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Background—We analyzed the terms of venture financings for 117 companies headquartered in Silicon Valley that reported raising money in the fourth quarter of 2011.
Overview of Fenwick & West Results
Anecdotally, we attribute the Series B results in part to the increased number of smaller, relatively low valuation, Series A financings undertaken by micro VC firms. When the investee companies in these financings make good progress, it can result in a significant percentage increase in valuation in the Series B round – and if these companies do not make good progress, and do not raise a Series B financing, they will not appear in the Barometer statistics because there is no transaction to report, as described under "Methodology" below. If Series B financings were excluded from the Barometer calculation (which we believe would be over compensating for this anomaly) the Barometer would have been 50%.
Along these lines we note that Dow Jones VentureSource ("VentureSource") reported that the three most prolific venture investors in 4Q11 were 500 Startups, SV Angel and First Round Capital, all early stage investors, with a combined 77 investments in 4Q11.
Overview of Other Industry Data
In 2011 we saw a generally improving venture environment, with venture investment, fundraising, valuations, M&A and IPOs all up compared to 2010. But there were some anomalies:
Venture capitalists (including corporation-affiliated venture groups) invested $7.4 billion in 803 deals in the U.S. in 4Q11, a 12% decrease in dollars from the $8.4 billion invested in 765 deals in 3Q11 (as reported in October 2011), according to VentureSource. For all of 2011 venture capitalists invested $32.6 billion in 3209 deals, a 25% increase in dollars from 2010, when $26.2 billion was invested in 2799 deals (as reported in January 2011).
The PwC/NVCA MoneyTree™ Report based on data from Thomson Reuters (the "MoneyTree Report") reported similar results. Venture investment in 4Q11 declined 6% in dollars compared to the 3Q11 results (as reported in October 2011), with investment of $6.6 billion in 844 deals in 4Q11, compared to $7.0 billion in 876 deals in 3Q11. For all of 2011 venture capitalists invested $28.4 billion in 3673 deals, a 30% increase from 2010 when $21.8 billion was invested in 3277 deals (as reported in January 2011).
The MoneyTree Report also noted that the internet and software industries saw the largest increase in investment in 2011, increasing 68% and 38% respectively over 2010, although both saw declines in investment from 3Q11 to 4Q11. Silicon Valley received 41% of all venture funding in 2011, followed by New England and New York at 11% and 9.5% respectively.
Acquisitions (including buyouts) of U.S. venture-backed companies in 4Q11 totaled $9.4 billion in 107 transactions, compared to $13 billion in 122 transactions in 3Q11 (as reported in October 2011), a 28% decline in dollars, according to Dow Jones. For all of 2011, 477 venture-backed companies were acquired for $47.8 billion, compared to 468 acquisitions for $35.8 billion in 2010 (as reported in January 2011), an increase of 34% in dollar terms.
Thomson Reuters and the NVCA ("Thomson/NVCA") reported 92 acquisitions in 4Q11 compared to 101 in 3Q11 (as reported in October 2011), and 429 in all of 2011, compared to 420 in 2010 (as reported in January 2011).
Dow Jones reported 10 U.S venture-backed company IPOs raising $2.4 billion in 4Q11, close to 5x higher in dollars from the 10 IPOs that raised $0.5 billion in 3Q11. In all of 2011, 45 venture-backed companies went public raising $5.4 billion, compared to 46 IPOs in 2010 raising $3.3 billion, a 64% increase in dollar terms.
Similarly Thomson/NVCA reported a 5x increase in IPO dollars raised from 3Q11 to 4Q11, and a 41% increase in dollars raised from 2010 to 2011.
Thomson/NVCA also reported that approximately 63% of the companies going public in both 4Q11 and 2011 overall were IT companies, and that 75% of the companies going public in 2011 were based in the U.S., with 54% of the U.S. companies based in California.
