compared to 2011, although
2012 was the second best year for internet investing since 2001.
Despite the weakness in life science generally, digital health investing is strong, with Rock Health reporting
a 45% increase from 2011 to 2012.

IPO Activity.

Dow Jones reported that 8 U.S. venture-backed companies went public in 4Q12 and raised $1.2 billion, a
decrease from the 10 IPOs in 3Q12, but an increase from the $0.8 billion raised in the 3Q12 IPOs.  In all of
2012, 50 U.S. venture-backed companies went public, a 10% increase from the 45 IPOs in 2011, thanks to a
strong first half of 2012.  The 2012 IPOs raised a total of $11.2 billion, the most since 2000, primarily due to
the $6.6 billion Facebook IPO, compared to $5.4 billion raised in 2011 IPOs.

Thomson/NVCA reported similar results for 4Q12 and 2012.  Five of the eight 4Q12 IPOs were in the IT
sector, and seven of the eight were based in the U.S., with the eighth from China.trends in terms of venture financings in silicon valley—fourth quarter 2012 3

Merger & Acquisition Activity.

Dow Jones reported that acquisitions (including buyouts) of U.S. venture-backed companies in 4Q12 totaled
$9.3 billion in 113 transactions, a 28% decline in dollars but a 14% increase in deals from the $13 billion
paid in 99 transactions in 3Q12 (as reported in October 2012).  For all of 2012 there were 433 acquisitions
for $40.3 billion, a 9% decrease in transactions and a 16% decrease in dollars from the 477 acquisitions for
$47.8 billion in 2011 (as reported in January 2012).

Thomson Reuters and the NVCA (“Thomson/NVCA”) reported 95 venture-backed acquisitions in 4Q12, a
1% decrease from the 96 reported in 3Q12, and 435 acquisitions in all of 2012, a 1% increase from the 429
reported in 2011 (as reported in January 2011).

Venture Capital Fundraising.

Dow Jones reported that 154 U.S. venture capital funds raised $20.3 billion in 2012, a 14% increase in funds
and a 25% increase in dollars from the 135 funds that raised $16.2 billion in 2011 (as reported in January
2012).  Eleven funds accounted for $11.3 billion of the $20.3 billion raised.  (Russ Garland, Venture Wire,
January 7, 2013)

Thomson/NVCA reported that 42 U.S. venture funds raised $3.3 billion in 4Q12, a 20% decrease in funds
and a 34% decrease in dollars from the 53 funds that raised $5.0 billion in 3Q12 (as reported in October
2012).  For all of 2012, 182 funds raised $20.6 billion, an 8% increase in funds and a 13% increase in
dollars from the 169 funds that raised $18.2 billion in 2011 (as reported in January 2012).
The number of members of the NVCA has declined from 470 in 2008 to 401 currently, a likely indication of
the shrinking number of venture firms.  (Russ Garland, VentureWire, January 28, 2013)

Corporate Investing.

As investments and fundraising by venture capitalists has had difficulties, corporate venture investing has
fared better.  According to the MoneyTree Report, the percentage of financings that included a corporate
investor increased to 15.2% in 2012, the third straight year of increase and the highest percentage since
the 2008 recession.

Notably, corporate investors tended to focus more on the industries that are currently least favored by
venture capitalists, participating in 20.5% of cleantech financings and 19.5% of biotech financings.
And corporate investors did not limit themselves to traditional venture investments.  For example, GE
(Healthymagination), Nike and Samsung have each announced the creation of, or other significant
involvement in, a start up accelerator, Rock Health has reported that Merck is a leading funder of digital
health startups and GlaxoSmithKline and Monsanto have each taken actions to increase their focus on
venture capital.

Angels and Accelerators.

