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Fenwick & West Seed Finance Survey 2012 by Barry J. Kramer and Steven S. Levine

Posted in Barry Kramer, Fenwick & West, Steven Levine, Uncategorized, tagged , , , on March 28, 2013| Leave a Comment »

Seed Finance Survey 2012

March 25, 2013
Seed Financing Survey 2012
Internet/Digital Media and Software Industries
Background

In early 2011 we published our first Seed Financing Survey (for 2010) in recognition of the growing importance of seed financing to entrepreneurs and the venture capital environment, especially in the internet/digital media and software industries.

This is the third such survey. In addition to providing information for 2012, this survey also offers comparative information with 2011 and 2010 to facilitate the identification of trends.

The information contained in this survey is based on 61 transactions in 2012, 56 transactions in 2011 and 52 in 2010. The vast majority of these transactions were for companies based in Silicon Valley, with some from the Seattle, Los Angeles and New York regions. Most of these transactions are those in which our firm was involved, and we believe is representative of transactions handled by large Silicon Valley law firms, but may not be representative of the larger, geographically dispersed, seed financing environment.

Overview of 2012 Seed Financing Survey Results

We saw the following trends in our 2012 survey:

  • Of the companies funded in 2011, 27% had raised a Series A financing by the end of the following year (2012), while 45% of the companies funded in 2010 had raised a Series A financing by the end of the following year (2011).
  • Conversely, 23% of the companies funded in 2011 raised follow-on seed financing by the end of the following year, while 12% of the companies funded in 2010 had raised a follow on seed by the end of the following year.
  • The percentage of companies in our survey receiving seed funding that were software companies increased from 25% in 2011 to 34% in 2012, while the percentage of such companies that were internet/digital media companies declined from 75% to 66%.
  • The percentage of seed financings led by venture capital investors increased from 27% in 2011 to 34% in 2012.
  • The use of a preferred stock structure increased from 59% in 2011 to 67% in 2012.
  • The average investment size increased for preferred stock deals from 2011 to 2012, and declined for convertible note deals over the same period.
  • The median pre-money valuation in preferred stock financings increased from $3.8 million in 2011 to $4.6 million in 2012.
  • The median size of preferred stock deals increased from $1.0 million in 2011 to $1.36 million in 2012, while the median size of convertible note deals decreased from $1.0 million to $0.9 million.
  • The median valuation cap on convertible notes decreased from $7.5 million in 2011 to $6.0 million in 2012.

The more detailed results of our survey are set forth below, after the “Overview of Seed Financing Environment” section.

Overview of Seed Financing Environment

The seed financing environment has become very dynamic, and has undergone significant changes, in the past few years.  Some of the trends that we are seeing are:

    • The Increasing Institutionalization of Seed Financing.

This is evidenced by the increasing participation of venture capitalists in seed financings, the growth of accelerators and “matchmaker” platforms, and the use of venture capital-like structures in seed financings.

    1. The increased involvement of venture capital funds in seed investing.  Dow Jones VentureSource reported that U.S. seed financings by venture capital firms increased from 173 in 2009 to 388 in 2012, and the amounts invested in such financings increased from $119 million to $287 million during that period.  Similarly, CB Insights reported that venture capital investment in seed deals increased from 143 deals in 2009 to 617 deals in 2012, and that the percentage of all seed deals in which venture capitalists invested increased from 30% in 2009 to 35% in 2012.  This trend is supported by the results of our Survey, which found that the percentage of seed deals that were led by venture capitalists increased from 26% in 2010 to 27% in 2011 to 34% in 2012.
    2. The growth of accelerators.  Accelerators provide structure to the formation of seed companies by providing formalized mentoring, a network of contacts and in some cases small amounts of financing.  This is unlike the prior generations of early stage companies that were more likely to have less formal guidance and structure during their pre-seed and seed period.  Since Y Combinator, the first of the current generation of accelerators, was founded in 2005, the number of accelerators has grown to over 130 in 33 countries, per research by Jed Christiansen, founder of Seed-DB, as reported in AllThingsDigital. And accelerators tracked by Seed-DB that provide funding to their companies have increased the number of companies they have funded from 243 in 2010 to 1137 in 2012.
    3. The growth of platforms that match entrepreneurs and investors.  Matchmaking platforms are becomingly increasingly important in seed financing, and with the passage of the JOBS Act are likely to continue to grow in importance.  These platforms have provided further structure to the seed financing process that did not exist even a few years ago.  For example, accelerators like 500 Startups and Rock Health now require all their applicants to submit their applications through AngelList (which was only founded in 2010).  And AngelList has recently teamed with Second Market to permit (accredited) investors to easily invest small amounts in some of the companies listed on AngelList. 
    4. The use of more traditional deal structures in seed financings.  As venture capitalists and professional seed funds become more involved in seed financings, we are seeing indications of the increased use of traditional venture capital deal structures in seed financings.  This is supported by our Survey, which shows that the use of preferred stock structures (versus convertible note structures) increased from 2011 to 2012, and that of those financings that used a convertible note structure, there was an increase in the use of valuation caps.  However, note that seed round preferred stock valuations increased overall from 2011 to 2012, so the increased use of preferred stock is not necessarily a trend that favors investors at the expense of entrepreneurs, but rather reflects the more traditional preference of venture capitalists to set valuations at the time an investment is made.
  • Increase in Seed Financings and the Series A Crunch.
    1. Rapid growth in seed financings compared to Series A.  The number of seed financings increased from 472 in 2009 to 1749 in 2012, while the number of Series A rounds only increased from 418 to 692 during the same period, as reported by CB Insights.  Additionally, Xconomy reported that the number of seed investments has grown from 15% to 31% of the total number of venture capital deals.  This has caused many to question whether too many seed deals are being funded, and opine that many of the seed funded companies will be unable to raise a Series A financing.  CB Insights estimates that only approximately 40% of seed funded companies will raise follow-on financings, and that as a result it projects that over 1000 companies that received seed funding in the past year will be unable to raise Series A funding.  This is consistent with our Survey data which found that while 45% of companies receiving seed funding in 2010 had received venture financing by the end of 2011, only 27% of companies receiving seed funding in 2011 had received venture financing by the end of 2012.
    2. Follow-on seed financings.  Further evidence of this trend is what appears to be a growth in follow-on seed financings, which provide a company with a longer runway to hopefully demonstrate the traction necessary to obtain Series A financing.  This is supported by our survey results which found that while only 12% of our 2010 class of seed funded companies received a follow-on seed financing by the end of 2011, 23% of our 2011 class have already received such financing.  Anecdotally, the growth of “acqui-hires” also seems to be increasing, supporting the idea that while many seed-funded companies have had difficulty in raising Series A financing, their ability to put together talented teams has led to acquisitions of these companies due to the value of their personnel.
    • The Seed Financing Universe is Expanding Geographically and by Industry.

