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.