close

For more than four decades, Fenwick & West LLP has helped some of the world’s most recognized companies become, and remain, market leaders. From emerging enterprises to large public corporations, our clients are leaders in the technology, life sciences and cleantech sectors and are fundamentally changing the world through rapid innovation.  MORE >

Fenwick & West was founded in 1972 in the heart of Silicon Valley—before “Silicon Valley” existed—by four visionary lawyers who left a top-tier New York law firm to pursue their shared belief that technology would revolutionize the business world and to pioneer the legal work for those technological innovations. In order to be most effective, they decided they needed to move to a location close to primary research and technology development. These four attorneys opened their first office in downtown Palo Alto, and Fenwick became one of the first technology law firms in the world.  MORE >

From our founding in 1972, Fenwick has been committed to promoting diversity and inclusion both within our firm and throughout the legal profession. For almost four decades, the firm has actively promoted an open and inclusive work environment and committed significant resources towards improving our diversity efforts at every level.  MORE >

At Fenwick, we are proud of our commitment to the community and to our culture of making a difference in the lives of individuals and organizations in the communities where we live and work. We recognize that providing legal services is not only an essential part of our professional responsibility, but also an excellent opportunity for our attorneys to gain valuable practical experience, learn new areas of the law and contribute to the community.  MORE >

Year after year, Fenwick & West is honored for excellence in the legal profession. Many of our attorneys are recognized as leaders in their respective fields, and our Corporate, Tax, Litigation and Intellectual Property Practice Groups consistently receive top national and international rankings, including:

  • Nearly 15 percent of Fenwick partners named America's Leading Lawyers for Business by Chambers USA and Chambers Global
  • Selected as a "Go-To" law firm by in-house legal departments at Fortune 500 companies in Corporate Counsel magazine
  • Named to The National Law Journal's inaugural "Intellectual Property Hot List" for outstanding patent, copyright, trademark and IP litigation services

MORE >

We take sustainability very seriously at Fenwick. Like many of our clients, we are adopting policies that reduce consumption and waste, and improve efficiency. By using technologies developed by a number of our cleantech clients, we are at the forefront of implementing sustainable policies and practices that minimize environmental impact. In fact, Fenwick has earned recognition in several areas as one of the top US law firms for implementing sustainable business practices.  MORE >

At Fenwick, we have a passion for excellence and innovation that mirrors our client base. Our firm is making revolutionary changes to the practice of law through substantial investments in proprietary technology tools and processes—allowing us to deliver best-in-class legal services more effectively.   MORE >

Mountain View Office
Silicon Valley Center
801 California Street
Mountain View, CA 94041
650.988.8500

San Francisco Office
555 California Street
12th Floor
San Francisco, CA 94104
415.875.2300

Seattle Office
1191 Second Avenue
10th Floor
Seattle, WA 98101
206.389.4510

Shanghai Office
36/F, Room 3690, Tower 2
Shanghai IFC
8 Century Avenue, Pudong
Shanghai 200120, China
+86 21 6062 6104

PUBLICATION DETAILS

Trends in Terms of Venture Financing In Silicon Valley (Third Quarter 2010)

November 22, 2010

Background – We analyzed the terms of venture financings for 107 companies headquartered in Silicon Valley that reported raising money in the third quarter of 2010.

Overview of Fenwick & West Results

 

  • Up rounds exceeded down rounds in 3Q10 52% to 30%, with 18% of rounds flat. That was generally consistent with 2Q10, when up rounds exceeded down rounds 55% to 27%, with 18% of rounds flat. This was the fifth quarter in a row in which up rounds exceeded down rounds.
  • The Fenwick & West Venture Capital Barometer showed an average price increase of 28% in 3Q10. Again this was generally consistent with 2Q10 when the Barometer was 30%. This was also the fifth quarter in a row in which the Barometer was positive.
  • The results by industry are set forth below. In general, the internet/digital media, and to a lesser extent, life science industries, had the best valuation-related results in 3Q10, while the cleantech and hardware industries trailed. From a valuation perspective internet/digital has significantly out performed other industries in the first three quarters of 2010.

