Venture Financing Forecast for 2013: Partly Cloudy With Lower Chance of Success -Venture Capital Dispatch

December 19, 2012 by Steven R. Gerbsman

Venture Financing Forecast for 2013: Partly Cloudy With Lower Chance of Success

By Russ Garland

Concerns that Series A rounds will be hard to come by in 2013 are widespread in the venture business, according to a survey being released today.

Forty-five percent of venture capitalists think this will be the most difficult financing to obtain, according to a survey of venture capitalists and startup chief executives by Dow Jones VentureSource and the National Venture Capital Association. That reflects an ongoing debate in the industry about whether seed-stage investors have financed too many consumer Internet startups that will now have trouble tapping the venture capital they need to grow.

Only 13% of the VC respondents said seed/angel financing would be the hardest to get in 2013 while 28% thought it would be Series B financing. The survey, conducted from Nov. 26 to Dec. 7, collected responses from more than 600 venture investors and CEOs of venture-backed startups. Responses were equally divided between the two groups.

A plurality of CEOs-42%–thought it would be more difficult to raise follow-on financing in 2013 versus this year; 36% said it would be the same difficulty and 22% said it would be less difficult.

Nonetheless, 67% of the CEOs said their company will raise additional capital in 2013. And 78% of them thought their company’s valuation would increase. But VCs were less sanguine–38% said valuations in their portfolio would decrease in 2013 compared with 2012.

VCs and CEOs were also of different minds when it came to forecasting the amount of U.S. venture investment next year. Venture capitalists were pessimistic, with 47% saying it would decrease, while 30% of CEOs said it would decrease.

VC attitudes are probably shaped by the frosty fundraising landscape. Of the respondents, 44% said venture capital fundraising would contract in 2013 with less money raised by fewer funds. Another 42% said it would concentrate with more money raised by fewer funds.

“Overall quality of companies is increasing; VC will continue to contract but overall achieve better quality,” said one of the respondents, Derek Small, CEO and president of drug developer Naurex, which this week announced it had raised $38 million in Series B financing.

VCs were upbeat about fund performance, with half of them expecting venture capital returns to improve in 2013. Most VCs predicted that the IPO market would be at least as good as this year, with 40% saying there would be more IPOs than in 2012 and 52% saying the quality would be higher.

Sandy Miller of Institutional Venture Partners said, “2013 should see a sustained good IPO environment rather than the starts and stops of recent years. All the ingredients are in place.”

Such optimism about the IPO market was another point of disagreement between VCs and CEOs, however, as just 29% of CEOs expect the number of IPOs to increase and 37% say the quality will be higher. The two groups agreed, however, that there would be more acquisitions next year of venture-backed companies, with 62% of each group predicting an increase.

Venture investors expect a pickup in business IT and health-care IT investing in 2013, with 61% and 57% seeing increases in those sectors, respectively. Interest in consumer IT has ebbed, with 35% of VCs forecasting an investment increase and 40% foreseeing a decline.

“The B2B tech private company valuation bubble will grow and then pop in October,” predicted Scott Maxwell of OpenView Venture Partners.

VentureSource is a research unit of VentureWire publisher Dow Jones & Co.

Write to Russ Garland at russell.garland@dowjones.com. Follow him on Twitter at @RussGarland

Posted in Inetellectual Property, Investments, Technology, Venture Capital, Venture Capital Dispatch, Venture Wire | Leave a Comment »

Bidding Process – Procedures for the Sale of Coherex Medical FlatStent Assets & Intellectual Property

December 16, 2012 by Steven R. Gerbsman

Bidding Process – Procedures for the Sale of Coherex Medical FlatStent Assets & Intellectual Property

Further to Gerbsman Partners e-mail of November 28, 2012 regarding the sale of Coherex Medical FlatStent Assets and Intellectual Property, I attach the draft legal documents that we will be requesting of bidders for certain assets of Coherex Medical, Inc. All parties bidding on the assets are encouraged, to the greatest extent possible, to conform the terms of their bids to the terms and form of the attached agreements. The FlatStent Assets and Intellectual Property of Coherex Medical, Inc.. will be sold on an “as is, where is” basis. I would also encourage all interested parties to have their counsel speak with Christopher Schoff, Esq., counsel to Coherex Medical, Inc.

