United States: Venture Capital Survey Silicon Valley Second Quarter 2011

Last Updated: August 23 2011
Article by Barry Kramer and Michael Patrick

Background — We analyzed the terms of venture financings for 117 companies headquartered in Silicon Valley that reported raising money in the second quarter of 2011.

Overview of Fenwick & West Results

  • Up rounds exceeded down rounds in 2Q11 61% to 25%, with 14% of rounds flat. Although this was a slight decline from 1Q11, when up rounds exceeded down rounds 67% to 16%, with 17% of rounds flat, it was still a very healthy performance. This was the eighth quarter in a row in which up rounds exceeded down rounds.
  • The Fenwick & West Venture Capital Barometer showed an average price increase of 71% in 2Q11, up from the 52% increase registered in 1Q11. This was the best barometer result since 2007, and was also the eighth quarter in a row in which the Barometer was positive.
  • Interpretive Comment regarding the Barometer. When interpreting the Barometer results please bear in mind that the results reflect the average price increase of companies raising money this 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 30-40% range should be considered normal. Our average Barometer reading since 1Q04, when we began calculating the Barometer, through 2Q11, has been 40%. We would expect such amount to be slightly higher than "normal", as the earlier years reflect the recovery from the dotcom bubble bust

The results by industry are set forth below. In general, software and internet/digital media industries had the best valuation-related results by a substantial amount in 2Q11, followed by the hardware and cleantech industries, while the life science industry continued to lag.

Overview of Other Industry Data

The second quarter of 2011 was generally a strong quarter for the venture capital industry, with the most notable result being an improved IPO market. The amount invested by venture capitalists in 2Q11 was also solid. Fundraising by venture capitalists showed a significant decline from the very strong 1Q11 results, but was still reasonable in dollar terms. Merger and acquisition activity was somewhat lower, perhaps as participants sought to understand the effect of the stronger IPO market.

However there are some clouds on the horizon, as the Silicon Valley Venture Capital Confidence Index declined for only the second time in 11 quarters, Nasdaq has had a very poor 3Q11 to date, there are reports of a number of IPOs being recently postponed and the world financial environment is undergoing substantial turbulence.

Detailed results from third-party publications are as follows:

  • Venture Capital Investment. Venture capitalists (including corporation affiliated venture groups) invested $8.0 billion in 776 deals in the U.S. in 2Q11, a 20% increase in dollars over the $6.4 billion invested in 661 deals reported for 1Q11 in April 2011, according to Dow Jones VentureSource ("VentureSource"). VentureSource also reported that $2.9 billion of such amount, or 36%, was invested in Silicon Valley-based companies.

Similarly, the PwC/NVCA MoneyTree" Report based on data from Thomson Reuters (the "MoneyTree Report") reported that venture capitalists invested $7.5 billion in 966 deals in 2Q11, a 27% increase in dollars over the $5.9 billion invested in 736 deals reported in April 2011 for 1Q11. The MoneyTree Report noted that investments in internet companies was at its highest quarterly level since 2001.

  • Merger and Acquisition Activity. Acquisitions of U.S. venture-backed companies in 2Q11 totaled $9.5 billion in 95 deals, a slight decrease from the $9.8 billion in 104 deals reported in April 2011 for 1Q11, according to VentureSource. Of the 2Q11 deals, 8 were private/private transactions, perhaps indicating a growing acquisition ability and interest of later stage private companies.

Thomson Reuters and the National Venture Capital Association ("Thompson/NVCA") also reported a decrease in M&A transactions, from 109 in 1Q11 (as reported in April 2011) to 79 in 2Q11. Of the 79 reported transactions in 2Q11, 56 were in the IT industry, but the largest was in the pharmaceutical industry where Daiichi Sankyo bought Berkeley-based Plexxikon for $805 million.

  • Initial Public Offerings. VentureSource reported that 14 venture-backed companies went public in 2Q11, raising $1.7 billion, a noticeable increase from the 11 IPOs raising $700 million reported in 1Q11.

