Mountain View, CA (August 10, 2017) – Fenwick & West today announced the results of its Second Quarter 2017 Silicon Valley Venture Capital Survey, which analyzed the terms of 208 venture financings that closed in the second quarter of 2017 by companies headquartered in Silicon Valley.
In Q2 2017, venture valuations continued the improvement that began in the first quarter of 2017, with the software sector recording the strongest valuation increases. The use of investor-friendly terms, such as multiple liquidation preferences and participation rights, declined.
“VC investment activity in Silicon Valley continued to improve in Q2 2017, but valuation metrics are still considerably off from the all-time highs reached in mid-2015,” said Cindy Hess, co-chair of Fenwick’s startup and venture capital practice and co-author of the survey. “The software industry saw the strongest valuations and showed significant improvements. We also saw the average price increases for later stage investments decrease in comparison to Q1, possibly reflecting challenges in the exit environment.”
“Industry data showed marginal improvement in the U.S. venture environment for Q2, in line with what we saw for Silicon Valley,” said Mark Leahy, co-chair of Fenwick’s startup and venture capital practice and co-author of the survey. “The pace of investments was flat but the amount of capital invested substantially increased from the last quarter, meaning the average round size is increasing. The number of venture-backed U.S. IPOs increased compared to Q1, but at the same time, the number and value of acquisitions continued to decline.”
Valuations Continue Improvement
Following a decline in 2016, venture valuations continued the improvement that began in Q1 2017. Valuation metrics are now marginally higher than their 13-year averages.
Up rounds exceeded down rounds 77% to 13%, with 10% flat—an increase from Q1 2017, when up rounds exceeded down rounds 73% to 18%, with 9% flat. Note that the percentage of down rounds decreased across all financing rounds.
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.
Software Sector Improves, Life Sciences Industry Declines in Valuation Metrics
The software industry recorded substantial improvements in valuation metrics and had the strongest valuation results in Q2 2017. It was followed by the hardware and internet/digital media industries, which recorded moderately weaker valuation metrics than in Q1.
Notably the life sciences industry recorded a considerable decline in valuation metrics.
Stronger Valuations Results for Early Stage Investments
The Fenwick & West Venture Capital Barometer™ showed an average price increase in Q2 2017 of 64%, an increase from the 54% recorded in Q1 and above the historical average of 56%.
In contrast to Q1 2017, when earlier stage rounds recorded weaker valuation results and later stage rounds recorded stronger valuation results compared to the prior quarter, the average price increases for early stage (Series B and C) rounds increased in Q2 while the average price increases for later stage (Series D and E+) rounds decreased.
The median price increase of financings in Q2 2017 was 30%, which represented a small increase from the 29% in Q1 2017 and the second consecutive quarter of modest increase after declining for six straight quarters.
Investor-Favorable Deal Terms Decrease
Following an increase in the use of investor-favorable deal terms in Q1 2017, the use of multiple liquidation preferences and participation rights declined in Q2 2017—the lowest since Q4 2014.
Complete results of the survey with related discussion are posted on Fenwick & West’s website.
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, this 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.