The current accelerator concept started in Silicon Valley, and was initially focused on mentoring internet-focused companies. This has changed.

    1. Geographically.  Of the approximately 140 accelerators tracked by Seed-DB, 45% are based outside of the United States  and even for those based in the U.S., many attract foreign entrepreneurs.  While it is unlikely to be representative of all incubators, we note that of the 33 companies in the most recent 500 Startups class, 57% are based outside of the United States, as reported in VentureBeat. Additionally, the Wall Street Journal reported that a significant number of accelerators being formed in Silicon Valley focus on nationals of specific countries, e.g. Australia, China, Denmark, Germany, Israel, Japan and Russia.  Their goal is to provide entrepreneurs from those countries access to Silicon Valley investors, and to provide those investors access to the markets of those countries.  And geographic growth is of course occurring in the US as well, with accelerators forming throughout the US, and with some accelerators, like Science in Los Angeles, explicitly focused on connecting their companies with Silicon Valley investors.
    2. Industry Diversification.  While the internet/digital media industry seems especially well suited for seed/accelerator financing, due to being less capital intensive and having a quicker time to market, accelerators are diversifying into other industries.  Examples are Lemnos Labs, Bolt and Haxlr8r (hardware), Rock Health, Blueprint Health and Healthbox (life science), Greenstart and Surge (energy/greentech) and Plug and Play (B2B).

Detailed Results of 2012 Financing Survey

  • Update on Companies Included in our Prior Seed Financing Surveys:

On average 30 months has passed since the companies funded in 2010 and included in our 2011 survey raised their seed round of financing, and on average 18 months has passed since the companies funded in 2011 and included in our 2012 survey raised their seed round of financing. Set forth below is information on what has happened to those companies during that time period.

Status of companies that raised their seed round of financing in 2010:

As of 12/31/2011

As of 12/31/2012
Raised venture capital financing:

45%

45%
Raised additional seed financing:

12%

14%
Still operating and have not raised additional financing:

21%

12%
Acquired:

12%

19%
Shut down:

4%

6%
No data available:

    6%

   4%
Total

100%

100%

Status of companies that raised their seed round of financing in 2010 versus those that raised their seed round in 2011, 18 months (average) after the seed round:

Status of 2010 companies as of 12/31/2011

Status of 2011 companies as of 12/31/2012
Raised venture capital financing:

45%

27%
Raised additional seed financing:

12%

23%
Still operating and have not raised additional financing:

21%

32%
Acquired:

12%

7%
Shut down:

4%

5.5%
No data available:

    6%

5.5%
Total

100%

100%
  • Other Survey Results
Industry breakdown:

2010

2011

2012

Internet/Digital Media:

71%

75%

66%

Software:

29%

25%

34%
Lead investor background:

Seed funds:

43%

46%

46%

Professional angels:

31%

28%

20%

Venture capital funds:

26%

27%

34%
Financing Structure:

Preferred Stock:

69%

59%

67%

Convertible Debt:

31%

41%

33%


Average Size of Investment
Below is the average size of investment for investors who invested at least $100,000, broken down by type of investor and between Preferred Stock financing and Convertible Note financing.

