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VC funding dips, and seed investments nosedive

Posted in Board Of Intellectual Capital, Business models, Distressed Intellectual Property, Economy, Gerbsman Partners, Intellectual capital, Investments, IPO news, Market research, National Venture Capital Association, NVCA, PricewaterhouseCoopers, PWC, Strategy, Technology, Venture Capital, tagged , , , , , , , , , , on October 20, 2011| Leave a Comment »

Article from GigaOm.

It’s no secret that the larger economy has hit a rough patch in recent months. Although Silicon Valley has — in general – fared better than many other parts of the world, the venture capital industry is not immune to the negative effects of the macro-economic slowdown.

In the third quarter of 2011, venture capital investment activity fell 12 percent in terms of dollars and 14 percent in terms of deals compared to the previous quarter, according to the latest edition of the MoneyTree Report assembled by accounting giant Pricewaterhouse Coopers (PwC) and the National Venture Capital Association (NVCA).VCs invested $6.9 billion in 876 deals during the July through September timeframe in 2011, the MoneyTree report says, a notable decline from the $7.9 billion invested in 1,015 deals during the second quarter of 2011.


To be fair, the industry is still up compared to last year. For the first three quarters of 2011, VCs invested $21.2 billion, which is 20 percent more than VCs invested in the first three quarters of 2010. And 2010 saw an even bigger drop between the second and third quarters of the year. But VC funding is not exactly predictable according to the time of year — in 2009, for instance, the third quarter of the year was stronger than the second.

The VC industry is not as predictably cyclical as others because it generally takes its cues from a fluctuating variety of places: the worldwide economy, the entrepreneurial environment, the stock market’s appetite for IPOs, and larger companies’ appetite for acquisitions. It’s a complicated mix, but at the moment, it seems venture capitalists may be nervous about the larger environment of financial unrest, and the IPO window that opened earlier this year seems to be closing.

Seed funding takes a hit

Seed funding — which has recently been the hotshot of the industry as more angel and individual investors have become active in funding the startup scene — took a major hit in the third quarter of 2011. Seed stage investments fell a whopping 56 percent in terms of dollars quarter-over-quarter, and 41 percent year-over-year, to $179 million. It’s not just the total amount of seed investment that’s fallen, it’s also the amount of money per deal: The average seed deal in the third quarter was worth $2 million, a 43 percent drop from the average seed deal in the second quarter of 2011, which was $3.3 million.

And late stage deals have started to see major declines as well. Later stage startup investments decreased 20 percent in dollars and 30 percent in deals in the third quarter compared to the second, MoneyTree reported. Middle, or expansion, stage deals were relatively robust: Expansion stage dollars increased two percent quarter-over-quarter and 43 percent year-over-year, with $2.5 billion going into 260 deals.

Software is still strong

It’s not all doom and gloom, though. The software space has held up fairly well, receiving the highest level of funding for all industries during the third quarter with $2 billion invested from venture capitalists. That’s a 23-percent increase in dollars from the second quarter, and according to MoneyTree, the highest quarterly investment in the sector in nearly a decade, since the fourth quarter of 2001.

The web industry had a relatively soft quarter, as investments in Internet-specific companies fell 33 percent quarter-over-quarter during the third quarter to $1.6 billion. But it’s not exactly time to cry for Internet startups; the third quarter had a very tough act to follow, because Internet-specific VC deals hit a 10-year high in the second quarter of 2011.

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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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Trends in Terms of Venture Financings In the San Francisco Bay Area (First Quarter 2011)

Posted in Board Of Intellectual Capital, tagged , , on June 15, 2011| Leave a Comment »

From Fenwick and West.

Background —We analyzed the terms of venture financings for 122 companies headquartered in Silicon Valley that reported raising money in the first quarter of 2011.

Overview of Fenwick & West Results

  • Up rounds exceeded down rounds in 1Q11 67% to 16%, with 17% of rounds flat.  This is very similar to 4Q10, when up rounds exceeded down rounds 67% to 21%, with 12% flat.  This was the seventh quarter in a row in which up rounds exceeded down rounds.  It was also the largest amount by which up rounds exceeded down rounds in 3.5 years.
  • The Fenwick & West Venture Capital Barometer showed an average price increase of 52% in 1Q11, less than the 61% increase registered in 4Q10, but still a very healthy increase.  This was also the seventh 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 in a healthy venture environment.

