We analyzed the terms of venture financings for 124 companies headquartered in Silicon Valley that reported raising money in the second quarter of 2013.
Overview of Fenwick & West Results
While valuation related results for 2Q13 were generally healthy, certain trends bear watching. Specifically, although the percentage of up rounds declined only mildly, to 64%, the number of down rounds doubled to 22%. Additionally, while the average share price increase improved modestly compared to 1Q13 (62% to 57%), the median share price was relatively low at 19%, and for the second quarter in a row was noticeably below the 30% average median increase in 2012.
Here are the more detailed results.
Overview of Other Industry Data
Third party reports of the venture environment for the second quarter of 2013 showed:
The more detailed results follow:
Similarly, the PwC/NVCA MoneyTree™ Report based on data from Thomson Reuters (the “MoneyTree Report”) reported a 13.5% increase in venture investment and a 6% increase in venture financings from 1Q13 to 2Q13. They reported that $6.7 billion was raised in 913 financings in 2Q13 compared to $5.9 billion raised in 863 financings in 1Q13 (as reported in April 2013).1 The MoneyTree Report also noted that biotech investment increased 41% from 1Q13 to 2Q13.
Both services reported that venture investment in 1H13 lagged 1H12.
CB Insights and TechCrunch each reported that venture investing trended up noticeably as 2Q13 progressed.
Thomson Reuters reported similar results and noted that there were the most biotech IPOs in a quarter since 3Q00.
The increase in healthcare IPOs was attributed to increasing new drug approvals (the 39 new drugs approved by the FDA in 2012 was the highest since 1997) and strong performance by public biotech companies. (VentureWire, Rockoff and Demos, July 1, 2013).
Another example is the “community” model, exemplified by First Round Capital, which has created a web platform to transform their portfolio companies into a community where entrepreneurs can exchange information, ideas and best practices among themselves.
GoogleVentures was the fourth largest investor (by number of deals) in 2Q13 according to VentureSource.
AngelList announced a service that lets angel investors syndicate a deal with each other and allows the lead angel to collect a carried interest from other participating angels, according to TechCrunch.
The percentage of down rounds by series were as follows:
The Fenwick & West Venture Capital Barometer™ (Magnitude of Price Change) — Set forth below is the average percentage change between the price per share at which companies raised funds in a quarter, compared to the price per share at which such companies raised funds in their prior round of financing. In calculating the average, all rounds (up, down and flat) are included, and results are not weighted for the amount raised in a financing.
* One software company had a 1460% up round and one internet/digital media company had a 1190% up round in 2Q12. If these were excluded the Barometer result for 2Q12 would have been 70%.
The Barometer results by series are as follows:
* Please note that the two above mentioned software and internet/digital media companies with greater than 10x up rounds in 2Q12 were both Series C rounds. If these were excluded the Barometer result for Series C rounds in 2Q12 would have been 72%.
Results by Industry for Current Quarter — The table below sets forth the direction of price changes, Barometer results and number of financings for companies receiving financing in 2Q13, compared to their previous round, by industry group. Companies receiving Series A financings are excluded as they have no previous rounds to compare.
Down Round Results by Industry — The table below sets forth the percentage of “down rounds,” by industry groups, for each of the past eight quarters.
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.
* One internet/digital media company had a 1500% up round in 3Q11. If this were excluded the Barometer result for the internet/digital media industry in 3Q11 would have been 73%.
** These include the two previously mentioned companies with greater than 10x up rounds in 2Q12. Excluding those two companies, the Barometer result for the software industry would have been 86% and the Barometer result for the internet/digital media industry would have been 176%.
Median Percentage Price Change — Set forth below is the median percentage change between the price per share at which companies raised funds in a quarter, compared to the price per share at which such companies raised funds in their prior round of financing. In calculating the median, all rounds (up, down and flat) are included, and results are not weighted for the amount raised in the financing. Please note that this is different than the Barometer, which is based on average percentage price change.
Median Percentage Price Change Results by Industry — The table below sets forth the median percentage price change results by industry group for each of the last eight quarters. Please note that this is different than the Barometer, which is based on average percentage price change.
A graphical representation of the above is below.
Financing Round — This quarter’s financings broke down by series according to the chart below.
Fenwick & West Data on Legal Terms
Liquidation Preference — Senior liquidation preferences were used in the following percentages of financings.
The percentage of senior liquidation preference by series was as follows:
Multiple Liquidation Preferences — The percentage of senior liquidation preferences that were multiple liquidation preferences were as follows:
Of the senior liquidation preferences that were a multiple preference, the ranges of the multiples broke down as follows:
Participation in Liquidation — The percentages of financings that provided for participation were as follows:
Of the financings that had participation, the percentages that were not capped were as follows:
Cumulative Dividends — Cumulative dividends were provided for in the following percentages of financings:
* Note that the use of cumulative dividends increased noticeably in 3Q12. We note that 46% of the financings using cumulative dividends were in the life science industry, and that 38% of the financings (and 33% of the life science financings) using cumulative dividends did not provide for a participating liquidation preference, suggesting that in those financings’ cumulative dividends were used as a substitute for participating liquidation preference.
Antidilution Provisions — The uses of antidilution provisions in the financings were as follows:
Pay-to-Play Provisions — The percentages of financings having pay-to-play provisions were as follows:
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.
Redemption — The percentages of financings providing for mandatory redemption or redemption at the option of the investor were as follows:
Corporate Reorganizations — The percentages of post-Series A financings involving a corporate reorganization (i.e. reverse splits or conversion of shares into another series or classes of shares) were as follows:
Note on Methodology.
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 to 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.
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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