Preferred Stock

2010

2011

2012

Professional angels:

$310,000

$163,000

$185,000

Seed funds:

$392,000

$423,000

$458,000

Venture capital funds:

$591,000

$516,000

$624,000
Convertible Notes

Professional angels:

$182,000

$244,000

$165,000

Seed funds:

$140,000

$424,000

$277,000

Venture capital funds:

$290,000

$501,000

$391,000
Analysis of Preferred Stock Seed Financings.

2010

2011

2012
  • Median pre-money valuation.

Internet/Digital media:

$3,400,000

$4,000,000

$4,400,000

Software:

$2,700,000

$3,500,000

$5,000,000
  • Median amount raised:

$1,056,000

$1,000,000

$1,360,000
  • Percentage using non-participating preferred liquidation preference:

90%

91%

85%
  • Percentage using participating preferred liquidation preference:

10%

9%

15%
  • Percentage in which investors received a board seat:

72.5%

70%

73%
Analysis of Convertible Note Seed Financings

2010

2011

2012
  • Median amount raised

$662,500

$1,000,000

$918,000
  • Median size of future financing in which note converts:

$1,000,000

$2,000,000

$1,750,000
  • Percentage of deals in which valuation on conversion is capped:

83%

82%

90%
  • Median valuation cap:

$4,000,000

$7,500,000

$6,000,000
  • Percentage of deals that convert at a discount to the next equity round valuation:

67%

83%

90%
  • Median initial discount:

20%

20%

20%
  • Percentage of deals with discount in which discount increases over time:

25%

5%

0%
  • Percentage of deals without discount that have a valuation cap:

100%

75%

100%
  • Percentage of deals having warrants:

0%

0%

0%
  • Treatment of note if company is acquired prior to an equity financing:

Receive return of investment plus a premium:

50%

61%

50%

Median premium:

0.75x original principal amount

1.0x original principal amount

1.0x original principal amount

Right to convert at an agreed upon valuation:

33%

65%

65%

Percentage that have neither conversion right nor premium:

17%

9%

5%

Percentage that have both conversion right and premium:

0%

35%

20%
  • Median interest rate:

6.0%

5.5%

5.5%
  • Median term:

18 months

18 months

18 months
  • Percentage in which notes are secured:

0%

4%

0%
  • Percentage in which investors received a
    board seat:

8.3%

4%

0%

Methodology and Definitions

For purposes of this survey we define a “seed” financing as the first round of financing by a company in which the company raises between $250,000 and $2,500,000, and in which professional investors play a lead role. Please note that this definition excludes financings led by “friends and family”, which terms may not be negotiated on an arms-length basis, and smaller financings where parties may not substantially negotiate terms. Due to the foregoing definition of a seed financing, and the fact that our firm had a connection with the transactions included in the survey, the survey may not be representative of all companies receiving early stage financing, as we are likely over-weighted to more promising companies funded by more established seed investors.

Please note the use of the following additional definitions:

i. a “Professional Angel” is an individual or group of individuals who regularly invest their own funds in early stage companies.

ii. a “Seed Fund” is a fund that primarily invests in the first round of professional financing of an early stage company.

iii. a “Venture Capital Fund” is a fund that invests in various stages of the growth of a private company.

Disclaimer

The preparation of the information contained herein involves assumptions, compilations and analysis, and there can be no assurance that the information provided herein is error-free. Neither Fenwick & West LLP nor any of its partners, associates, staff or agents shall have any liability for any information contained herein, including any errors or incompleteness. The contents of this report are not intended, and should not be considered, as legal advice or opinion.

Contact Information

For additional information about this report please contact Barry Kramer at 650-335-7278 | bkramer@fenwick.com or Steven Levine at 650-335-7847 | slevine@fenwick.com at Fenwick & West.

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Silicon Valley Venture Capital Survey – Third Quarter 2012

Posted in Board Of Intellectual Capital, tagged , , , , , , , , , , , on November 19, 2012| Leave a Comment »

Article from Fenwick & West.

Background—We analyzed the terms of venture financings for 117 companies headquartered in Silicon Valley that reported raising money in the third quarter of 2012.

Overview of Fenwick & West Results

Venture financings in 3Q12 continued to show solid price increases from their prior round, but 3Q12 was not as strong as 2Q12.

    • Up rounds exceeded down rounds in 3Q12, 61% to 17%, with 22% of rounds flat. This was another strong quarter, but not as strong as 2Q12 when 74% of rounds were up, 11% down and 15% flat. This was the 13th quarter in a row in which up rounds exceeded down rounds.

Series B rounds were especially strong, with 92% of Series B rounds up, and Series E (and later) rounds were relatively weak, with only 44% up. However 64% of the Series B rounds were software and internet/digital media companies, while only 39% of the Series E rounds were from those industries, and as described below, software and internet/digital media were the strongest industries.

  • The Fenwick & West Venture Capital Barometer™ showed an average price increase of 78% in 3Q12 – again a solid result but a decrease from 99% in 2Q12. There were three financings in 3Q12 that were up over 750% (two in internet/digital media and one in hardware), and if these three were excluded the Barometer would have been up 50% rather than 78%.
  • The median price increase of financings in 3Q12 was 23%, down from 30% in 2Q12, and the lowest median price increase in the past two years.
  • The results by industry are set forth below. In general the software and internet/digital media industries continued to be the strongest, cleantech showed good results on very low volume, hardware lagged a bit and the life science industry trailed significantly.