For additional information please contact Christopher Shoff, Esq., of Cooley Godward counsel to Coherex Medical, Inc. He can be reached at 310 883 6415 and/or at cshoff@cooley.com

Following an initial round of due diligence, interested parties will be invited to participate with a sealed bid, for the acquisition of the FlatStent Assets and Intellectual Property. Sealed bids must be submitted so that the bid is actually received by Gerbsman Partners no later than January 4, 2013 by 3:00 p.m. Pacific Standard Time (the “Bid Deadline”) at COHEREX MEDICAL’ office, located at 125 Constitution Drive, Menlo Park, CA 94025. Please also email steve@gerbsmanpartners.com with any bid.

For your convenience, I have restated the description of the Updated Bidding Process.

The key dates and terms include:

The Bidding Process for Interested Buyers

Interested and qualified parties will be expected to sign a nondisclosure agreement (attached hereto as Exhibit A) to have access to key members of the management and intellectual capital teams and the due diligence “war room” documentation (the “Due Diligence Access”). Each interested party, as a consequence of the Due Diligence Access granted to it, shall be deemed to acknowledge and represent (i) that it is bound by the bidding procedures described herein; (ii) that it has an opportunity to inspect and examine the COHEREX MEDICAL Assets and to review all pertinent documents and information with respect thereto; (iii) that it is not relying upon any written or oral statements, representations, or warranties of COHEREX MEDICAL, Inc., Gerbsman Partners, or their respective staff, agents, or attorneys; and (iv) all such documents and reports have been provided solely for the convenience of the interested party, and neither COHEREX MEDICAL nor Gerbsman Partners (or their respective, staff, agents, or attorneys) makes any representations as to the accuracy or completeness of the same.

Following an initial round of due diligence, interested parties will be invited to participate with a sealed bid, for the acquisition of the COHEREX MEDICAL Assets. Sealed bids must be submitted so that the bid is actually received by Gerbsman Partners no later than January 4, 2013 at 3:00 p.m. Pacific Standard Time (the “Bid Deadline”) at COHEREX MEDICAL’ office, located at 125 Constitution Drive, Menlo Park, CA 94025. Please also email steve@gerbsmanpartners.com with any bid.

Bids should identify those assets being tendered for in a specific and identifiable way. The attached COHEREX MEDICAL fixed asset list may not be complete and Bidders interested in the COHEREX MEDICAL Assets must submit a separate bid for such assets. Be specific as to the assets desired.

Any person or other entity making a bid must be prepared to provide independent confirmation that they possess the financial resources to complete the purchase where applicable. All bids must be accompanied by a refundable deposit check in the amount of $200,000 (payable to COHEREX MEDICAL, Inc.). The winning bidder will be notified within 3 business days after the Bid Deadline. Unsuccessful bidders will have their deposit returned to them. COHEREX MEDICAL reserves the right to, in its sole discretion, accept or reject any bid, or withdraw any or all assets from sale.

COHEREX MEDICAL will require the successful bidder to close within 7 business days. Any or all of the assets of COHEREX MEDICAL will be sold on an “as is, where is” basis, with no representation or warranties whatsoever.

All sales, transfer, and recording taxes, stamp taxes, or similar taxes, if any, relating to the sale of the COHEREX MEDICAL Assets shall be the sole responsibility of the successful bidder and shall be paid to COHEREX MEDICAL at the closing of each transaction.

For additional information, please see below and/or contact:

Steven R. Gerbsman
(415) 456-0628
steve@gerbsmanpartners.com

Kenneth Hardesty
(408) 591-7528
ken@gerbsmanpartners.com

Philip Taub
(917) 650-5958
phil@gerbsmanpartners.com

Posted in "Date Certain M&A Process", Coherex Medical, Medical Device | Leave a Comment »

Blog of Corporate Transformation MAXIMIZING CORPORATE SUCCESS AND SHAREHOLDER RETURN AT STRATEGIC INFLECTION POINT

December 14, 2012 by Steven R. Gerbsman

Transformational Leadership for Incoming Leaders: A Template for the First Six Months

by Beatriz Infante Published December 10, 2012

Leaders who have been recruited to take over a company or organization in order to lead a transformation and turnaround must address all of the items laid out in the section on Transforming the Business – A Three-Step Process for Business Transformation, including completing a Transformational Goal, Transformational Arc, and Twelve-Month Goals. In addition, they will have to deal with a host of immediate personnel priorities.