The results by industry are set forth below.  In general, the software and internet/digital media industries had the best valuation-related results in 1Q11, followed by the hardware industry, while the life science industry continued to lag.

We also note anecdotally that we are seeing an increasing number of early stage companies being funded in a more substantive way by angels, and accordingly delaying their first venture capital round, especially in the internet/digital media space.  For a copy of our initial angel/seed financing survey, please go here.

There was a significant increase in commitments to venture capital funds in 1Q11 – a welcome result given that venture capitalists had invested $68.3 billion, while raising only $55 billion, over the past three years.  That said, the funds raised were concentrated in a few large funds such as Bessemer, Sequoia and JP Morgan, which together accounted for over 55% of the total amount raised.

Liquidity results for venture-backed companies in 1Q11 were solid but not extraordinary.  There are however signals that the IPO market will continue to improve.

Detailed results from third-party publications are as follows:

  • Venture Capital Investment.  Venture capitalists invested $6.4 billion in 661 deals in the U.S. in 1Q11, compared to $7.6 billion in 735 deals reported in January 2011 for 4Q10, according to Dow Jones VentureSource (“VentureSource”).  Although this represents a 16% decline in dollars and a 10% decline in deal volume from 4Q10, the 1Q11 results were generally flat with the average of $6.6 billion raised per quarter in 2010.

The PwC/NVCA MoneyTree™ Report based on data from Thomson Reuters (the “MoneyTree Report”) reported venture investment of $5.9 billion in 736 deals in 1Q11, a 5% increase in dollars and an 11% decrease in deal volume from 4Q10. Unlike results in recent quarters, the cleantech and life science industries saw the largest percentage increases in investment compared to 4Q10, and the internet sector lagged.

  • Merger and Acquisition Activity.  Acquisitions of U.S. venture-backed companies in 1Q11 totaled $9.8 billion in 104 transactions, compared to $10.5 billion in 109 transactions in 4Q10, according to VentureSource.  Although this represents a 7% decrease in dollars and a 5% decrease in deal volume, it is approximately 10% above the average of $9 billion of acquisitions per quarter in 2010.
  • The MoneyTree Report reported an increase in M&A transactions from 97 in 4Q10 to 109 in 1Q11, and a slight decrease in average deal size.
  • Initial Public Offerings.  VentureSource reported that 11 venture backed companies went public in 1Q11, raising $768 million, a decrease from 14 IPOs raising $1.1 billion in 4Q10, but flat with the quarterly average of 11.5 IPOs in 2010.

Close to half of the 1Q11 IPOs were healthcare related. The MoneyTree Report reported that 14 venture-backed companies went public in 1Q11, raising $1.4 billion.  The quarter marked the strongest Q1 for IPOs since 2007, and unlike 4Q10, was dominated by U.S.-based companies who comprised 10 of the 14 deals.

With 45 companies in registration at the end of 1Q11, there is reason to believe that 2Q11 will show improvement in IPO activity.

  • Venture Capital Fundraising.  VentureSource reported that U.S. funds raised $7.7 billion in 1Q11, in 25 funds.  This was the highest amount raised in a first quarter since 2001, but the lowest number of individual funds raising money in a first quarter since 2003.

Similarly, VentureSource reported that U.S. venture funds raised $7.1 billion in 1Q11, in 36 funds.

  • 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 3.91 on a 5 point scale, an increase from the prior quarter’s reading of 3.75 and the highest reading since 3Q07.
  • Nasdaq.  Nasdaq increased 5% in 1Q11, but has decreased by 4% in 2Q11 through May 27, 2011.

Read the complete article here.

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So What Comes After Social Commerce?

Posted in Board Of Intellectual Capital, tagged , , , , , , , , , , , , , , , , , , , , , , , , , , on April 21, 2011| Leave a Comment »

Article from GigaOm.

“A year and a half ago, I spent a few hours at the offices of Hunch, a New York-based startup, learning about their decision engine. By asking you seemingly random questions, the engine helped you make decisions. Hunch’s engine was a nice way to aggregate what you liked, then help you find information based on that assumption. For me, the real potential of this decision engine was commerce, and that’s why I thought perhaps Amazon should buy Hunch. It could use the decision engine to help customers sift through the ever-expanding array of offerings and make purchasing decisions. That little kernel of an idea still looms large in my thinking, especially as I wonder what the future of media and e-commerce looks like.