Overview of Other Industry Data

The third quarter of 2012 was generally not a strong one for the venture industry, with the upcoming election, the looming “fiscal cliff” and global economic uncertainty perhaps weighing on investors’ minds.

  • Venture investing in the U.S. was down slightly in 3Q12 compared to 2Q12, and 2012 is on track to be below 2011.
  • M&A was down slightly in 3Q12 compared to 2Q12, and was also down slightly in the first nine months of 2Q12 compared to the first nine months of 2011.
  • The number of IPOs was down slightly both in 3Q12, compared to 2Q12, and in the first nine months of 2012 compared to the first nine months of 2011.
  • Venture fundraising in 3Q12 lagged 2Q12, but year to date fundraising in 2012 was above 2011 levels. Funding continues to be concentrated in a limited number of large funds, although less so in 3Q12 than 2Q12.
    • Venture Capital Investment.

      Dow Jones VentureSource (“VentureSouce”) reported that U.S. companies raised $6.92 billion in 820 venture financings in 3Q12, a 14.6% decrease in dollars and a 5% decrease in transactions from the $8.1 billion raised in 863 financings in 2Q12 (as reported in July 2012). Similarly, venture investment was down 15%, and the number of financings was down 3%, for the first nine months of 2012 compared to the first nine months of 2011.

      Venture capital investment in Silicon Valley was down 22% from the first nine months of 2012 ($8.2 billion) compared to the first nine months of 2011 ($10.5 billion), although the number of deals was only down 6.5%. That said, Silicon Valley received 39% of all U.S. venture investment in 3Q12.

The median amount raised in a 3Q12 financing round was $3.7 million, the lowest quarterly median amount since 1997. This result was driven in part by first round financings, whose median amount raised is on track to be $2.5 million for 2012, which would be the lowest annual amount since 1992.

The lead venture investors in 3Q12 were Google Ventures with 21 deals, Kleiner Perkins with 17, and 500 Startups and NEA with 16 each. Google Ventures recently announced that it was increasing its annual fund size from $200 million to $300 million, which will allow it to make more late stage investments (Sarah McBride, Reuters, 11/8/12).

Similar to VentureSource, the PwC/NVCA MoneyTree™ Report based on data from Thomson Reuters (the “MoneyTree Report”) reported that $6.5 billion was invested in 890 deals in 3Q12, a 7.1% decrease in dollars and a 1% decrease in transactions from the $7.0 billion raised in 898 deals in 2Q12 (as reported in July 2012). The MoneyTree Report also indicated that venture investing in 2012 is on track to be below 2011 amounts in both dollars and deal volume, and that seed stage venture investing was especially weak.

The MoneyTree Report also reported that software and internet/digital media investing remained strong in 3Q12 at $2.1 billion, but both industries declined in dollar terms from 2Q12 amounts. Life science investing, led by follow-on biotech financings, increased in dollar terms from 2Q12, but is down 19% year-to-date compared to the first nine months of 2011. Cleantech investing declined 20% in dollars compared to 2Q12, but saw an increase in the number of deals as investing in this sector appears to be shifting to smaller, less capital intensive deals.

    • Merger and Acquisitions Activity.

      Dow Jones reported 99 acquisitions (including buyouts) of venture-backed U.S. companies for $13 billion in 3Q12, a 10% decrease in transactions, and a 5% decrease in dollars from the 110 transactions for $13.7 billion reported in 2Q12 (as reported in July 2012). Nearly half of the companies acquired this quarter were based in California. For the first nine months of 2012, there were 314 acquisitions of venture backed companies for a total of $39.5 billion, a decrease from the 404 acquisitions for $40.6 billion in the first nine months of 2011.

Similarly, Thomson Reuters and the NVCA (“Thomson/NVCA”) reported 96 venture-backed acquisitions in 3Q12, a 6% decrease from the 102 reported in 2Q12 (as reported in July 2012). IT companies dominated the acquisition environment in 3Q12, with 70 of the 96 transactions.

  • IPO Activity.

    VentureSource reported 10 IPOs of U.S. venture-backed companies raising $807 million in 3Q12. This was a slight decrease from the 11 IPOs raising $7.7 billion ($6.8 billion was Facebook) in 2Q12 (as reported in July 2012).

    Similarly, Thomson/NVCA reported 10 IPOs raising $1.1 billion in 3Q12, compared to 11 IPOs raising $1.3 billion in 2Q12. (It appears that Thomson/NVCA includes sales by shareholders in their calculation of the amount raised). Six of the IPOs were in the IT industry, six were from companies based in California and all were from companies in the U.S. For the first nine months of 2012, there were 40 IPOs compared to 41 IPOs in the first nine months of 2011.

  • Venture Capital Fundraising.