Overview of Other Industry Data

Third party analysis of the venture industry in the third quarter of 2010 reported a decrease in venture investment compared to the second quarter of 2010, but a continued improvement in venture funded company liquidity. Fundraising by venture capital funds continued to be difficult. Detailed results are as follows:

  • DowJones VentureSource (“VentureSource”) reported that the amount invested by venture capitalists in the U.S. in the third quarter of 2010 was approximately $5.5 billion in 662 deals, a decrease from the $7.7 billion invested in 740 deals in 2Q10. The PwC/NVCA MoneyTree™ report based on data from Thomson Reuters (the “MoneyTree™ Report”) also reported a decrease in 3Q10 venture capital investment, with $4.8 billion invested in 780 deals, compared to $6.9 billion being invested in 962 deals in 2Q10. Despite the decrease in 3Q10, investments by venture capital funds in 2010 is on pace to modestly surpass the amount invested in 2009, although 2009 was the weakest year for venture investment since 2003.
  • VentureSource reported 102 acquisitions of venture-backed companies in the U.S. in 3Q10, for a total of $5.7 billion, an increase from the $4.8 billion paid in 85 acquisitions reported for 2Q10. Thomson Reuters and the National Venture Capital Association reported 104 acquisitions of venture-backed companies in the third quarter of 2010, compared to 97 currently being reported for 2Q10. Acquisitions of venture-backed companies in the first three quarters of 2010 have almost already surpassed total acquisitions in all of 2009. The largest acquisition in 3Q10 was Walt Disney’s acquisition of Playdom for $563 million.
  • There were 14 venture-backed IPOs in the third quarter of 2010 raising a total of $1.2 billion, compared to 17 in 2Q10 raising a total of $1.3 billion, according to Thomson Reuters and the National Venture Capital Association. Although IPOs declined in the third quarter, there have already been significantly more IPOs in the first three quarters of 2010 (40) than in all of 2009 (12). VentureSource reported nine venture-backed IPOs in 3Q10 raising a total of $723 million, compared to 15 IPOs raising $900 million in 2Q10. The largest IPO in 3Q10 was by Green Dot Corp. raising $164 million.
  • Fundraising by U.S. venture capital funds increased in the third quarter, with 45 firms raising $3 billion in the quarter, compared to 51 firms raising $2.1 billion in the second quarter of 2010, according to Thomson Reuters and the National Venture Capital Association. The largest fundraising in 3Q10 was $750 million by IVP. Both Thomson Reuters/NVCA and VentureSource report VC fundraising in 2010 to be behind the pace of 2009, which was the lowest year for fundraising in six years.
  • Since the first quarter of 2009, venture capitalists have invested significantly more in companies ($41.4 billion per VentureSource, $34.9 billion per the MoneyTree) than new capital that has been committed to venture funds ($22.7 billion per VentureSource, $25.4 billion per Thomson Reuters/NVCA), which is not sustainable over a prolonged period.
  • The Silicon Valley Venture Capital Confidence Index produced by Professor Mark Cannice at the University of San Francisco reported the confidence level of Silicon Valley venture capitalists at 3.7 on a 5 point scale, which was a significant increase from the previous quarter’s reading of 3.28.
  • Nasdaq was up 12.2% in Q3, and is up another 3.5% in Q4 through November 16, 2010.

