Posts Tagged ‘VC research’

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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Here is an analysis by John Mauldin at InvestorInsight. It was originally published as a special series at Stratfor.

John Mauldin is president of Millennium Wave Advisors, LLC, a registered investment advisor. All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions. Opinions expressed in these reports may change without prior notice. John Mauldin and/or the staff at Millennium Wave Advisors, LLC may or may not have investments in any funds cited above. Mauldin can be reached at 800-829-7273.

This information is not to be construed as an offer to sell or the solicitation of an offer to buy any securities.

“Dear Friends: One of the first things you learn about analyzing a company is how to dissect a balance sheet. What assets and liabilities can be deployed by a company to create equity over time? I’ve enclosed a fascinating variant on this process. Take a look at how STRATFOR has analyzed the “geographic balance sheets” of the US, Russia, China, and Europe to understand why different countries’ economies have suffered to varying degrees from the current economic crisis.

As investors, it’s precisely this type of outside-the-box thinking that can provide us profitable opportunities, and it’s precisely this type of outside-the-box thinking that makes STRATFOR such an important part of my investment decision making. The key to investment profits is thinking differently and thinking earlier than the next guy. STRATFOR’s work exemplifies both these traits.

I’ve arranged for a special deal on a STRATFOR Membership for my readers, which you can click here to take advantage of.  Many of you are invested in alternative strategies, but I want to make sure that you also employ alternative thinking strategies. So take a look at these different “country balance sheets” as you formulate your plans.
Your Mapping It Out Analyst, John Mauldin

The Geography of Recession

The global recession is the biggest development in the global system in the year to date. In the United States, it has become almost dogma that the recession is the worst since the Great Depression. But this is only one of a wealth of misperceptions about whom the downturn is hurting most, and why.As one can see in the chart, the U.S. recession at this point is only the worst since 1982, not the 1930s, and it pales in comparison to what is occurring in the rest of the world.

(Figures for China have not been included, in part because of the unreliability of Chinese statistics, but also because the country’s financial system is so radically different from the rest of the world as to make such comparisons misleading. For more, click here.)

But didn’t the recession begin in the United States? That it did, but the American system is far more stable, durable and flexible than most of the other global economies, in large part thanks to the country’s geography. To understand how place shapes economics, we need to take a giant step back from the gloom and doom of the current moment and examine the long-term picture of why different regions follow different economic paths.

The United States and the Free Market

The most important aspect of the United States is not simply its sheer size, but the size of its usable land. Russia and China may both be similar-sized in absolute terms, but the vast majority of Russian and Chinese land is useless for agriculture, habitation or development. In contrast, courtesy of the Midwest, the United States boasts the world’s largest contiguous mass of arable land — and that mass does not include the hardly inconsequential chunks of usable territory on both the West and East coasts. Second is the American maritime transport system. The Mississippi River, linked as it is to the Red, Missouri, Ohio and Tennessee rivers, comprises the largest interconnected network of navigable rivers in the world. In the San Francisco Bay, Chesapeake Bay and Long Island Sound/New York Bay, the United States has three of the world’s largest and best natural harbors. The series of barrier islands a few miles off the shores of Texas and the East Coast form a water-based highway — an Intercoastal Waterway — that shields American coastal shipping from all but the worst that the elements can throw at ships and ports.

The real beauty is that the two overlap with near perfect symmetry. The Intercoastal Waterway and most of the bays link up with agricultural regions and their own local river systems (such as the series of rivers that descend from the Appalachians to the East Coast), while the Greater Mississippi river network is the circulatory system of the Midwest. Even without the addition of canals, it is possible for ships to reach nearly any part of the Midwest from nearly any part of the Gulf or East coasts. The result is not just a massive ability to grow a massive amount of crops — and not just the ability to easily and cheaply move the crops to local, regional and global markets — but also the ability to use that same transport network for any other economic purpose without having to worry about food supplies.

The implications of such a confluence are deep and sustained. Where most countries need to scrape together capital to build roads and rail to establish the very foundation of an economy, transport capability, geography granted the United States a near-perfect system at no cost. That frees up U.S. capital for other pursuits and almost condemns the United States to be capital-rich. Any additional infrastructure the United States constructs is icing on the cake. (The cake itself is free — and, incidentally, the United States had so much free capital that it was able to go on to build one of the best road-and-rail networks anyway, resulting in even greater economic advantages over competitors.)

Third, geography has also ensured that the United States has very little local competition. To the north, Canada is both much colder and much more mountainous than the United States. Canada’s only navigable maritime network — the Great Lakes-St. Lawrence Seaway —is shared with the United States, and most of its usable land is hard by the American border. Often this makes it more economically advantageous for Canadian provinces to integrate with their neighbor to the south than with their co-nationals to the east and west.

Similarly, Mexico has only small chunks of land, separated by deserts and mountains, that are useful for much more than subsistence agriculture; most of Mexican territory is either too dry, too tropical or too mountainous. And Mexico completely lacks any meaningful river system for maritime transport. Add in a largely desert border, and Mexico as a country is not a meaningful threat to American security (which hardly means that there are not serious and ongoing concerns in the American-Mexican relationship).

With geography empowering the United States and hindering Canada and Mexico, the United States does not need to maintain a large standing military force to counter either. The Canadian border is almost completely unguarded, and the Mexican border is no more than a fence in most locations — a far cry from the sort of military standoffs that have marked more adversarial borders in human history. Not only are Canada and Mexico not major threats, but the U.S. transport network allows the United States the luxury of being able to quickly move a smaller force to deal with occasional problems rather than requiring it to station large static forces on its borders.Like the transport network, this also helps the U.S. focus its resources on other things.”

John F. Mauldin

Read more here.

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