Thompson/NVCA reported that 22 venture-backed companies went public in the U.S. in 2Q11, raising $5.5 billion, a substantial increase over the 14 IPOs raising $1.4 billion reported in 1Q11. Of the 22 IPOs, 14 were based in the U.S. and 5 in China, and 14 were in the IT industry with 11 of those being internet focused. The largest of the IPOs was Russian-based Yandex raising $1.3 billion.

At the end of 2Q11 46 U.S. venture-backed companies were in registration to go public, similar to the 45 in registration at the end of 1Q11.

  • Venture Capital Fundraising. Thompson/NVCA reported that 37 venture funds raised $2.7 billion in 2Q11, a significant decline from the $7.6 billion raised by 42 funds in 1Q11. However, 1Q11 was the highest first quarter for fundraising since 2001, and 2Q11 was 28% higher (in dollars) than 2Q10. Also the first half of 2011 saw 67% more funds raised than the first half of 2Q10, but a 15% decrease in the number of venture funds closing fundings.

VentureSource provided consistent results, reporting that U.S. venture funds raised $8.1 billion in the first half of 2011, a 20% increase in dollars over the first half of 2010. VentureSource noted that only 7 funds raised 77% of the $8.1 billion.

  • Venture Capital Returns. According to the Cambridge Associates U.S. Venture Capital Index® U.S. venture capital funds achieved an 18.5% return for the 12-month period ending 1Q11, slightly higher than the Nasdaq return of 16% (not including any dividends) during that period. Note that this information is reported with a one-quarter delay.
  • Sentiment. The Silicon Valley Venture Capital Confidence Index produced by Professor Mark Cannice at the University of San Francisco reported that the confidence level of Silicon Valley venture capitalists was 3.66 on a 5 point scale, a decrease from the 3.91 result reported for 1Q11. Venture capitalists expressed concerns due to macroeconomic trends, high venture valuations, uneven capital availability and life science regulatory constraints.
  • Nasdaq. Nasdaq increased 1% in 2Q11, but has decreased 9% in 3Q11 through August 15, 2011.

Detailed Fenwick & West Results

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

Series

Q2'11

Q1'11

Q4'10

Q3'10

Q2'10

Q1'10

Q4'09

Q3'09

A

19%

18%

13%

20%

18%

24%

23%

17%

B

25%

24%

26%

23%

22%

21%

22%

31%

C

26%

24%

35%

28%

28%

30%

21%

19%

D

15%

20%

14%

9%

20%

11%

17%

16%

E and higher

15%

14%

12%

20%

12%

14%

17%

17%

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

Price Change

Q2'11

Q1'11

Q4'10

Q3'10

Q2'10

Q1'10

Q4'09

Q3'09

Down

25%

16%

21%

30%

27%

32%

30%

36%

Flat

14%

17%

12%

18%

18%

19%

23%

23%

Up

61%

67%

67%

52%

55%

49%

47%

41%

The percentage of down rounds by series were as follows:

Series

Q2'11

Q1'11

Q4'10

Q3'10

Q2'10

Q1'10

Q4'09

Q3'09

B

17%

10%

12%

20%

14%

23%

24%

19%

C

27%

17%

27%

33%

29%

45%

25%

45%

D

28%

25%

23%

30%

36%

18%

47%

56%

E and higher

33%

12%

17%

38%

33%

27%

26%

39%

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 2Q11 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 Q2'11

Combined total for all Series for Q1'11

Combined total for all Series for Q4'10

Combined total for all Series for Q3'10

Combined total for all Series for Q2'10

Up rounds

+198%

+139%

+90%

+37%

+138%

+91%

+104%

+81%

+86%

Down rounds

-53%

-55%

-41%

-53%

-51%

-56%

-45%

-47%

-65%

Net result

+134%

+74%

+39%

-1%

+71%

+52%

+61%

+28%

+30%

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 2Q11, 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

