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Fenwick & West – Silicon Valley Venture Survey – Second Quarter 2012 by Barry Kramer and Michael Patrick

Posted in Fenwick & West, Silicon Valley, Venture Capital on August 24, 2012| Leave a Comment »

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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Biotech Start-Ups See Benefits from Changing Structure, Lawyer Says – Venture Capital Dispatch

Posted in Biotech, Inetellectual Property, Life Science, Venture Capital, Venture Capital Dispatch on August 11, 2012| Leave a Comment »

Biotech Start-Ups See Benefits from Changing Structure, Lawyer Says

By Brian Gormley

Albert L. Sokol has been pondering the problems facing biotechnology start-ups and has come to a conclusion: many could improve their outlook by shifting their structures.

Sokol, a partner with the law firm Edwards Wildman Palmer, recently has helped two venture-backed biotechs convert from C corporations to limited liability companies, a change that he and some venture capitalists say could help many young drug-makers.

Because not enough of these companies have been acquired or gone public in the past few years, venture firms have been investing less in biotech. U.S. investment fell 45% to just over $1 billion in the first half of this year compared to the same period of 2011, according to VentureSource, which is owned by Dow Jones & Co., publisher of Venture Capital Dispatch.

The problem for many biotechs is that they try to sell themselves whole in one large transaction, according to Sokol. While that’s possible, it’s become more difficult given that the pool of acquirers has become shallower after a recent series of pharmaceutical-industry mergers. Many biotechs would be better off selling individual drugs from their pipelines in a series of smaller deals that, in the aggregate, would add up to more than they would have gotten if they had sold their business all at once, according to Sokol.

When corporations buy a biotech whole, they typically make offers that primarily reflect the value of the drugs that interest them. Start-ups that agree to these deals get little or nothing for their other products. By selling drugs piecemeal, a start-up can wring more value from each one, and buyers don’t have to spend time evaluating therapies that don’t interest them, according to Sokol. The biotech can then pass the gains from each sale on to venture investors, giving these firms a steady stream of income.

The approach is well-suited to biotechs with technology to continually produce new drugs, Sokol said. That would describe Forma Therapeutics and Viamet Pharmaceuticals, the two companies he has helped convert into LLCs, a more tax-efficient structure for passing on profits of asset sales to investors than a C corp.

There’s another reason to consider reorganizing as an LLC: employees are often better off if the company is sold whole, according to Sokol.

“Don’t think just about making life better for your investors,” Sokol said. “It’s all about optimizing it for all your constituencies.”

Employees in a C corp. usually receive stock options instead of shares. This way, they don’t have to pay for the shares and be taxed on them right way. But most people wait too long to exercise their options, Sokol said. As a result, they pay the short-term capital-gains tax rate, which is roughly double that of the long-term rate, when the company is sold. This isn’t a problem in an LLC, because employees are granted shares instead of options.

Employees of an LLC receive profits-interest shares, which aren’t taxed when they’re issued. Here’s the reason: if a start-up is worth $20 million on the day an employee receives profits-interest shares, and the company is sold that same day, the new worker would get nothing until his more senior colleagues got at least $20 million. If the company is sold five years later, when the business is worth more, that employee would pay the long-term capital-gains tax rate on the gains he makes from the sale of the profits-interest shares.

During his five-year employment, he has every incentive to help increase the company’s value. Otherwise, he’ll get nothing for his profits-interest shares.

“If you have a group of employees you’re trying to incentivize, that’s pretty cool,” Sokol said.

Write to Brian Gormley at brian.gormley@dowjones.com

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$10M Would Be Seventh Heaven for China’s AngelVest – Venture Capital Dispatch

Posted in China, Entrepreneurship, Inetellectual Property, Technology Incubators, Venture Capital, Venture Capital Dispatch on August 9, 2012| Leave a Comment »

ugust 9, 2012, 9:52 AM

$10M Would Be Seventh Heaven for China’s AngelVest

By Sonja Cheung

Shanghai-based AngelVest is targeting up to $10 million for its inaugural fund that will invest in China-based start ups, said co-founder David Chen.