You will have no more than two to three months to demonstrate to your management and peers that you were the right person for the job, and that you can create the positive cycle of change that leads to corporate renewal or transformation. That doesn’t mean the transformation is complete – that may take twelve to twenty-four months or longer – but the actions you take in the first 90 days will determine the ultimate success or failure of your corporate transformation effort. This is why the First Six Months Plan provides a proven template and timeline for all the things that need to be accomplished in that timeframe. This chapter is a step-by-step guide to the leadership skills you will need to succeed during this demanding challenge as you implement your First Six Months Plan and beyond.

The First Six Months Plan

The First Six Months Plan provides a highly structured, urgency-based, top-down approach that has been proven to work in many situations requiring rapid turnaround and crisis response. This methodology is appropriate to a “hit the ground running, no time to waste” approach; however, once a level of stability has been reached, the First Six Months Plan format and timeframe flows seamlessly into the 12-Month Goal format. This drives lower level goals in a cascading fashion from the Transformational Goal, and directly ties team MBO’s to corporate goals and the desired results in the Transformational Arc.

The First Six Months Plan is a one-page summary of the most relevant actions you must accomplish in the six-month timeframe and should serve as a measure of your progress and a communication mechanism with your boss or your board. By its very nature, the Six Months Plan will be somewhat more fluid in the latter months – there will be many unknowns and inevitably surprises. Nevertheless, best practices in corporate turnarounds dictate a rhythm and timing to sets of actions that are universal across industries and situations. While the actions outlined below may appear to be extremely rapid, in most circumstances the timeframes below are completely achievable, and in many cases dictated by the financial constraints of the business.

Immediate Strategic Priorities

In any new transformational or renewal role, regardless of industry or situation, there are certain invariants that must be immediately addressed.

Stabilize and Secure Sources of Cash. In any transformation, it is of primary importance to understand how much cash runway you have available to effect the transformation, and if the company has a cash cow business, how quickly it is likely to decline. Debt may need to be restructured, vendor contracts re-negotiated or deferred payment arrangements made. But, if the company is in a negative cash flow situation, especially if total cash is also low, all necessary steps should be taken to reduce cash outflow and reduce overall expense burn.

Establish Trust with Customers. Particularly in situations where there have been visible misses in terms of forecast revenue, or where there have been customer-impacting issues such as product or support problems, customers may have concerns about the future of the company, and a management change at the top may increase that concern. Therefore strong customer outreach is essential in order to reassure and stabilize, as well as open channels of communication and receive feedback on customer needs and requirements.

Analyze Prior Financial Performance and Issues. Having a qualified CFO as trusted partner is essential to a thorough analysis of past financial statements. The cleanest situation will be a public company with clean financials. However, even in this situation a thorough analysis should be undertaken. Companies that have had revenue reporting issues and private companies must receive the highest level of scrutiny, and if a qualified CFO is not in place, contract resources must be utilized. Smaller private companies in particular will need a complete examination of past revenue recognition practices, reconciliation with contract T&C’s, verification of receivables and payables, as well as validation of bookings and commission payments.

Model Financial Plan, Downside Plan, and Worst-case Plan. While the company likely has a current operating plan, an immediate responsibility is to examine the plan and make a business judgment about its accuracy. Based on this risk assessment, a Downside Plan should be modeled which reflects a significantly reduced risk profile. Finally, Worst-case plan should be developed which models situations of increased risk such as a more rapidly declining mainstream business than historical precedent would indicate, or a greater falloff in planned revenue.

Establish Forward-going Spend Levels and Take Immediate Action. Based on the sensitivity analysis above, it will likely be necessary to take immediate cost containment actions to ensure the financial health of the business.