Dow Jones reported that venture funds raised $5.2 billion in 4Q11 compared to $2.2 billion in 3Q11, and that 135 funds raised $16.2 billion in all of 2011, compared to 154 funds raising $11.6 billion in 2011. Fifteen firms accounted for $10.5 billion or 65% of the total raised in 2011.
Dow Jones also reported that VC funds raised less than $50 billion over the past three years (2009-2011), while in the preceding three years (2006-2008), $100 billion was raised.
Similarly, Thomson/NVCA reported that 38 U.S. venture funds raised $5.6 billion in 4Q11, a 162% increase in dollars but a 41% decline in number of funds compared to the $2.1 billion raised by 64 funds in 3Q11. For all of 2011, 169 funds raised $18.2 billion, a 32% increase in dollars compared to 2010, when 169 funds raised $13.8 billion.
Until recently, the liquidity formula for venture investors and entrepreneurs was essentially: Liquidity=IPOs plus M&A. However, in recent years, with liquidity for venture-backed companies being difficult, and liquidity becoming increasingly important due to global financial turmoil, a third path for liquidity has grown – secondary purchases of equity in venture-backed companies (i.e., direct secondary purchases).
One of the more recent developments is the founding of secondary markets such as SecondMarket and SharesPost, which enable stockholders in venture-backed companies to sell their shares in an auction or market type environment to accredited investors. Some statistics on these markets are:
SharesPost handled over 1000 transactions for 40-50 venture-backed companies in 2011. They have created an index of their most frequently traded shares. The index was up 54% in 2011.
Another development is the growth of more traditional secondary funds that typically purchase shares in large blocks in negotiated transactions from shareholders in venture-backed companies. Industry Ventures estimates that they saw $7 billion of such opportunities in 2011, and Millenium Technology Ventures indicated in early 2011 that they expected the direct secondary market in private technology companies to be $10 billion annually by the end of 2013. These are not insubstantial numbers when compared to the approximately $53 billion of combined IPO and M&A provided liquidity in 2011.
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 3.27 on a 5 point scale in 4Q11, a decrease from the 3.41 reported for 3Q11, and the third quarter of decrease in a row.
According to the Venture View survey of venture capitalists conducted by the NVCA and Dow Jones VentureSource in December 2011, venture capitalists predictions for 2012 (compared to 2011) were:
|Venture capital investment:||36% decrease||33% flat||32% increase|
|Venture capital fundraising:||42% decrease||31% flat||27% increase|
|Number of IPOs:||48% increase||34% same/unsure||18% less|
|Mergers and acquisitions:||69% increase||27% same/unsure||4% decrease|
|Secondary market activity:||49% increase||29% less||22% same|
Nasdaq increased 6.5% in 4Q11, and has increased an additional 11.4% in 1Q12 through February 16, 2012.
Barometer Results By Industry — The table below sets forth Barometer results by industry group for each of the last eight quarters.
A graphical representation of the above is below.
*Please note that one internet/digital media company had a 1,500% up round. If this were excluded the Barometer result for the internet/digital media industry would have been 73%.
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.
When interpreting the Barometer results please bear in mind that the results reflect the average price increase of companies raising money in a given 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 40% range should be considered normal.
When comparing current period results to prior period results based on third party data (e.g., amounts invested by venture capitalists, amount of M&A proceeds, etc.), we use the prior period results initially published by the third party for the period, not the results that have been updated with additional information over time, to provide better comparability with the current period results. For example, when comparing fourth quarter results to third quarter results, we use the initially published third quarter results, typically provided in October, not the updated results that are typically provided in January. Such situations are set forth in our report with a parenthetical as to the date the information was initially reported.
The preparation of the information contained herein involves assumptions, compilations and analysis, and there can be no assurance that the information provided herein is error-free. Neither Fenwick & West LLP nor any of its partners, associates, staff or agents shall have any liability for any information contained herein, including any errors or incompleteness. The contents of this report are not intended, and should not be considered, as legal advice or opinion.
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