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Posts Tagged ‘The Fenwick & West Venture Capital Barometer™’

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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Article from Fenwick & West LLP.

Background —We analyzed the terms of venture financings for 113 companies headquartered in Silicon Valley that reported raising money in the third quarter of 2011.

Overview of Fenwick & West Results

  • Up rounds exceeded down rounds in 3Q11 70% to 15%, with 15% of rounds flat.  This was an increase from 2Q11 when up rounds exceeded down rounds 61% to 25%, with 14% of rounds flat.  Series B rounds were exceptionally strong, comprising 38% of the relevant rounds (Series A rounds aren’t included as there is no prior round for comparison purposes), and 89% of the Series B rounds were up rounds.  This was the ninth quarter in a row in which up rounds exceeded down rounds.
  • The Fenwick & West Venture Capital Barometer™ showed an average price increase of 69% in 3Q11, a slight decrease from the 71% increase registered in 2Q11.  However, we note that one internet/digital media company had a 1,500% up round, and that if such round was excluded the Barometer would have been 54%.  This was also the ninth 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.
  • The results by industry are set forth below.  In general internet/digital media was the clear valuation leader, followed by software, cleantech and hardware, with life science continuing to lag.
Overview of Other Industry Data
  • After 2Q11 there was reason to believe that the venture environment was improving, but the results were more mixed in 3Q11.  While the amount invested by venture capitalists in 3Q11 was healthy, the amount raised by venture capitalists was significantly off the pace set in the first half of the year.  As a result, venture capitalists are continuing to invest significantly more than they raise, an unsustainable situation (and one that perhaps provides increased opportunities for angels and corporate investors).  IPOs also decreased significantly in 3Q11, although M&A activity was up.  The internet/digital media industry continued to lead, while life science continued to lag.

    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, 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 $8.4 billion in 765 deals in the U.S. in 3Q11, a 5% increase in dollars over the $8.0 billion invested in 776 deals reported for 2Q11 in July 2011, according to Dow Jones Venture Source (“VentureSource”).  The largest Silicon Valley investments in 3Q11 were Twitter and Bloom Energy, which were also two of the three largest nationwide.  Northern California received 38% of all U.S. venture investment in 3Q11.

      The PwC/NVCA MoneyTree™ Report based on data from Thomson Reuters (the “MoneyTree Report”) reported slightly different results – that venture capitalists invested $7.0 billion in 876 deals in 3Q11, a 7% decrease in dollars over the $7.5 billion invested in 966 deals reported in July 2011 for 2Q11.  Investments in software companies were at their highest quarterly level since 4Q01, at $2.0 billion; investments in internet companies fell to $1.6 billion after the ten year high of $2.4 billion reported in 2Q11, and life science and cleantech investments fell 18% and 13% respectively from 2Q11.

      Overall, venture capital investment in 2011 is on track to exceed the amount invested in 2010 according to both VentureSource and the MoneyTree Report.

    • Merger and Acquisition Activity. Acquisitions (including buyouts) of U.S. venture-backed companies in 3Q11 totaled $13 billion in 122 deals, a 33% increase in dollar terms from the $9.8 billion paid in 100 deals reported in July 2011 for 2Q11, according to Dow Jones.  The information and enterprise technology sectors had the most acquisitions, and the acquisition of PopCap Games by Electronic Arts for $750 million was the largest acquisition of the quarter.

      Thomson Reuters and the National Venture Capital Association (“Thomson/NVCA”) also reported an increase in M&A transactions, from 79 in 2Q11 (as reported in July 2011) to 101 in 3Q11.

    • Initial Public Offerings.  Dow Jones reported that 10 U.S. venture-backed companies went public in 3Q11, raising $0.5 billion, a significant decrease from the 14 IPOs raising $1.7 billion in 2Q11.  Perhaps of greater concern is that six of the IPOs occurred in July, with only four in the latter two months of the quarter, and half of the 10 companies went public on non-U.S. exchanges (one each on AIM, Australia and Tokyo, two on Taiwan).  By comparison, all 25 companies going public in the first half of 2011 went public on U.S. exchanges.

      Similarly, Thomson/NVCA reported that only five U.S. venture-backed companies went public in the U.S. in 3Q11 (they do not include offerings on foreign exchanges), raising $0.4 billion, a substantial decrease from the 22 IPOs raising $5.5 billion reported in 2Q11.  This was the lowest IPO level in seven quarters.  Of the five IPOs, four of the companies were based in the U.S. and one in China, and four were IT-focused and one was life science-focused.  The largest of the IPOs was China-based Tudou, raising $0.2 billion.

      At the end of 3Q11, 64 U.S. venture-backed companies were in registration to go public, an increase from 46 in registration at the end of 2Q11.

    • Venture Capital Fundraising. Dow Jones reported that U.S. venture capital funds raised $2.2 billion in 3Q11, a significant decline from the $8.1 billion raised in the first half of 2011.  2011 is on track to be the fourth year in a row in which venture capital fundraising will be less than investments made by venture capitalists, and by over $30 billion in the aggregate.

      Similarly, Thomson/NVCA reported that U.S. venture capital funds raised $1.7 billion in 3Q11, a substantial dollar decrease from the $2.7 billion reported raised by 37 funds in 2Q11.

    • Venture Capital Returns. According to the Cambridge Associates U.S. Venture Capital Index®, U.S. venture capital funds achieved a 26% return for the 12-month period ending 2Q11, less than the Nasdaq return of 31% (not including any dividends) during that period.  Note that this information is reported with a one quarter lag.
    • 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 3.41 on a 5 point scale, a decrease from the 3.66 result reported for 2Q11, and the second quarter of decrease in a row.  Venture capitalists expressed concerns due to the macro economic environment, the uncertain exit environment, high company valuations and regulatory burdens.  The divergence between the internet/digital media industry, which has performed well, and the lagging life science industry, was also noted.
    • Nasdaq. Nasdaq decreased 13% in 3Q11, but has increased 10% in 4Q11 through November 14, 2011.

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