There continues to be concern that the angel/accelerator environment has become frothy.  CB Insights
reported 1749 seed financing rounds in 2012, compared with just 472 in 2009, while Series A rounds grew
much more slowly, from 418 in 2009 to 692 in 2012, indicating that there will likely be a lot of seed funded trends in terms of venture financings in silicon valley—fourth quarter 2012 4 companies that won’t obtain Series A investment.  While this is not necessarily bad, as there is value to
making small bets on a lot of high risk opportunities, at some point the odds get too high.
Notably, Y Combinator announced in 4Q12 that the amount of money loaned to each of its companies
would be reduced from $150,000 to $80,000, and that the size of its class would also be reduced.  And
Polaris Venture Partners has indicated that it is significantly scaling back its “Dogpatch Labs” incubator.
However we do not see a trend yet here, as accelerators like TechStars and 500 Startups are not reducing
their size.  (Lizette Chapman, VentureWire, December 20, 2012).

Venture Capital Returns.

Cambridge Associates reported that the value of its venture capital index increased by 0.64% in 3Q12
(4Q12 information has not been publicly released) compared to a 6.17% increase for Nasdaq.  The venture
capital index substantially lagged Nasdaq for the 12-month period ended September 30, 2012, 7.69% to
29%, and for the ten-year period 6.07% to 10.27%.  The Cambridge Associates venture index is net of fees,
expenses and carried interest.  These type of results are, of course, a significant part of the reason why
venture fundraising has been difficult.

Venture Capital Sentiment.

The 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 3.63 on a 5 point
scale in 4Q12, a slight increase from the 3.53 reported for 3Q12.

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Silicon Valley Venture Survey – Second Quarter 2012

August 23, 2012

Background—We analyzed the terms of venture financings for 115 companies headquartered in Silicon Valley that raised money in the second quarter of 2012.

Overview of Fenwick & West Results

  • Up rounds exceeded down rounds in 2Q12, 74% to 11%, with 15% of rounds flat. This was better than 1Q12, when up rounds exceeded down rounds 65% to 22%, and the best quarter since 2007. Series B rounds were especially strong, although we note that the percentage of Series B financings in the survey has declined for three straight quarters, perhaps indicating that companies are having difficulty securing Series B funding, but those that do are being rewarded with substantial valuation increases. This was the twelfth quarter in a row in which up rounds exceeded down rounds.
  • The Fenwick & West Venture Capital Barometer™ showed an average price increase of 99% in 2Q12, an increase from 52% in 1Q12. This was the highest Barometer result since we began calculating the Barometer in 2004. That said, we note that there were two financings (one in the internet industry and one in the software industry) that were each up over 1000% (i.e. over 10x), and if they were excluded, the Barometer result would have been 70%. The median price increase in 2Q12 was 30%.
  • The results by industry are set forth below. In general, internet/digital media and software continued to be the strongest industries by far, with Barometer increases of 248% and 123% respectively (which would have been 176% and 86% respectively if the two aforementioned 10x deals were excluded). The median price increase for internet/digital media and software financings were 105% and 56%, respectively. Cleantech and life science trailed significantly.

Overview of Other Industry Data

    • Venture investment was up in the software and internet/digital media industries in 2Q12 versus 1Q12, while cleantech and life science lagged. However, overall venture funding in 2012 is modestly lagging 2011 to date.
    • M&A was up slightly in 2Q12 versus 1Q12, and 2012 is generally flat in dollars compared to 2011.
    • The number of IPOs was down in 2Q12 compared to 1Q12, but dollars raised were up, as the Facebook IPO dominated the quarter. 2012 is ahead of 2011 year to date.
    • Venture fundraising in dollars was up, but the number of funds raising money declined in 2Q12, compared to 1Q12. Fundraising in 2012 is ahead of 2011 in dollars.The venture environment continues to be a “tale of two cities” with software and internet/digital media thriving and life science and cleantech lagging. Additionally, we note that venture investment, M&A and IPOs have all returned to 2007 (pre financial industry meltdown) levels, but fundraising by venture capitalists continues to be significantly below those levels.

The effects of the increasing concentration of venture capital in fewer funds also bears watching. There are understandable reasons for this trend (capital moving to managers with the best results, early stage companies going global sooner and benefitting from venture capitalists with a more global reach) but this increased financial concentration could leave companies with fewer alternatives. However, the growth of super angels and micro VCs discussed below, and the commitment of some of the larger funds to continue making smaller investments, may offset this trend.

