Trends in venture capital financings
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Trends in venture capital financings

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    Trends in venture capital financings Trends in venture capital financings Presentation Transcript

    • Trends in Venture Capital FinancingsFinancings Leonard Grayver, Esq. June 11, 2013
    • About Leonard Grayver  Partner at Greenberg, Whitcombe & Takeuchi Partner at Greenberg, Whitcombe & Takeuchi  Represents  VC Funds  Founders  Startups  Offices in California and Moscow Offices in California and Moscow  For a copy of Russian-language Guide to VC Term Sheets  email LGrayver@gwtllp.com
    • Agenda  Overview of Venture Capital Activity Overview of Venture Capital Activity  Overview of Deal Terms  Overview of Seed Round Activity  Overview of Seed Investment Deal Terms
    • Data Used  Wilson Sonsini Financing Trends Wilson Sonsini Financing Trends  Fenwick and West VC Survey  PricewaterhouseCoopers MoneyTree report  Dow Jones VentureSource  Personal Experience Personal Experience
    • BAROMETER OF 2012-13BAROMETER OF 2012-13 VC ACTIVITY
    • VC Financings Across Rounds Series Q1'12 Q2'12 Q3'12 Q4'12 Q1'13 Series A 24% 24% 24% 12% 25%Series A 24% 24% 24% 12% 25% Series B 18% 17% 24% 31% 20% Series C 17% 21% 22% 22% 19% Series D 17% 14% 15% 16% 18% Series E+ 24% 24% 15% 19% 18%  Distribution across rounds is pretty stable  Many seed investments don’t get further funding  Expect to see fewer D & E rounds in the future
    • Median Pre-Money Valuations Series 2007 2008 2009 2010 2011 2012 Q1'2013 Series A $ 9.60 $ 6.60 $ 4.80 $ 4.60 $ 6.00 $ 7.50 7.60$ Series B $ 28.20 $ 21.50 $ 15.30 $ 17.80 $ 19.20 $ 23.50 27.50$  The ‘Instagram Effect’  Improving economySeries B $ 28.20 $ 21.50 $ 15.30 $ 17.80 $ 19.20 $ 23.50 27.50$ Series C+ $ 60.30 $ 52.50 $ 47.50 $ 55.00 $ 69.20 $ 96.20 120.00$ $80 $100 $120 $140 $160 Series C+  Companies raise rounds later in life $- $20 $40 $60 $80 2007 2008 2009 2010 2011 2012 Q1'2013 Series B Series A
    • Median Amount Raised Series 2007 2008 2009 2010 2011 2012 Q1'2013 Series A $ 6.00 $ 3.45 $ 2.60 $ 2.00 $ 1.80 $ 2.10 2.40$ Series B $ 11.80 $ 9.90 $ 8.00 $ 5.50 $ 4.10 $ 5.00 5.00$ Series C+ $ 13.10 $ 11.20 $ 9.30 $ 9.10 $ 8.10 $ 10.40 10.50$Series C+ $ 13.10 $ 11.20 $ 9.30 $ 9.10 $ 8.10 $ 10.40 10.50$ $15 $20 $25 $30 Series C+ Series B $- $5 $10 2007 2008 2009 2010 2011 2012 Q1'2013 Series A
    • Founders’ Share of Company After Series A Round 75% 80% 50% 55% 60% 65% 70% 2007 2008 2009 2010 2011 2012 Q1'2013  Increased valuation = increased founders’ share  Does not account for Stock Option Plan
    • Stock Option Pool Size After Series A Round 30.0% 35.0% 40.0% Percentageofcompanies Percentage of companies Option Pool Size 2.8% <5% 4 0.112 16.6% 5-10% 7.5 1.245 37.1% 10-15% 12.5 4.6375 22.2% 15-20% 17.5 3.885 8.4% 20-25% 22.5 1.89 13.9% >25% 27.5 3.8225 Average 2.598667 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% <5% 5-10% 10-15% 15-20% 20-25% >25% Percentageofcompanies Size ofemployee stock option pool  Average option pool size is 15.9 %  Stock Option Pool comes out of Founders’ shares  Strategy: Negotiate by building a hiring model Size ofemployee stock option pool
