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Fenwick's Silicon Valley Venture Capital Survey Shows Valuation Metrics Stabilizing in Q1 2017

Valuation Metrics Now Level With 13-Year Averages After Falling from 2015 Highs

Mountain View, CA (May 23, 2017) – Fenwick & West today announced the results of its First Quarter 2017 Silicon Valley Venture Capital Survey. Notably, late stage VC investment activity increased and the hardware sector was a standout in terms of valuation increases.

The survey analyzed the valuations and terms of venture financings for 191 companies headquartered in the Silicon Valley that raised capital in the first quarter of 2017.

“Looking at VC investment activity in the U.S., we’ve seen an increase in dollars invested in the first quarter of this year compared to the fourth quarter of 2016. However, the pace of investments remained constant,” said Cindy Hess, co-chair of Fenwick’s startup & venture capital practice and co-author of the survey. “Though investment activity in the first quarter of 2017 is much lower than the incredible numbers we’ve seen over the past few years, it is in line with historical norms. This signals a return to healthier levels of investment activity."

“Most of the venture data indicates that late stage VC investment activity increased in the first quarter of 2017 from the fourth quarter of 2016, while seed and early stage investment activity declined in terms of the number of financings,” noted Mark Leahy, co-chair of Fenwick’s startup & venture capital practice and co-author of the survey. “The hardware industry saw the strongest valuations, and we also observed a rise in healthcare financing in the first quarter. On the other hand, investments in the IT, internet and consumer service areas noticeably declined.”

Valuations Stabilize

Venture valuations showed improvements in Q1 2017 compared to Q4 2016, and valuation metrics are now generally flat with their 13-year averages after having fallen from all-time highs in mid-2015.

Up rounds exceeded down rounds 73% to 18%, with 9% flat. Both the percentage of up rounds and the percentage of down rounds increased from Q4 2016 when up rounds exceeded down rounds 70% to 14%, with 16% flat.

An up round is one in which the price per share at which a company sells its stock has increased since its prior financing round. Conversely, a down round is one in which the price per share has declined since a company’s prior financing round.

Hardware Sector Stands Out

The hardware industry recorded the strongest valuation results in Q1 2017, with the Fenwick & West Venture Capital Barometer™ showing an average price increase of 81% in Q1 2017, up from 50% in Q4 2016.

The strength of the hardware industry continues to be a key theme in our Q1 findings where the median percentage price increase was 38% in Q1 2017, up from 0% in Q4 2016.

In comparison, the software and internet/digital media industries faced significantly more down rounds in Q1 2017 than Q4 2016. Down rounds increased for the life science industry as well—but less notably—and only the hardware industry remained level on down rounds in Q1 2017 and Q4 2016 (both at 18%).

Comparing all Barometer results, the life science industry is the industry that experienced the largest change from Q4 2016 to Q1 2017, seeing a significant decrease from 123% to 41%.

Generally, the life sciences and software industries both recorded weakening valuation results in Q1 2017, with the average and median price increases declining and the number of down rounds increasing in Q1 2017. On the other hand, the internet/digital media industry recorded a higher average price increase in Q1 2017, but the median price increase declined and the number of down rounds increased in Q1 2017.

Average Price Increases for Later Stage Investments

The Barometer showed an average price increase in Q1 2017 of 54%, a slight increase from the 51% recorded in Q4 2016 and below the historical average of 56%.

The average price increase for Series B and C rounds declined from 107% and 41% in Q4 2016 to 75% and 35% in Q1 2017, while the average price increase for Series D and E+ rounds increased from 16% and -1% in Q4 2016 to 45% and 60% in Q1 2017.

The median price increase of financings in Q1 2017 was 29%, which represented a small increase from the 27% in Q4 2016 after previously having declined for six straight quarters.

Investor-Favorable Deal Terms Increase

The use of investor-favorable deal terms, including multiple liquidation preferences, participation rights and cumulative dividends, increased in Q1 2017.

Complete results of the survey with related discussion are posted on Fenwick & West’s website at www.fenwick.com/vcsurvey.

About the Survey
The Fenwick & West Venture Capital Survey has been published quarterly for over 14 years and offers a unique view of the venture capital market in Silicon Valley by providing insight into changes in valuations and terms. Focusing on trends in venture financing and valuations, the Fenwick & West Survey complements the economic data presented by Dow Jones VentureSource, PWC/ CB Insights MoneyTree™ Report and PitchBook-NVCA Venture Monitor.

About Fenwick & West
Fenwick & West LLP provides comprehensive legal services to ground-breaking technology and life sciences companies—at every stage of their lifecycle—and the investors that partner with them. We craft innovative, cost-effective and practical solutions on issues ranging from venture capital, public offerings, joint ventures, M&A and strategic relationships, to intellectual property, litigation and dispute resolution, taxation, antitrust, and employment and labor law. For more than four decades, Fenwick has helped some of the world's most recognized companies become and remain market leaders. For more information, please visit fenwick.com.

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