    Thomson/NVCA reported that 53 U.S. venture funds raised $5.0 billion in 3Q12, a 15% decrease in dollars but a 40% increase in funds from the $5.9 billion raised by 38 funds in 2Q12 (as reported in July 2012). Fundraising for the first nine months of 2012 was $16.2 billion raised by 148 funds, a 31% increase in dollars from the $12.4 billion raised in the first nine months of 2011, but a 13% decrease in funds. The concentration of fundraising by a few large funds decreased a bit in 3Q12, where the top five funds accounted for 55% of fundraising, as compared to 2Q12 when they accounted for 80% of fundraising, but was still significant.

    Thomson/NVCA also reported that the number of mid-sized venture funds ($250-800 million in size) raising funds has declined significantly over the past five years, with 41 and 45 raising money in 2006 and 2007 respectively, while only 16 raised money in 2011 and only 10 raised money in the first half of 2012 (Private Markets, Mark Boslet, 10/2/12).

    Dow Jones reported generally similar fundraising results, finding that $4.73 billion was raised in 3Q12 (but by only 37 funds) and that fundraising for 2012 to date was $17.5 billion versus $12.7 billion in the first nine months of 2011. However Dow Jones found that 9% more funds raised money in 2012 to date compared to the same period in 2011.

    Venture fundraising again lagged venture investment in 3Q12 by a significant amount.

  • Developments in Non-IT Fundraising.

    With traditional fundraising by non-IT venture funds (e.g. life science, cleantech and hardware funds) especially challenging, some alternative funding mechanisms are appearing. This funding is often by entities, such as large corporations and governments, that have motives for investing in addition to financial return (e.g. filling product pipelines, diversifying a nation’s economy), or that have a longer time horizon.

    For example Thomson/NVCA has reported that corporate venture capitalists participated in 17.5% of life science financings in 2011 through the first half of 2012, up from 15.3% in the 2010/2011 time frame. Large pharmaceutical companies are also expanding their investments in, and forming closer ties with, traditional venture capitalists (Timothy Hay, VentureWire, 10/9/12). Johnson & Johnson is even creating early stage “innovation centers” in life science hubs such as San Francisco, Cambridge, London and China to improve access to early stage life science companies. (Brian Gormley, VentureWire, 9/18/12).

    Similarly, in the cleantech area, Broadscale Investment Network has been formed to connect large energy corporations with energy start-ups for investing and partnership purposes, and well known companies like GE and Duke Energy have paid to participate in this venture. (Yuliya Chernova, Venture Wire, 9/24/12).

    In sovereign investing, the Russian government backed fund of funds, RVC-USA, has committed up to $400 million to U.S. start-ups focused in medical devices, IT infrastructure, energy efficiency technologies and telecommunications. Similarly, another Russian fund, Rusnano has invested hundreds of millions in U.S. venture funds, especially those focused in the life sciences (Jonathan Shieber, LBO Wire, 9/11/12).

  • Kauffman Report on Immigrant Entrepreneurs.

    A recent Kauffman Report by Vivek Wadhwa concludes that the U.S. is becoming less attractive to foreign entrepreneurs. The report found that the percentage of Silicon Valley-based companies with a foreign born founder decreased from 52% over the period 1995-2005 to 43% over the period 2005-2012. Visa/immigration problems was listed as a major problem. The improvement in the entrepreneurial environment in countries outside the U.S. was also a likely factor. The report found that by far the largest number of entrepreneurial immigrants to the U.S. came from India (33%), followed by China (8.1%), the U.K. (6.3%), Canada (4.2%), Germany (3.9%), Israel (3.5%) and Russia (2.4%).

  • Accelerators and Angels.

    As noted above, early stage venture investing has declined recently, but the growth of early stage non- venture funding is continuing and may be offsetting this trend.

    For example, the number of accelerators and incubators continues to grow, with worldwide estimates ranging from 200-700. There is concern, however, about the value of some of these accelerators. A recent study by Kauffman Fellow Aziz Gilani of venture firm DFJ Mercury analyzing 29 accelerators found that 45% failed to produce even one graduate that obtained venture funding. David Cohen of Techstars has encouraged accelerators to publish their track records, so that entrepreneurs can be better informed in their selection process. A possible trend in the accelerator environment is increased specialization, with accelerators focusing on assisting entrepreneurs in a specific industry. (Tom Stein, Private Markets, 9/512; Mark Boslet, Private Markets, 10/2/12).

    Angel investing also continues to grow, increasing 3.1% in the first half of 2012 over the first half of 2011, with 40% of such funding going to seed and early stage companies. Jeffrey Sohl, “The Angel Investor Market in Q1/Q2 2012: A Market in Steady Recovery”, Center for Venture Research, October 10, 2012.

  • Venture Capital Return.

    Cambridge Associates reported that the value of its venture capital index increased by 0.61% in 2Q12 (3Q12 information has not been publicly released) compared to -5.06% for Nasdaq. The venture capital index was also slightly higher Nasdaq for the 12 month period ended June 30, 2012, 6% vs. 5.82%, but still lagged for the ten year period ending June 30, 2012, 5.28% to 7.21% per year. The Cambridge Associates venture index is net of fees, expenses and carried interest.