    • Series A Valuations by Industry (under $2M raised) Industry Valuation Clean Tech 2.20$ Internet 3.00$ Software 3.50$ $4.00 $5.00 moneyvaluation Software 3.50$ Life Sciences 3.50$ Non-technology 4.50$ $- $1.00 $2.00 $3.00 $4.00Pre-moneyvaluation  Non-technology products had the highest valuations
    • Industry Valuation Life Sciences 5.10$ Clean Tech 6.00$ Non-technology 10.00$$10.00 $15.00 moneyvaluation Series A Valuations by Industry (over $2M raised) Non-technology 10.00$ Electronics/Hardware 12.00$ Semiconductor 12.30$ Software 13.00$ Internet 13.50$ $- $5.00 $10.00 Pre-moneyvaluation  New categories require more money to start  Life Sciences is lowest valuation (was tied for highest in the under $2M bracket)  Likely due to higher risk and longer road to liquidity  Founders’ share in Life Science/CleanTech is under 40%
    • Up Rounds and Down Rounds 2009 2010 2011 2012 Q1'2013 Down rounds 39% 28% 15% 15% 11% Flat rounds 24% 16% 18% 18% 21% Up rounds 36% 56% 67% 68% 68%60% 70% 80% 0% 10% 20% 30% 40% 50% 2009 2010 2011 2012 Q1'2013 Down rounds Flat rounds Up rounds  Marked improvement since start of recession  Plateaued over the last two years
    • But a lot depends on the round Series 2012 Q1'2013 Series B 6% 4% Series C 16% 5% Series D 15% 19% Series E+ 22% 18% 20% 25% Series E+ 22% 18% 0% 5% 10% 15% Series B Series C Series D Series E+ DownRounds 2012 Q1'2013  Later rounds = more chance of a down round  Probably due to exit difficulties  Founders suffer more than investors Series B Series C Series D Series E+
    • … and the industryIndustry 2012 Q1'2013 Software 9% 10% Hardware 24% 0% Life Science 15% 33% Internet 12% 6% CleanTech 23% 0% 25% 30% 35% CleanTech 23% 0% 0% 5% 10% 15% 20% Software Hardware LifeScience Internet CleanTech 2012 Q1'2013  Software consistently up rounds  CleanTech had one really bad quarter
    • Change in Valuation Across RoundsSeries 2012 Q1'2013 Series B 125% 96% Series C 75% 93% Series D 33% 17% 120% 140% Series D 33% 17% Series E+ 35% 18% 0% 20% 40% 60% 80% 100% Series B Series C Series D Series E+ IncreaseinValuation 2012 Q1'2013  120% increase is 2.2× increase  Lower increase in later rounds is likely due to more down rounds Series B Series C Series D Series E+
    • … and Across Industries Industry 2012 Q1'2013 Software 97% 67% Hardware 43% 38% Life Sciences 16% 6% Internet 122% 103% 100% 120% 140% IncreaseinValuation Internet 122% 103% CleanTech 46% 51% 0% 20% 40% 60% 80% 100% Software Hardware Life Sciences Internet CleanTech IncreaseinValuation 2012 Q1'2013  Includes data from all rounds  CleanTech is very volatile
    • SEED ROUND INVESTMENTSSEED ROUND INVESTMENTS
    • Growth and Recognition of Seed Investments  Three of the six largest VC investors Three of the six largest VC investors (by number of deals) were seed focused funds  500 Startups, Y Combinator, First Round Capital  Between 2009 and 2012  Number of seed financings almost quadrupled to 1800to 1800  Number of seed investments doubled to 31% of the total number of VC deals  Number of companies funded by accelerators increased five-fold to 1200