Having “literally” just completed the legal documents for AngelVest Fund LP, the firm expects to close the fund in the next 12 to 18 months, with commitments largely from family offices based in Hong Kong, Singapore and the U.S., he said.

Read the full story here.

Traditionally, AngelVest members have clubbed together to invest in portfolio companies that include mobile business SmarTots and foreign language website iTalki.com. The latter recently closed a second round of angel investment that was partly backed by AngelVest, said Kevin Chen, co-founder of the Shanghai-based business. It will likely tap the venture market for a $2 million to $3 million Series A round in the first half of 2013, he added, declining to disclose the size of the recent angel round.

AngelVest invests $250,000 per company, and has no immediate intentions of increasing that amount and graduating to venture capital-size rounds, said David Chen.  “We’re sticking to our guns, if anything, we’d look to raise multiple funds in different cities,” he added, noting that AngelVest is considering setting up a group for angel investors based around the south of China in Guangzhou and Shenzhen, as well as Hong Kong.

Write to Sonja Cheung at Sonja.Cheung@dowjones.com. Follow her on Twitter at @SonjaCheung

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As Knight Capital Gains a Lifeline, It Loses Market-Making Duties

Posted in Board Of Intellectual Capital, Business models, Distressed IP, Economy, Intellectual capital, International Finance, internet, Internet Security, Investments, Market research, Strategy, Technology, Venture Capital, tagged , , , , , , , , , , , , , on August 6, 2012| Leave a Comment »

Article from NYTimes.

The Knight Capital Group confirmed on Monday that it had struck a $400 million rescue deal with a group of investors, staving off collapse after a recent trading mishap, even as the New York Stock Exchange temporarily revoked the firm’s market-making responsibilities.

The rescue package, which was arranged by the Jefferies Group, includes investments from TD Ameritrade and the Blackstone Group. Getco and Stifel, Nicolaus & Company were also involved.

“We are grateful for the support of these leading Wall Street firms that came together to invest in Knight,” Tom Joyce, the firm’s chairman and chief executive, said in a statement. “The array of participants in this capital infusion underscores Knight’s critical role in the capital markets.”

In a regulatory filing, Knight Capital said the investors agreed to purchase $400 million of the brokerage firm’s preferred stock. Under the terms of the deal, Knight will also expand its board by adding three new members.

The deal could provide the investors with more than 260 million shares of the firm, affording the investors the right to buy the shares at $1.50 a piece, according to the statement. Last week, before the trading blunder, the firm’s shares closed over $10.

The rescue deal will hugely dilute existing shareholders of the company. In mid-morning trading, shares of Knight Capital were down 24 percent.

The lifeline was assembled in the wake of Knight Capital’s disclosure of a $440 million trading loss. The loss stemmed from a technology error that occurred on Wednesday when the firm unveiled new trading software, a glitch that generated erroneous orders to buy shares of major stocks. The orders affected the shares of 148 companies, including Ford Motor, RadioShack and American Airlines, sending the markets into upheaval.

Knight Capital said it reached the deal on Sunday, and it expected to close the transaction on Monday. It was a rapid a recovery for a firm that just days ago was facing collapse.

Still, the firm faces significant challenges. The New York Stock Exchange said on Monday it “temporarily” reassigned the firm’s market-making responsibilities for more than 600 securities to Getco, the high-speed trading firm that also invested in Knight. Market makers buy and sell securities on behalf of clients.

The move, the exchange said in a statement on Monday, was a stop-gap measure needed until the investor deal was final. Once the recapitalization plan is complete, Knight will resume its duties.

“We believe this interim transition is in the best interests of investors, our listed issuers, market stability and efficiency, as well as Knight, as the firm finalizes its equity financing transaction,” Larry Leibowitz, chief operating officer of NYSE Euronext, said in the statement.

Knight Capital also faces heavy regulatory scrutiny. The Securities and Exchange Commission is examining potential legal violations as it pieces together the firm’s missteps.

The problems for Knight Capital began at the start of trading on Wednesday. The firm tweaked its computer coding to push itself onto a new trading platform that the New York Stock Exchange opened that day. Under this program, trades from retail investors shift to a special platform where firms like Knight compete to offer them the best price.