  • 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 3.53 on a 5-point scale in 3Q12, a small increase from the 3.47 reported in 2Q12. Venture capitalists expressed concern about high valuations, macro economic uncertainty and life science funding, but felt positive about the depth and breadth of innovation in Silicon Valley, especially in the mobile, cloud and payment industries, and the availability of strategic acquirors with substantial cash holdings.

  • Nasdaq.

    Nasdaq increased 6.1% in 3Q12, and is flat in 4Q12 through November 8, 2012.

Read orginial article here.

 

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Silicon Valley Venture Survey – First Quarter 2012

Posted in Board Of Intellectual Capital, boic, Economy, Entrepreneurship, Fenwick & West, Investments, Market research, Strategy, tagged , , , , , , , on May 28, 2012| Leave a Comment »

Article from Fenwick & West.

Background—We analyzed the terms of venture financings for 114 companies headquartered in Silicon Valley that reported raising money in the first quarter of 2012.

Overview of Fenwick & West Results

  • Up rounds exceeded down rounds in 1Q12, 65% to 22%, with 13% of rounds flat. This showed continued solid valuations in the venture environment, although a small drop off from 3Q11 and 4Q11, when 70% of rounds were up rounds. This was the eleventh quarter in a row in which up rounds exceeded down rounds.
  • The Fenwick & West Venture Capital Barometer™ showed an average price increase of 52% in 1Q12, a decline from the 85% reported in 4Q11, but still a solid showing.
  • We note some weakness in late stage financing (Series E and higher) valuations, where 37% of the financings were down rounds and the Barometer reported only a 12% increase. Series B financings were also not as frothy as they have been, with a Barometer reading of 58%, the lowest since 4Q09, but still very solid.

The results by industry are set forth below. In general software and digital media/internet companies continued to see the strongest valuation increases, with hardware and life sciences lagging.

Overview of Other Industry Data

  • Venture valuations were healthy, but investment was down.
  • M&A valuations were up, but the number of deals was down.
  • Venture fundraising was mixed, but corporate venture investing was up.
  • IPOs were up, and the passage of the JOBS Act is a further encouraging signal for the public market, but continuing global financial uncertainty, especially in Europe, is a concern.

So what is the take-away? Venture fundraising continues to be problematic, and likely contributed to the decreased venture investment the last two quarters. However with IPOs improving, and interest rates still extremely low, there is reason to believe that venture fundraising will improve, if the global economic environment doesn’t further increase risk averseness. The M&A market slowed a bit in 1Q12, possibly to give participants a chance to evaluate the improvement in IPOs, and its possible effect on valuations, but corporate America has plenty to spend, evidenced by their increasing participation in venture investment. And the areas of entrepreneurial focus and innovation are broad, with mobile, cloud, security, big data and of course social media all attracting substantial attention.

Venture Capital Investment.

  • Venture capital investment in the U.S. declined for the second quarter in a row, with the decline evident in most major industry segments, including internet/digital media.
  • Dow Jones VentureSource (“VentureSource”) reported $6.2 billion of venture investment in 717 deals in 1Q12, a 16% decline in dollars from the $7.4 billion invested in 803 deals in 4Q11 (as reported in January 2012).
  • The PwC/NVCA MoneyTree™ Report based on data from Thomson Reuters (the “MoneyTree Report”) reported $5.8 billion of venture investment in 758 deals in 1Q12, a 12% decline from the $6.6 billion invested in 844 deals in 4Q11 (as reported in January 2012).

Merger and Acquisitions Activity.

  • M&A activity for venture-backed companies had mixed results in 1Q12, with deal volume declining for the second quarter in a row, to the lowest quarterly amount since 2009, but with Dow Jones reporting a significant increase in deal proceeds.
  • Dow Jones reported 94 acquisitions of venture-backed companies in 1Q12 for $18.1 billion, a 12% decline in transaction volume, but a 93% increase in dollars, from the 107 transactions for $9.4 billion in 4Q11 (as reported in January 2012).
  • Thomson Reuters and the NVCA (“Thomson/NVCA”) reported 86 transactions in 1Q12, a 7% decline from the 92 reported in 4Q11 (as reported in January 2012). Sixty-eight of the 86 deals were in the IT sector.
  • Dealogic reported that Google, Facebook, Groupon and Zynga purchased a combined 34 companies in 1Q12 (not necessarily all venture-backed).

IPO Activity.

  • IPO activity for venture-backed companies improved again in 1Q12, which was the best quarter for number of IPOs since 4Q07.
  • VentureSource reported 20 venture-backed IPOs raising $1.4 billion in 1Q12, compared to 10 IPOs raising $2.4 billion in 4Q11 (as reported in January 2012). There were 50 companies in registration at the end of the quarter.

We note that the new law that permits confidential IPO filings may delay future information on the number of companies in registration, as a substantial number of companies appear to be taking advantage of this alternative.

Thomson/NVCA reported 19 IPOs for $1.5 billion in 1Q12, compared to 12 IPOs raising $2.6 billion in 4Q11. Eleven of the IPOs were in IT and five in healthcare, and 95% were U.S.-based companies.

Venture Capital Fundraising.