    • Where are Seed Investments Going?2010 2011 2012 Internet/Di gital Media 71% 75% 66% Software 29% 25% 34% 70% 80% Software 29% 25% 34% 0% 10% 20% 30% 40% 50% 60% 2010 2011 2012 Internet/Digital Media Software  Capital-heavy industries are not suitable 2010 2011 2012
    • Who is Investing in Seed? 2010 2011 2012 Seed funds 43% 46% 46% Profession al angels 31% 28% 20% VC funds 26% 27% 34% 35% 40% 45% 50% VC funds 26% 27% 34% 0% 5% 10% 15% 20% 25% 30% 35% 2010 2011 2012 Seed funds Professional angels VC funds  Professional angels are being squeezed out by VC funds
    • What is the Seed Investment Vehicle? 2010 2011 2012 Preferred Stock 69% 59% 67% Convertible Debt 31% 41% 33% 70% 80% Debt 0% 10% 20% 30% 40% 50% 60% 2010 2011 2012 Preferred Stock Convertible Debt  Preferred stock deals predominate  Counter to what most people think  Shows the institutionalization of seed deals 2010 2011 2012
    • How Much is Invested? 2010 2011 2012 Preferred Stock Deals$1,056,000 $1,000,000 $1,360,000 Convertible Note Deals$662,500 $1,000,000 $918,000 $1,200,000 $1,400,000 $0 $200,000 $400,000 $600,000 $800,000 $1,000,000 2010 2011 2012 Preferred Stock Deals ConvertibleNoteDeals  Preferred stock deals are somewhat higher than convertible note deals
    • The Hard Part is Getting to the Next Round …  From 2009 to 2012 From 2009 to 2012  Number of seed financings increased from 472 to 1749  Number of Series A rounds only increased from 418 to 692
    • Seed Bubble?  45% of companies that raised their seed round in 2010 raised a Series A Round byround in 2010 raised a Series A Round by the end of 2011  27% of companies that raised their seed round in 2011 raised a Series A Round by the end of 2012  The rest? Many, if not most, have shut down. The rest? Many, if not most, have shut down.
    • SEED INVESTMENT DEAL TERMSSEED INVESTMENT DEAL TERMS
    • Preferred Stock Financings  Usually use simplified financing documents  No anti-dilution rights No ROFR or Co-sale rights No ROFR or Co-sale rights  No Registration Rights  No Dividend Preference Rights  Limited Veto Rights  Limited Drag Along  Information Rights - Yes Pre-emptive rights – Yes Pre-emptive rights – Yes  Legal Fees <$10,000  Investor gets a board seat in ≈ 70% of deals
    • Liquidation Preference 2010 2011 2012 Non- participatin g preferred liquidation 90% 91% 85% 75% 100% preference Participati ng preferred liquidation preference 10% 9% 15% 0% 25% 50% 75% 2010 2011 2012 Participating preferred liquidation preference Non-participating preferred liquidation preference  Almost always non-participating liquidation preference
    • Convertible Note Financings  Used in ≈35% of all seed financings Used in ≈35% of all seed financings  Probably in most seed financings < $250k
    • Interest RatePercentag e in which investors received a board seat: 72.50% 70% 73 70% 80% 90% 100% 2012 Q1'2013 < 8% 64% 82% = 8% 30% 18% > 8% 5% 0% 0% 10% 20% 30% 40% 50% 60% 2012 Q1'2013 > 8% = 8% < 8%  Median interest rate is 5.5%
    • Maturity 2012 Q1'2013 < 12 months 8% 0% = 12 months 30% 45% > 12 70% 80% 90% 100%  Median maturity is 18 months > 12 months 62% 55% 0% 10% 20% 30% 40% 50% 60% 2012 Q1'2013 > 12 months = 12 months < 12 months  Median maturity is 18 months