71%

20%

9%

+123%

Hardware

12

50%

50%

0%

+35%

Lifescience

24

46%

33%

21%

+6%

Internet/Digital Media

17

76%

6%

8%

+115%

Cleantech

6

67%

17%

16%

+24%

Other

2

0%

50%

50%

-33%

Total - All Industries

95

61%

25%

14%

+71%

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:

Q2'11

Q1'11

Q4'10

Q3'10

Q2'10

Q1'10

Q4'09

Q3'09

37%

43%

28%

41%

40%

38%

41%

49%

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

Series

Q2'11

Q1'11

Q4'10

Q3'10

Q2'10

Q1'10

Q4'09

Q3'09

B

31%

24%

12%

32%

32%

23%

24%

38%

C

37%

47%

27%

27%

34%

42%

50%

40%

D

39%

42%

46%

60%

48%

36%

58%

63%

E and higher

44%

71%

42%

62%

53%

53%

37%

67%

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

Q2'11

Q1'11

Q4'10

Q3'10

Q2'10

Q1'10

Q4'09

Q3'09

29%

14%

13%

20%

17%

23%

19%

21%

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

Range of multiples

Q2'11

Q1'11

Q4'10

Q3'10

Q2'10

Q1'10

Q4'09

Q3'09

>1x – 2x

62%

83%

100%

85%

71%

86%

57%

89%

>2x – 3x

25%

0%

0%

0%

29%

14%

43%

11%

>3x

13%

17%

0%

15%

0%

0%

0%

0%

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

Q2'11

Q1'11

Q4'10

Q3'10

Q2'10

Q1'10

Q4'09

Q3'09

38%

43%

45%

53%

35%

48%

51%

53%

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

Q2'11

Q1'11

Q4'10

Q3'10

Q2'10

Q1'10

Q4'09

Q3'09

64%

60%

40%

58%

61%

54%

54%

60%

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

Q2'11

Q1'11

Q4'10

Q3'10

Q2'10

Q1'10

Q4'09

Q3'09

6%

8%

5%

7%

7%

7%

4%

7%

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

Type of Provision

Q2'11

Q1'11

Q4'10

Q3'10

Q2'10

Q1'10

Q4'09

Q3'09

Ratchet

5%

5%

3%

4%

4%

5%

6%

3%

Weighted Average

92%

92%

95%

93%

94%

94%

94%

96%

None

3%

3%

2%

3%

2%

1%

0%

1%

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.

Q2'11

Q1'11

Q4'10

Q3'10

Q2'10

Q1'10

Q4'09

Q3'09

14%

5%

7%

15%

16%

7%

10%

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

Q2'11

Q1'11

Q4'10

Q3'10

Q2'10

Q1'10

Q4'09

Q3'09

100%

83%

100%

81%

100%

86%

80%

93%

- Shadow Preferred Stock

Q2'11

Q1'11

Q4'10

Q3'10

Q2'10

Q1'10

Q4'09

Q3'09

0%

17%

0%

19%

0%

14%

20%

7%

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

Q2'11

Q1'11

Q4'10

Q3'10

Q2'10

Q1'10

Q4'09

Q3'09

19%

20%

19%

22%

23%

24%

21%

19%

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

Q2'11

Q1'11

Q4'10

Q3'10

Q2'10

Q1'10

Q4'09

Q3'09

5%

7%

4%

9%

8%

14%

5%

8%

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Barry Kramer
 
In association with
Related Video
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
Accounting and Audit
Anti-trust/Competition Law
Consumer Protection
Corporate/Commercial Law
Criminal Law
Employment and HR
Energy and Natural Resources
Environment
Family and Matrimonial
Finance and Banking
Food, Drugs, Healthcare, Life Sciences
Government, Public Sector
Immigration
Insolvency/Bankruptcy, Re-structuring
Insurance
Intellectual Property
International Law
Litigation, Mediation & Arbitration
Media, Telecoms, IT, Entertainment
Privacy
Real Estate and Construction
Strategy
Tax
Transport
Wealth Management
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.