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Archive for the ‘Michael Patrick’ Category

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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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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