Examine all Functional Areas. Since the activities cited above will be time-consuming, triage should be performed on the functional areas that appear to need the most focus. For example, support margins may have been significantly decreasing, so the support organization may need to be examined first, or product issues may be at the forefront, in which case an analysis of the product organization may be needed. Often the initial flash point may prove to lead to a different root cause; for example, support margins may be increasing because of decreased quality in the product. The First Six Months Plan should encompass deep operational reviews of all functional areas, but the timing should be adjusted so as to address the most critical areas first.

Posted in Beatriz Infante, Blog of Corporate Transformation, Corporate Renewal, Leadership, Management | Leave a Comment »

Venture capital for startups hard to get

December 12, 2012 by Steven R. Gerbsman

Article from SFGate.

It’s suddenly a lot harder for venture capitalists and startups to raise funds, as investors fed up with low returns turn their backs on the sector.

Most industry observers agree that lots of young firms will simply not be able to raise their next round of funding, commencing a period of belt tightening, consolidation and closures. At a minimum, it seems to mark the beginning of a more level-headed investment climate in Silicon Valley, after years of insatiable lust for all things mobile and social.

But if the drop-off is too sudden and steep, this new austerity could spill over into an economy highly dependent on the tech sector. Indeed, as The Chronicle reported last week, the industry has an enormous impact, with each tech job creating 4.3 indirect jobs in the community, according to a Bay Area Council Economic Institute report.

The investors and venture capitalists I spoke to insisted that we’re not on the verge of anything like the dot-com meltdown, characterizing the shift as a minor and healthy correction, or a “rationalization.” One suggested it was little more than the usual process of separating good and bad ideas in the marketplace.

But the numbers suggest something new is afoot. In the third quarter, the amount that U.S. companies raised in venture capital dropped 32 percent from the prior year, according to Dow Jones VentureSource. Venture capital funds themselves raised 17 percent fewer dollars from the second to third quarter, even as the number of funds grew, according to a joint report from Thomson Reuters and the National Venture Capital Association.

Economic uncertainty

Some partially blame the economic uncertainty surrounding the outcome of the election and the “fiscal cliff.” But the main problem seems to be that many of the “limited partners” that fund venture capital are pulling back after years of frustration.

Ever since a brief period in the late 1990s when venture capital burned bright, the industry has been delivering consistently weak returns on the whole.

In fact, despite requiring greater risks and larger capital outlays, venture capital has been underperforming the stock market over the past decade, according to a report this year by the Ewing Marion Kauffman Foundation.

Joe Dear, chief investment officer for CalPERS, told Reuters this summer that venture capital “has been the most disappointing asset class over the past 10 years as far as returns.” The huge pension fund for California’s public employees didn’t return repeated calls from The Chronicle.

Investment horizons have steadily spread out, from five to 10 to sometimes 15 years, as exit opportunities like acquisitions and initial public offerings fail to materialize. This has sometimes forced investors to put in more money to protect their initial funds.

‘Pretty grumpy’

“The industry definitely, for the last decade, has been a tough place to be,” said Ray Rothrock of Palo Alto venture capital firm Venrock. “We’re all pretty grumpy right now.”

Some of this is due to macroeconomic conditions outside the control of venture capitalists, notably the housing and banking crises. But at least some of it has to do with poor picks and herd mentality, funding companies with few real prospects and driving up the entry price for legitimately promising companies beyond what they could pay off.

“The market overfunded the number of companies in the system,” said Hans Swildens, founder of Industry Ventures in San Francisco. “There’s a glut.”

Even the grand promise of Web 2.0 companies that lured so much recent money hasn’t generated the hoped-for returns. The ones that managed to go public were often disappointments, including Facebook, Zynga and Groupon, in some cases leaving late-stage investors underwater on their holdings.

That was a final straw for some.

Last week, Forbes dug up figures from CB Insights that highlighted a wide and growing gap between the number of companies that raised initial funding and companies securing the follow-on investments, known as a Series A, generally necessary to keep going. This year, there have been 1,747 seed or angel rounds but only 688 Series A deals, underscoring the coming crunch.

Bad businesses

Based on as scientific a survey as the PR pitches in my inbox, there’s a tremendous number of silly, redundant and poorly executed companies out there that don’t warrant additional funding. The real problem isn’t that many of these companies won’t raise more money; it’s that they raised money in the first place.

