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Article from Fenwick and West.

“In 2002, Fenwick & West began publishing its Silicon Valley Venture Capital Survey. The survey was published in response to dramatic changes in the venture capital financing environment resulting from the bursting of the “dot-com bubble”, and our belief that there was a need for an objective analysis of how the venture capital environment had changed. The survey was well received and we have continued to publish it – a copy of the most recent survey is available here.
We believe that in recent years there has been a significant change in the angel/seed financing environment primarily in the internet/digital media and software industries. We believe these changes are due to the following factors:

The nature of these industries is such that products can be developed and introduced to the market quicker and with less resources than other industries. The development of new technologies has further accelerated the speed, and reduced the resources needed, to introduce new products in these industries.

These industries have now been around for at least a decade, if not longer, and as such a generation of successful entrepreneurs having the expertise, financial resources and interest is now available to assist and finance the current generation of entrepreneurs.
Venture capital has become harder to obtain, with venture capital investment in the U.S. overall declining from $29.9 billion in 2007 to $26.2 billion in 2010, and with investment in venture funds by limited partners declining even more precipitously, with $11.6 billion invested in 2010, the lowest amount since 2003, according to Dow Jones VentureSource.

As a result of these factors we believe that there have been the following changes in the angel/seed financing environment:

  • There has been a shift in the composition of investors, from largely friends and family, wealthy individuals and a few organized groups, to a larger percentage of professional angels, seed funds and venture capital funds willing to invest smaller amounts of capital.
  • The amounts raised in angel/seed financings have increased, and can exceed $1 million. Investors in these financings also have deeper pockets with the ability to participate in later rounds.
  • The terms of these financings have become more sophisticated and arms length, as investors are more likely to be true third parties investing larger sums, with an interest in being more active in the oversight of their investment.

In light of the increasing importance of angel/seed financings, and a desire to make objective information about such financings available to the community at large, we undertook a survey of 52 internet/digital media and software industry companies that obtained angel/seed financing[1] in 2010 in the Silicon Valley and Seattle markets.”

Read more here.

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Trends in Terms of Venture Financings In the San Francisco Bay Area (Third Quarter 2010)

http://fenwick.com/publications/6.12.1.asp?vid=15&WT.mc_id=2010.Q3_VCS_BK_EMAIL

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

Regards,
Barry Kramer
Michael Patrick – Fenwick & West

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“Startup valuations are falling and venture capitalists are driving harder bargains, according to a survey by California law firm Fenwick & West.

Like the rest of the economy, the world of venture capital and startups is starting to feel more pain from the deepening global financial crisis. That’s the main takeaway from a new survey detailing trends in venture capital investments during the fourth quarter of 2008 by the California law firm Fenwick & West.

The survey, which analyzed the terms of venture deals for 128 companies headquartered in the San Francisco Bay Area, found that valuations are falling for startups and that venture capitalists are driving harder bargains. The silver lining: The fallout so far is not nearly as bad as it was during the dot-com bust, when hundreds of companies went under and stratospheric valuations came crashing down to earth.

Down Rounds on the Rise

Sure, there were some startups last quarter that secured a higher value on their latest investment round, such as online vacation rental site HomeAway. But, of the 128 companies that received financing, 33% of them experienced so-called down rounds, or an investment that placed a lower valuation on the company than it received in the previous round of investment. More ominous, the percentage of down rounds rose every month at year’s end, hitting 45% in December. “Each month things got worse in the fourth quarter,” says Barry Kramer, the Fenwick & West partner who runs the survey. The highest percentage of down rounds occurred in the first quarter of 2003, when 73% of the companies surveyed by Fenwick & West suffered down rounds.”

Read the full article by Spencer E. Ante here
Other comments on this piece can be found here: World Tech News, The Livermore report, Silobreaker,

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