    • Conversion into Shares  Conversion to shares at discounted price in about 85% of the dealsin about 85% of the deals  Discount ranges: 2012 Q1'2013 < 20 % 17% 30% = 20% 54% 40% > 20 % 29% 30% 30% 40% 50% 60% 70% 80% 90% 100% > 20 % = 20% < 20 %  Median discount is 20% 0% 10% 20% 30% 2012 Q1'2013 < 20 %
    • Valuation Caps  Over 2010 – 2012, valuation caps were Over 2010 – 2012, valuation caps were used in 85% of deals  The median valuation cap was $6M
    • Infrequently Used Terms  Investors get a board seat in ≈2% of deals Investors get a board seat in ≈2% of deals  Notes are secured in ≈2% of deals  Notes include warrants in ≈6% of deals  Notes are senior to other debt in ≈10% of deals
    • VENTURE ROUND DEAL TERMSVENTURE ROUND DEAL TERMS
    • Liquidation Preference 2012 2011 2010 2009 2008 37% 48,5% 50% 57% 45% 2008 2009 2010 2011 2012 Q1'2013 55% 60% PercentageSeniorLiquidation2008 2009 2010 2011 2012 Q1'2013 45% 57% 50% 48% 37% 34% 30% 35% 40% 45% 50% 2008 2009 2010 2011 2012 Q1'2013 PercentageSeniorLiquidation Preference  As economy improves, senior liquidation preferences are becoming less common
    • Senior Liquidation Preference Across Rounds 2008 2009 2010 2011 2012 Q1'2013 Series B 31% 28.50% 22% 26% 22.20% 29% Series C 40% 45% 32.50% 44% 28.70% 41% Series D 54.50% 57% 47.50% 37.50% 34.50% 33.00% 55% 60% PercentageSeniorLiquidation Series D 54.50% 57% 47.50% 37.50% 34.50% 33.00% Series E+ 52% 53% 52.50% 42% 44.50% 32% 20% 25% 30% 35% 40% 45% 50% 2008 2009 2010 2011 2012 Q1'2013 PercentageSeniorLiquidation Preference Series B Series C Series D Series E+  Least common in series B  Steady decline in later rounds 2008 2009 2010 2011 2012 Q1'2013
    • Multiple Liquidation Preferences 2008 2009 2010 2011 2012 Q1'2013 >1x-2x 74% 75% 86% 61% 96.50% 57% >2x-3x 23% 25% 9% 25% 3.50% 29% >3x 3% 0% 5% 14% 0% 14% 80% 90% 100% >3x 3% 0% 5% 14% 0% 14% 0% 10% 20% 30% 40% 50% 60% 70% 80% 2008 2009 2010 2011 2012 Q1'2013 >1x-2x >2x-3x >3x  Very surprising jump in multiple liquidation preference in Q1’2013 2008 2009 2010 2011 2012 Q1'2013
    • Participating v. Non-participating 2008 2009 2010 2011 2012 Q1'2013 58% 51% 50% 42% 33% 32% 55% 60% 30% 35% 40% 45% 50% 2008 2009 2010 2011 2012 Q1'2013  Steady decline in participating liquidation preference 2008 2009 2010 2011 2012 Q1'2013
    • Cumulative Dividends 2008 2009 2010 2011 2012 Q1'2013 6.00% 5.70% 6.50% 6.00% 6.25% 3% 5.00% 6.00% 7.00% 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 2008 2009 2010 2011 2012 Q1'2013  More common in East Coast VC financings
    • Anti-Dilution 2008 2009 2010 2011 2012 Q1'2 Full Ratchet 4% 3.70% 4% 4% 3% 1% Weighted Average 94% 96% 94% 94% 95% 96% None 2% 0.30% 2% 2% 2% 3%80% 100% 4% 0% 20% 40% 60% Full Ratchet Weighted Average None 0% 2% 4%  Full Ratchet is almost never used
    • Redemption 2008 2009 2010 2011 2012 Q1'2013 23% 19.50% 22% 17.50% 16.70% 0.14 20% 22% 24% 10% 12% 14% 16% 18% 20% 2008 2009 2010 2011 2012 Q1'2013
    • ANY QUESTIONS OR IF YOU NEED A LAWYER, EMAIL MENEED A LAWYER, EMAIL ME LGrayver@GWTLLP.com