    • Venture Capital Investment.Dow Jones VentureSource (“VentureSource”) reported that U.S.-based companies raised $8.1 billion in 863 venture deals in 2Q12, a 31% increase in dollars and a 20% increase in deals compared to 1Q12, when $6.2 billion was raised in 717 deals (as reported in April 2012). However, investment in the first half of 2012 slightly lags the first half of 2011. Over half of all venture capital was invested in California in 2Q12, with 42% of the total in Northern California.

      Similarly, the PwC/NVCA MoneyTree™ Report based on data from Thomson Reuters (the “MoneyTree Report”) reported $7.0 billion of venture investments in 898 deals in 2Q12, a 21% increase in dollars and a 18% increase in deals from the $5.8 billion invested in 758 deals in 1Q12 (as reported in April 2012). The MoneyTree reported that the software and internet industries were especially strong, while life science was weak.

    • Merger and Acquisitions Activity.Dow Jones reported 110 acquisitions of venture-backed companies in 2Q12 for $13.6 billion, a 7% increase in transaction dollars, and a 12% increase in transactions, from the 98 acquisitions for $12.7 billion in 1Q12 (as reported in July 2012 – the initial April 2012 numbers were subsequently revised substantially and so are not being used). The largest acquisition in the quarter was Facebook’s acquisition of Instagram for $1 billion.

      Thomson Reuters and the NVCA (“Thomson/NVCA”) reported 102 transactions in 2Q12, a 19% increase from the 86 transactions reported in 1Q12 (as reported in April 2012). IT companies dominated, with 77 of the 102 deals.

    • IPO Activity.VentureSource reported 11 venture-backed IPOs raising $7.7 billion in 2Q12 ($6.8 billion from Facebook), compared to 20 IPOs raising $1.4 billion in 1Q12 (as reported in April 2012). 72% of the companies going public were based in Silicon Valley, as opposed to 35% in 1Q12.

      Similarly, Thomson/NVCA reported 11 IPOs raising $17.1 billion in 2Q12 ($15.8 billion from Facebook) compared to 19 IPOs raising $1.5 billion in 1Q12. (It appears that Thomson/NVCA includes shares sold by shareholders in the IPO amount, while VentureSource does not.) Nine of the eleven IPOs were IT companies and all were U.S. based.

    • Venture Capital Fundraising.Dow Jones reported that for the first half of 2012, 82 U.S. venture capital funds raised $13 billion, a 31% increase in dollars over the first half of 2011.

      Thomson/NVCA reported that 38 U.S. venture capital funds raised $5.9 billion in 2Q12, a 20% increase in dollar commitments and a 10% decrease in the number of funds compared to the $4.9 billion raised by 42 funds in 1Q12 (as reported in April 2012). The top 5 funds accounted for almost 80% of the total fundraising in the quarter. Mark Heesen, President of the NVCA, noted that this concentration of capital in fewer funds has narrowed the field of venture funds for both entrepreneurs seeking venture capital, and limited partners looking to invest in venture capital.

      Some traditional investors in venture capital are also indicating a reduction in commitment to the asset class when they cannot get into the best funds. For example, the Mercury News has reported that CalPERS will likely decrease its venture commitment from 6% of its private equity portfolio to 1%, due to poor returns on its investments. And the Kauffman Foundation has indicated similar plans (see “Kauffman Foundation Venture Capital Report” below).

      Venture fundraising by venture capital funds in 2Q12 was again less than the amount of venture capital invested in companies in the quarter.

      The SBA, after 8 years out of the market, has recently allocated $1 billion over the next five years to increase access to early stage venture capital – i.e. companies looking to raise $1‑4 million.  Early stage venture funds can borrow from the SBA an amount equal to what they can raise privately.

    • Secondary Trading.Secondary trading was estimated to be $10 billion in 2011.  The Venture Capital Journal reported that 80% of such trading occurred in negotiated one-on-one transactions (as opposed to on secondary exchanges), and that half of late stage primary financings included a secondary component, triple the amount from five years ago.