  • Industry sources reported conflicting fundraising results for 1Q12, with Dow Jones reporting an increase in dollars raised and Thomson/NVCA reporting a decline. Taking an average of the two, venture capital fundraising and venture capital investing were approximately equal this quarter, but the number of funds raising money continues to be low.
  • Dow Jones reported that 47 U.S. venture funds raised $7 billion in 1Q12, a 35% increase in dollars over the $5.2 billion that was raised in 4Q11 (as reported in January 2012).

Thomson/NVCA reported that 42 U.S. venture capital funds raised $4.9 billion in 1Q12, a 13% decrease in dollars over the $5.6 billion raised by 38 U.S. funds in 4Q12 (as reported in January 2012). The top 5 fundraisers accounted for 75% of the total amount raised, with Andreessen Horowitz raising $1.5 billion and leading the way.

Secondary Markets.

  • The secondary market for venture-backed company shares is in uncharted waters.
  • The recently passed JOBS Act made filing for an IPO more appealing to companies, which could decrease the number of late stage private companies whose shares would be available for secondary trading. However, the Act also increased the maximum number of shareholders that private companies could have before registering with the SEC, which allows private companies to stay private longer, which could increase the pool of late stage private companies whose shares would be available for secondary trading.
  • Additionally, Facebook, which accounted for a large percentage of the trading on secondary exchanges, and whose shares were also purchased by secondary funds, just went public, and secondary trading of their shares ended at the end of March 2012.
  • And the venture-backed IPO market seems to be improving in general, providing more opportunity for late stage private companies to go public.
  • Second Market reported that issuers were the buyer in 54% of second market transactions, but only accounted for 1.7% of transaction proceeds, suggesting that issuers are using Second Market to purchase small amounts of shares from numerous sellers, likely to limit their number of shareholders.

Corporate Venture Capital.

  • With a challenging venture fundraising environment, we thought it would be useful to provide some information on corporate venture capital (“CVC”).
  • In general, CVC declined precipitously in 2009 as a result of the stock market decline and global financial problems in 2008. Since then it has rebounded significantly with corporate venture investment increasing from $1.4 billion in 2009 to $2.0 billion in 2010 to $2.3 billion in 2011. Similarly, CVCs participated in 12.7% of all venture deals in 2009, 13.6% in 2010 and 14.9% in 2011. That said, these amounts significantly lag 2007, the best year for CVC in the past decade, when CVCs invested $2.6 billion and participated in 19% of deals (data from the MoneyTree Report).
  • While companies like Intel and Cisco have long been significant players in CVC investing, it will be interesting to see how heavily the current wave of major Silicon Valley companies participate in CVC. One indiciation is that Google started Google Ventures two years ago with the goal of investing $100 million a year, and has invested in 20 start-ups through March 2012. (Data from San Jose Mercury)
  • Another indication of CVC activity is that the number of CVCs who are members of the NVCA has grown from 50 to 62 members in the past year, and now comprises 7% of the total membership. (Data from Dow Jones VentureWire)
  • CVC investment seems more focused in industries with large capital requirements like cleantech and biotech, which accounted for 23% and 16% of CVC investment respectively in 2010/2011, than are independent venture capitalists. (Data from the MoneyTree Report)

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 3.79 on a 5 point sale in 1Q12, a significant increase from the 3.27 reported in 4Q11, and the first increase in four quarters.

Nasdaq.
Nasdaq increased 16% in 1Q12, but has declined 10% in 2Q12 through May 21.

Read more here.

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Venture Capital Survey Silicon Valley Second Quarter 2011 – by Fenwick & West

Posted in Board Of Intellectual Capital, boic, Business models, Economy, Fenwick & West, Investments, Market research, tagged , , , , on August 20, 2011| Leave a Comment »

Article from Fenwick & West. For additional information about this report please contact Barry Kramer at 650-335-7278; bkramer@fenwick.com or Michael Patrick at 650-335-7273; mpatrick@fenwick.com at Fenwick & West.

Background —We analyzed the terms of venture financings for 117 companies headquartered in Silicon Valley that reported raising money in the second quarter of 2011.
Overview of Fenwick & West Results

Up rounds exceeded down rounds in 2Q11 61% to 25%, with 14% of rounds flat.  Although this was a slight decline from 1Q11, when up rounds exceeded down rounds 67% to 16%, with 17% of rounds flat, it was still a very healthy performance.  This was the eighth quarter in a row in which up rounds exceeded down rounds.

The Fenwick & West Venture Capital Barometer showed an average price increase of 71% in 2Q11, up from the 52% increase registered in 1Q11.  This was the best barometer result since 2007, and was also the eighth quarter in a row in which the Barometer was positive.

Interpretive Comment regarding the Barometer.  When interpreting the Barometer results please bear in mind that the results reflect the average price increase of companies raising money this quarter compared to their prior round of financing, which was in general 12‑18 months prior.  Given that venture capitalists (and their investors) generally look for at least a 20% IRR to justify the risk that they are taking, and that by definition we are not taking into account those companies that were unable to raise a new financing (and that likely resulted in a loss to investors), a Barometer increase in the 30-40% range should be considered normal.  Our average Barometer reading since 1Q04, when we began calculating the Barometer, through 2Q11, has been 40%.  We would expect such amount to be slightly higher than “normal”, as the earlier years reflect the recovery from the dotcom bubble bust

The results by industry are set forth below.  In general, software and internet/digital media industries had the best valuation-related results by a substantial amount in 2Q11, followed by the hardware and cleantech industries, while the life science industry continued to lag.