Detailed Fenwick & West Results

Financing Round – The financings broke down according to the following rounds:

<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 

Series

Q3’10

Q2’10

Q1’10

Q4’09

Q3’09

Q2’09

Q1’09

Q4’08

A

20%

18%

24%

23%

17%

8%

13%

16%

B

23%

22%

21%

22%

31%

27%

28%

26%

C

28%

28%

30%

21%

19%

35%

17%

29%

D

9%

20%

11%

17%

16%

13%

20%

14%

E and higher

20%

12%

14%

17%

17%

17%

22%

15%

 

Price Change – The direction of price changes for companies receiving financing this quarter, compared to their previous round, were as follows:

<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 

Price Change

Q3’10

Q2’10

Q1’10

Q4’09

Q3’09

Q2’09

Q1’09

Q4’08

Down

30%

27%

32%

30%

36%

46%

46%

33%

Flat

18%

18%

19%

23%

23%

22%

29%

13%

Up

52%

55%

49%

47%

41%

32%

25%

54%

 

The percentage of down rounds by series were as follows:

<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 

Series

Q3’10

Q2’10

Q1’10

Q4’09

Q3’09

Q2’09

Q1’09

Q4’08

B

20%

14%

23%

24%

19%

16%

38%

21%

C

33%

29%

45%

25%

45%

51%

50%

43%

D

30%

36%

18%

47%

56%

67%

39%

22%

E and higher

38%

33%

27%

26%

39%

67%

60%

45%

 

The Fenwick & West Venture Capital Barometer™ (Magnitude of Price Change) –Set forth below is (i) for up rounds, the average per share percentage increase over the previous round, (ii) for down rounds, the average per share percentage decrease over the previous round, and (iii) the overall average per share percentage change from the previous round for all rounds taken together.  Such information is broken down by series for 3Q10 and is provided on an aggregate basis for comparison purposes for the prior four quarters.  In calculating the “net result” for all rounds, “flat rounds” are included.  For purposes of these calculations, all financings are considered equal, and accordingly the results are not weighted for the amount raised in a financing.

<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 

Percent Change

Series B

Series C

Series D

Series E and higher

Combined total for all Series for Q3’10

Combined total for all Series for Q2’10

Combined total for all Series for Q1’10

Combined total for all Series for Q4’09

Combined total for all Series for Q3’09

Up rounds

+116%

+65%

+40%

+58%

+81%

+86%

+78%

+73%

+77%

Down rounds

-47%

-53%

-46%

-41%

-47%

-65%

-54%

-50%

-57%

Net result

+74%

+13%

+6

+7%

+28%

+30%

+21%

+19%

+11%

 

Results by Industry for Price Changes and Fenwick & West Venture Capital Barometer™ – The table below sets forth the direction of price changes and Barometer results for companies receiving financing in 3Q10, compared to their previous round, by industry group.  Companies receiving Series A financings are excluded as they have no previous rounds to compare.

<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 


Industry

               Number of Financings


Up Rounds


 Down Rounds


  Flat Rounds


   Barometer

Software

34

53%

32%

15%

+26%

Hardware

23

35%

35%

30%

+10%

Lifescience

11

64%

27%

9%

+44%

Internet/Digital Media

10

90%

0%

10%

+82%

Cleantech

5

20%

60%

20%

+5%

Other

3

67%

33%

0%

-8%

Total - All Industries

86

52%

30%

18%

+28%

 

Please note that some industries have small sample sizes that reduce the statistical validity of the results.

Liquidation Preference – Senior liquidation preferences were used in the following percentages of financings:

Q3’10

Q2’10

Q1’10

Q4’09

Q3’09

Q2’09

Q1’09

Q4’08

41%

40%

38%

41%

49%

41%

45%

41%

 

The percentage of senior liquidation preference by series was as follows:

<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 

Series

Q3’10

Q2’10

Q1’10

Q4’09

Q3’09

Q2’09

Q1’09

Q4’08

B

32%

32%

23%

24%

38%

17%

35%

30%

C

27%

34%

42%

50%

40%

52%

38%

35%

D

60%

48%

36%

58%

63%

50%

56%

61%

E and higher

62%

53%

53%

37%

67%

53%

55%

50%

 

Multiple Liquidation Preferences - The percentage of senior liquidation preferences that were multiple preferences were as follows:

Q3’10

Q2’10

Q1’10

Q4’09

Q3’09

Q2’09

Q1’09

Q4’08

20%

17%

23%

19%

21%

24%

28%

23%

 

Of the senior liquidation preferences that included a multiple preference, the ranges of the multiples broke down as follows:

<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 

Range of multiples

Q3’10

Q2’10

Q1’10

Q4’09

Q3’09

Q2’09

Q1’09

Q4’08

>1x – 2x

85%

71%

86%

57%

89%

75%

80%

70%

>2x – 3x

0%

29%

14%

43%

11%

25%

10%

20%

>3x

15%

0%

0%

0%

0%

0%

10%

10%

 

Participation in Liquidation – The percentages of financings that provided for participation were as follows:

Q3’10

Q2’10

Q1’10

Q4’09

Q3’09

Q2’09

Q1’09

Q4’08

53%

35%

48%

51%

53%

49%

51%

57%

 

Of the financings that had participation, the percentages that were not capped were as follows:

Q3’10

Q2’10

Q1’10

Q4’09

Q3’09

Q2’09

Q1’09

Q4’08

58%

61%

54%

54%

60%

67%

60%

51%

 

The decrease in use of participating liquidation preference was due to a significant decrease in the use of that provision in Series A rounds this quarter.

Cumulative Dividends – Cumulative dividends were provided for in the following percentages of financings:

Q3’10

Q2’10

Q1’10

Q4’09

Q3’09

Q2’09

Q1’09

Q4’08

7%

7%

7%

4%

7%

2%

10%

4%

 

Antidilution Provisions – The uses of antidilution provisions in the financings were as follows:

<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 

Type of Provision

Q3’10

Q2’10

Q1’10

Q4’09

Q3’09

Q2’09

Q1’09

Q4’08

Ratchet

4%

4%

5%

6%

3%

3%

3%

2%

Weighted Average

93%

94%

94%

94%

96%

97%

97%

98%

None

3%

2%

1%

0%

1%

0%

0%

0%

 

Pay-to-Play Provisions – The use of pay-to-play provisions in the financings was as follows:

Percentages of financings having pay-to-play provisions.

<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 
<><><><>
 

Q3’10

Q2’10

Q1’10

Q4’09

Q3’09

Q2’09

Q1’09

Q4’08

15%

16%

7%

10%

15%

15%

14%

15%

 

Note that anecdotal evidence indicates that companies are increasingly using contractual “pull up” provisions instead of charter based “pay to play” provisions.  These two types of provisions have similar economic effect but are implemented differently.  The above information includes some, but likely not all, pull up provisions, and accordingly may understate the use of these provisions.

The pay-to-play provisions provided for conversion of non-participating investors’ preferred stock into common stock or shadow preferred stock, in the percentages set forth below:

- Common Stock.

Q3’10

Q2’10

Q1’10

Q4’09

Q3’09

Q2’09

Q1’09

Q4’08

81%

100%

86%

80%

93%

100%

73%

85%

 

- Shadow Preferred Stock.

Q3’10

Q2’10

Q1’10

Q4’09

Q3’09

Q2’09

Q1’09

Q4’08

19%

0%

14%

20%

7%

0%

27%

15%

 

Redemption – The percentages of financings providing for mandatory redemption or redemption at the option of the venture capitalist were as follows:

Q3’10

Q2’10

Q1’10

Q4’09

Q3’09

Q2’09

Q1’09

Q4’08

22%

23%

24%

21%

19%

20%

24%

20%

 

Corporate Reorganizations – The percentages of post-Series A financings involving a corporate reorganization were as follows:  

Q3’10

Q2’10

Q1’10

Q4’09

Q3’09

Q2’09

Q1’09

Q4’08

9%

8%

14%

5%

8%

10%

10%

13%

 

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.  The contents of this report are not intended, and should not be considered, as legal advice or opinion.

To be placed on an email list for future editions of this survey please go to our
VC Survey sign up page

©2010 Fenwick & West LLP

Related Content