For the venture capital industry to get back on track, it needs to embrace a renewed sense of discipline – on company picks, deal terms and total spending.

But hope springs eternal in Silicon Valley.

Rothrock stresses that the industry’s trend-line averages mask very strong results and ongoing investment at top firms, as well as growing venture capital activity among corporations like Google. Companies are just being more selective and looking beyond consumer Internet opportunities.

“We’re steady as she goes in terms of funding enterprise,” he said.

Secondary opportunity

Swildens oversees a secondary fund that buys shares from limited partners and venture firms looking to liquidate part of their holdings. He sees this period as a ripe opportunity for bold investors to get into promising companies at suddenly reasonable rates.

“Ours is one of the few firms aggressively putting money into these funds,” he said.

Mark Heesen, president of National Venture Capital Association, is similarly optimistic. He says the industry could be primed for a strong comeback in 2013, as long as the broader economy strengthens.

Above all, what the industry needs are some wins – acquisitions or initial public offerings that put investors clearly in the black and start to restore some lost confidence.

“If we see these exit markets start to generate good returns, I think you’ll see limited partners look at this asset class again,” he said.

James Temple is a San Francisco Chronicle columnist. E-mail: jtemple@sfchronicle.com Twitter: @jtemple

Chinese giant Wanxiang wins bid for bankrupt A123 and its battery tech

December 10, 2012 by Steven R. Gerbsman

Article from GigaOm.

Chinese auto tech behemoth Wanxiang has won the bidding process in an auction to buy the assets of bankrupt battery maker A123 Systems. On Sunday the companies announced that Wanxiang plans to acquire most of the assets of A123 for $256.6 million. It’s news that could be a bit controversial, given A123 received a $132 million grant from the U.S. government, and could now be owned by a Chinese company.

The winning bid beat out Johnson Control’s bid to acquire A123′s automotive division. Johnson Controls previously had offered to buy the automotive division and two factories for $125 million.

One of the reasons Wanxiang’s offer to buy up A123 had been controversial was because A123 had some U.S. military contracts, which critics didn’t want to see in the hands of a Chinese company. But A123 decided to sell off its government business, including all its U.S. military contracts, to Illinois-based company Navitas Systems, for $2.25 million. Wanxiang acquired the rest of the assets including the grid storage business.

We’ll see if that move silences politician critics like U.S. Sens. John Thune (R-S.D.) and Charles E. Grassley (R-Iowa). The deal still has to be approved by the bankruptcy court as well as the Committee for Foreign Investment in the United States (CIFIUS).

If approved, the future of A123 System’s lithium ion battery tech will fittingly be owned by a Chinese auto giant, as China is increasingly becoming one of the most important markets for electric vehicles. Money from Chinese investors, conglomerates, cities and the government, continues to drive a significant amount of the future of next-generation electric car technology.

The deal also provides a future for A123′s technology, which had a promising beginning, but had suffered a series of setbacks in 2012. Venture-backed A123 held the largest IPO in 2009, raising some $371 million, and was trading at over $20 per share when it started trading. A123 also raised more than $350 million from private investors when it was still a startup.

Yet in recent months, it suffered from manufacturing problems, and also had only a handful of customers for its premium batteries. The company had been losing boat loads of money for years.

The Wanxiang deal still won’t make back enough to cover its debts. A123 says:

Because the total purchase price for A123’s assets would be less than the total amount owed to creditors, the Company does not anticipate any recoveries for its current shareholders and believes its stock to have no value.

Now that the A123 bankruptcy is moving forward, it will be interesting to see what Fisker Automotive, one of A123′s prime customers, will do. Fisker had told the media that it is waiting for the results of the A123 auction before it starts back up assembling its Karma cars.

This isn’t Wanxiang’s first cleantech and clean energy acquisition — it’s actually its fifth in 2012, says the company in a release. Wanxiang has been aggressively acquiring under valued American cleantech and clean energy companies.

Blog of Intellectual Capital

A Blog from Gerbsman Partners Board of Intellectual Capital on “Maximizing Enterprise Value” for technology, life science, medical device and cleantech companies and their Intellectual Property