The second quarter of 2011 was generally a strong quarter for the venture capital industry, with the most notable result being an improved IPO market.  The amount invested by venture capitalists in 2Q11 was also solid.  Fundraising by venture capitalists showed a significant decline from the very strong 1Q11 results, but was still reasonable in dollar terms.  Merger and acquisition activity was somewhat lower, perhaps as participants sought to understand the effect of the stronger IPO market.

However there are some clouds on the horizon, as the Silicon Valley Venture Capital Confidence Index declined for only the second time in 11 quarters, Nasdaq has had a very poor 3Q11 to date, there are reports of a number of IPOs being recently postponed and the world financial environment is undergoing substantial turbulence.

Detailed results from third-party publications are as follows:

Venture Capital Investment. Venture capitalists (including corporation affiliated venture groups) invested $8.0 billion in 776 deals in the U.S. in 2Q11, a 20% increase in dollars over the $6.4 billion invested in 661 deals reported for 1Q11 in April 2011, according to Dow Jones VentureSource (“VentureSource”).  VentureSource also reported that $2.9 billion of such amount, or 36%, was invested in Silicon Valley-based companies.

Similarly, the PwC/NVCA MoneyTree™ Report based on data from Thomson Reuters (the “MoneyTree Report”) reported that venture capitalists invested $7.5 billion in 966 deals in 2Q11, a 27% increase in dollars over the $5.9 billion invested in 736 deals reported in April 2011 for 1Q11.  The MoneyTree Report noted that investments in internet companies was at its highest quarterly level since 2001.

Merger and Acquisition Activity. Acquisitions of U.S. venture-backed companies in 2Q11 totaled $9.5 billion in 95 deals, a slight decrease from the $9.8 billion in 104 deals reported in April 2011 for 1Q11, according to VentureSource.  Of the 2Q11 deals, 8 were private/private transactions, perhaps indicating a growing acquisition ability and interest of later stage private companies.

Thomson Reuters and the National Venture Capital Association (“Thompson/NVCA”) also reported a decrease in M&A transactions, from 109 in 1Q11 (as reported in April 2011) to 79 in 2Q11.  Of the 79 reported transactions in 2Q11, 56 were in the IT industry, but the largest was in the pharmaceutical industry where Daiichi Sankyo bought Berkeley-based Plexxikon for $805 million.

Initial Public Offerings. VentureSource reported that 14 venture-backed companies went public in 2Q11, raising $1.7 billion, a noticeable increase from the 11 IPOs raising $700 million reported in 1Q11.

Thompson/NVCA reported that 22 venture-backed companies went public in the U.S. in 2Q11, raising $5.5 billion, a substantial increase over the 14 IPOs raising $1.4 billion reported in 1Q11.  Of the 22 IPOs, 14 were based in the U.S. and 5 in China, and 14 were in the IT industry with 11 of those being internet focused.  The largest of the IPOs was Russian-based Yandex raising $1.3 billion.

At the end of 2Q11 46 U.S. venture-backed companies were in registration to go public, similar to the 45 in registration at the end of 1Q11.

Venture Capital Fundraising. Thompson/NVCA reported that 37 venture funds raised $2.7 billion in 2Q11, a significant decline from the $7.6 billion raised by 42 funds in 1Q11.  However, 1Q11 was the highest first quarter for fundraising since 2001, and 2Q11 was 28% higher (in dollars) than 2Q10.  Also the first half of 2011 saw 67% more funds raised than the first half of 2Q10, but a 15% decrease in the number of venture funds closing fundings.

VentureSource provided consistent results, reporting that U.S. venture funds raised $8.1 billion in the first half of 2011, a 20% increase in dollars over the first half of 2010.  VentureSource noted that only 7 funds raised 77% of the $8.1 billion.

Venture Capital Returns. According to the Cambridge Associates U.S. Venture Capital Index® U.S. venture capital funds achieved an 18.5% return for the 12-month period ending 1Q11, slightly higher than the Nasdaq return of 16% (not including any dividends) during that period.  Note that this information is reported with a one-quarter delay.

Sentiment. The Silicon Valley Venture Capital Confidence Index produced by Professor Mark Cannice at the University of San Francisco reported that the confidence level of Silicon Valley venture capitalists was 3.66 on a 5 point scale, a decrease from the 3.91 result reported for 1Q11.  Venture capitalists expressed concerns due to macroeconomic trends, high venture valuations, uneven capital availability and life science regulatory constraints.

Nasdaq. Nasdaq increased 1% in 2Q11, but has decreased 9% in 3Q11 through August 15, 2011.

For additional information about this report please contact Barry Kramer at 650-335-7278; bkramer@fenwick.com or Michael Patrick at 650-335-7273; mpatrick@fenwick.com at Fenwick & West.

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