      That said, secondary exchanges had a good year in 2011, with Second Market reporting $558 million in trades and SharesPost reporting $625 million.  However, with the IPOs of Zynga, LinkedIn, GroupOn and now Facebook, it seems doubtful that secondary exchange trading of other venture-backed companies will be able to take up the slack in 2012.  Some exchanges are working to address this by proactively working with late stage companies to facilitate liquidity arrangements for the companies’ employees and early stage investors with the exchange’s investor base.

      In general, it seems that late stage companies are becoming more comfortable with secondary sales, and are leaning towards negotiated sales where information provided to investors can remain confidential, the purchasers are known and the transaction can be combined with a primary sale, if desired.

    • Seed Investment.Although concern continues that the valuations of seed stage companies are getting frothy, the expansion of the accelerator/incubator model continues.  Accelerators focused on Swiss, Danish, Israeli and German entrepreneurs have each been started in the past year, or are in the process of being started, in Silicon Valley.  And General Catalyst Partners has joined Yuri Milner, SV Angel and Andreesen Horowitz in the Start Fund which commits to loan $150,000 to each Y Combinator company (foregoing information from Venture Wire).

      Additionally, the two most active venture capitalists in 2Q12 were 500 Startups and First Round Capital (tied for second with NEA), both of whom are seed investors.  (VentureSource)

      And perhaps most interestingly, a significant number of super angels/micro VCs are seeking to raise larger funds or taking on LPs, which if successful could act as a counterweight to the decreasing number of venture capital funds (Venture Capital Journal).

    • The Kauffman Foundation Venture Capital Report.In May 2012 the respected Kauffman Foundation issued a report that concluded, based on their 20 year history of venture investing experience in nearly 100 funds, that “the Limited Partner investment model is broken.”  The report based its conclusion on, among other things, poor returns from most venture funds, incentives for managers to create larger funds to increase management fees, the increasing length of life of venture funds and the relatively small amounts invested personally by many fund managers.  It recommended that limited partners require a better alignment of interests between LPs and GPs, more transparency and better governance provisions.

      The Kauffman Foundation has indicated that it intends to focus its future venture investment in funds of less than $400 million, with historical performance above what could be achieved in equivalent public market funds (which it believes are better performance measures than IRR, top quartile, vintage year and gross return measurements), and in which GPs commit at least 5% of the capital.  They also plan to increase their direct investing and to move a portion of their capital allocated to venture capital into the public markets, as they do not believe that there are enough strong venture capitalists to absorb the available capital.

      Other suggestions from the Kauffman report include (i) that management fees should be based on a budget, not a percentage of funds under management, (ii) that investors should receive their funds back plus a preferred return before venture capitalists share in profits, and (iii) that there should be more transparency in how the venture capital management company is structured to understand how the individual venture capitalists are incented.

    • Venture Capital Return.Cambridge Associates reported that the value of its venture capital index increased by 4.7% in 1Q12 (2Q12 information has not been publicly released) compared to 18.7% for Nasdaq, although for the 12 month period ended March 31, 2012, the venture capital index was up 12.8%, which slightly beat Nasdaq which was up 11.2%.  The Cambridge venture index is net of fees, expenses and carried interest.

      For the ten years ended March 31, 2012 the Cambridge venture capital index was up 4.4% per year, while Nasdaq was up 5.30%.

    • Venture Capital 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 3.47 on a 5-point scale in 2Q12, a decrease from the 3.79 reported in 1Q12.  Reasons given for the decrease in confidence were primarily macro oriented (global economy, life science regulation), as there was general agreement that the entrepreneurial environment viewed in isolation was strong.

      The Deloitte/NVCA Global Confidence Survey reported that global venture capitalists were most confident about the prospects of the cloud computing, software, new media, healthcare IT and consumer businesses (in order of higher confidence to lower) and were least confident about the medical device, financial services, biopharmaceuticals, cleantech, telecom and semiconductor industries (in order of higher confidence to lower).

  • Nasdaq.
    Nasdaq decreased 4.9% in 2Q12, but has increased 2.8% in 3Q12 through August 10, 2012.

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