Social Spending

Last week, I was chatting with Lightspeed VC’s Jeremy Liew, who has invested in companies such as Bonobos, ShoeDazzle and LivingSocial. He pointed out that the first phase of e-commerce was about shopping for staples. It was utilitarian, and he pointed to the success of companies such as Diapers.com, Amazon and Zappos. The next phase of e-commerce is about recreational shopping, and as a result, it needs to be a more fun and social experience.

No wonder there seems to be a growing obsession with companies such as Groupon and LivingSocial, part of an amorphous category called “social commerce,” which means different things to different people. Elizabeth Yin, co-founder of the wedding apparel shopping service Shiny Orb, wrote in a guest column: “the social shopping space is comprised of e-commerce sites that facilitate interaction among customers as part of a shopping experience.”

If that is indeed the case, I have to say today’s social commerce companies need to build deeper social experiences. But how? And where does social commerce go from here?

Enter the “Interest Graph”

In July 2010, Chris Dixon — co-founder of Hunch — noted we would soon enter a phase where “one graph to rule them all” will give way to more-focused, social graphs built around concepts such as taste, location and trust. In other words, these concepts could become the underpinning of what is now generically known as the interest graph.

At its very core, the interest graph is a way to organize a social network based on people’s interests. For instance, if you’re a fan of Charlie Sheen and Lindsay Lohan, it’s clear self-destructive Hollywood stars and their lives are what you’re interested in. The interest graphs are built through various mechanisms: by following people whom you deem as experts, through your likes and shares, etc. In the middle part of the last decade, we tried to do this through tags.

These interest graphs are more like mini-Twitters. Just as you can follow someone — Will Ferrell, for example — without being his friend, you can have an asymmetrical relationship with someone who has similar musical interests or taste in watches. As a blogger for Asset Map, a San Francisco-based startup, noted:

Music, movies, books, articles — these are all things where people have tastes that aren’t always influenced by friends — or at least not a big group of your friends. It’s no surprise to me that the most successful music services so far are things like Last.fm and Pandora that are far more organized around your musical interest graph than your musical social graph (AssetMap Blog)

Interest Graph + Commerce = Transactions

Interest graph, for me, is the underpinning of a new kind of e-commerce experience. Think of it as a new kind of social commerce experience that goes beyond the notion of group shopping (Gilt Groupe, Groupon), shopping communities and recommendation engines. When Apple launched Ping, its music-oriented social network last year, to me it represented a template for social commerce.

Since Ping’s launch, I’ve downloaded songs based on the likes and recommendations of people who are not necessarily my friends, but who I follow because they have good taste in music. Sure, I have friends who are good at picking tracks, but Ping’s social layer has helped me discover new artists.

A few years back, I met Jeff Bezos and asked him why he was buying up content sites. I suspected the Amazon founder wanted to eliminate the “advertising” between commerce and content. If you remember, in 2007, Amazon bought DPreview, a digital camera community, and later acquired IMDB, a movie database.

As always, Bezos was a little ahead of the curve. In the post-Facebook, post-Groupon world, one can see a new kind of symbiotic relationship emerge between the interest graph and the “sellers.”

The concept is no different from enthusiast magazines of the past, such as Stereo Review, except there are “network effects” at play. Network effect, according to the Wikipedia definition is, “the effect that one user of a good or service has on the value of that product to other people.”

While enthusiast magazines were limited by the geographic boundaries and dollars publishers could spend on attracting new customers, in the Internet age, the network allows us to spread the word at a rapid clip, especially amongst people with similar interests. More importantly, since sellers can target the exact interest graph they want, they can skip advertising entirely. Instead, they can come up with an actual offer that leads to a transaction.

For entrepreneurs, I believe there are opportunities to create unique experiences around the concept of “interest graphs” that can be built off the backs of uber-networks such as Facebook and Twitter. These networks can help find the right kind of audience to build a viable channel for new commerce experience.”

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Internet/Digital Media and Software Industries Silicon Valley and Seattle 2010

Posted in Board Of Intellectual Capital, Investments, Strategy, Technology, Venture Capital, tagged , , , , , , on April 8, 2011| Leave a Comment »

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.”

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