But when Knight’s new system went live, the firm “experienced a human error and/or a technology malfunction related to its installation of trading software,” the firm explained in the filing on Monday.

Chaos ensued. The error caused Knight to place unauthorized offers to buy and sell shares of big American companies, driving up the volume of trading and causing a stir among traders and exchanges.

Knight had to sell the stocks that it accidentally bought, prompting a $440 million loss. The loss drained Knight’s capital cushion and caused “liquidity pressures,” the firm said in the filing.

“In view of the impact to the company’s capital base and the resultant loss of customer and counterparty confidence, there is substantial doubt about the company’s ability to continue as a going concern,” the filing said.

Knight and its chief executive, Thomas M. Joyce, began contacting potential suitors for parts of the business, and the firm consulted restructuring lawyers on a potential Chapter 11 filing, according to the people with direct knowledge of the matter.

But events soon turned in the firm’s favor.

The firm secured emergency short-term financing that allowed it to operate on Friday, and it used Goldman Sachs to buy at a discount the shares Knight had erroneously accumulated.

Some of the firm’s biggest customers, including TD Ameritrade and Scottrade, said that they had resumed doing business with Knight by Friday afternoon.

The firm capped its efforts to stay afloat on Sunday with the rescue deal. Knight expects to finalize the agreement on Monday morning and detail the financing terms in a regulatory filing.

“Knight’s financial position and capital base have been restored to a level that more than offsets the loss incurred last week,” Mr. Joyce said in a statement. “We thank our clients, employees and partners for their steadfastness during a brief yet difficult period and we are getting back to business as usual.”

Read more here.

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DOE funds 19 next-gen battery projects with $43M

Posted in Board Of Intellectual Capital, Business models, cleantech, Economy, Entrepreneurship, Gerbsman Partners, Intellectual capital, Investments, Market research, Startups, Strategy, Technology, Venture Capital, tagged , , , , , , , , , , , , , , on August 3, 2012| Leave a Comment »

Article from GigaOm.

The Department of Energy’s program that gives grants to early-stage energy projects — called ARPA-E — has allocated another $43 million for 19 battery projects, including grants for futuristic batteries made of new chemical mixes, using brand new architectures and utilizing nanotechnology. The ARPA-E program has been aggressively funding next-generation battery technologies over the years, and though these are small grants, the amount of innovation happening is substantial.

The funds go to projects that are very early stage, and are supposed to help bring disruptive R&D closer to commercialization. While Japanese and Korean conglomerates dominate the industry of producing small format lithium ion batteries for laptops and cell phones, these next-gen batteries are mostly targeted for electric cars and the power grid. Some of these projects also aren’t strictly traditional batteries, and a couple are flow batteries, which are large tanks of chemicals that flow into a containerized system and provide energy storage for the power grid (see Primus Power’s flow battery pictured).

Notable winners of the funds include big companies like Ford, GE, and Eaton, small startups like Khosla Ventures-backed Pellion, and projects out of the labs of Oak Ridge National Laboratory, Battelle Memorial Institute, and Washington University in St. Louis.

Here’s some of the winners (for the full list of 19 go here):

  • Ford: $3.13 million for a very precise battery testing device that can improve forecasting of battery-life.
  • GE Global Research: $3.13 million for sensors thin-film sensors that can detect and monitor temperature and surface pressure for each cell within a battery pack.
  • Eaton: $2.50 million for a system that optimizes the power and operation of hybrid electric vehicles.
  • Pellion Technologies: $2.50 million for the startup’s long range battery for electric vehicles.
  • Sila Nanotechnologies: $1.73 million for the startup’s lithium ion electric car battery that it says has double the capacity of current lithium ion batteries.
  • Xilectric: $1.73 million to “reinvent Thomas Edison’s battery chemistries for today’s electric vehicles.”
  • Energy Storage Systems: $1.73 million for a flow battery for the grid, with an electrolyte made of low cost iron, and using a next-gen cell design.
  • Battelle Memorial Institute: $600K for a sensor to monitor the internal environment of a lithium-ion battery in real-time.

Read more here.

 

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