Trends in Venture CapitalFinancingsFinancings
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 [email protected]
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 2012-13 BAROMETER OF 2012-13 VC ACTIVITY
VC Financings Across Rounds
Series Q1'12 Q2'12 Q3'12 Q4'12 Q1'13Series 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 Q1'2013Series 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 RaisedSeries 2007 2008 2009 2010 2011 2012 Q1'2013Series 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%
Perc
enta
ge o
f com
pani
esPercentage of companies Option Pool Size
2.8% <5% 4 0.11216.6% 5-10% 7.5 1.24537.1% 10-15% 12.5 4.637522.2% 15-20% 17.5 3.885
8.4% 20-25% 22.5 1.8913.9% >25% 27.5 3.8225
Average 2.5986670.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
<5% 5-10% 10-15% 15-20% 20-25% >25%
Perc
enta
ge o
f com
pani
es
Size of employee 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 of employee stock option pool
Series A Valuations byIndustry (under $2M raised)Industry ValuationClean Tech 2.20$ Internet 3.00$ Software 3.50$
$4.00
$5.00
mon
ey v
alua
tion
Software 3.50$ Life Sciences 3.50$ Non-technology 4.50$
$-
$1.00
$2.00
$3.00
$4.00 Pr
e-m
oney
val
uatio
n
Non-technology products had the highestvaluations
Industry ValuationLife Sciences 5.10$ Clean Tech 6.00$ Non-technology 10.00$ $10.00
$15.00
mon
ey v
alua
tion
Series A Valuations byIndustry (over $2M raised)
Non-technology 10.00$ Electronics/Hardware 12.00$ Semiconductor 12.30$ Software 13.00$ Internet 13.50$
$-
$5.00
$10.00 Pr
e-m
oney
val
uatio
n
New categories require more money to start
Life Sciences is lowest valuation (was tiedfor 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 Rounds2009 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 roundSeries 2012 Q1'2013Series 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+
Dow
n Ro
unds
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 Q1'2013Software 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 Life Science Internet CleanTech
2012
Q1'2013
Software consistently up rounds
CleanTech had one really bad quarter
Change in Valuation AcrossRounds
Series 2012 Q1'2013Series 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+
Incr
ease
in V
alua
tion
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 IndustriesIndustry 2012 Q1'2013Software 97% 67%Hardware 43% 38%Life Sciences 16% 6%Internet 122% 103%100%
120%
140%
Incr
ease
in V
alua
tion
Internet 122% 103%CleanTech 46% 51%
0%
20%
40%
60%
80%
100%
Software Hardware Life Sciences
Internet CleanTech
Incr
ease
in V
alua
tion
2012
Q1'2013
Includes data from all rounds
CleanTech is very volatile
SEED ROUND INVESTMENTSSEED ROUND INVESTMENTS
Growth and Recognitionof 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 quadrupledto 1800to 1800
Number of seed investments doubled to31% of the total number of VC deals
Number of companies funded by acceleratorsincreased five-fold to 1200
Where are Seed Investments Going?
2010 2011 2012
Internet/Digital 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%
Professional 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 squeezedout by VC funds
What is the SeedInvestment Vehicle?
2010 2011 2012Preferred 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
Convertible Note Deals
Preferred stock deals are somewhathigher 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 bythe end of 2011
27% of companies that raised their seed round in 2011 raised a Series A Round bythe 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 rightsNo 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 Preference2010 2011 2012
Non-participating preferred
liquidation
90% 91% 85%
75%
100%
preference
Participating 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 liquidationpreference
Convertible Note Financings
Used in !35% of all seed financings Used in !35% of all seed financings
Probably in most seed financings < $250k
Interest RatePercentage 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%
Maturity2012 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 pricein 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 wereused 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 Preference2012 2011 2010 2009 200837% 48,5% 50% 57% 45%
2008 2009 2010 2011 2012 Q1'2013
55%
60%
Perc
enta
ge S
enio
r Liq
uida
tion
2008 2009 2010 2011 2012 Q1'201345% 57% 50% 48% 37% 34%
30%
35%
40%
45%
50%
2008 2009 2010 2011 2012 Q1'2013
Perc
enta
ge S
enio
r Liq
uida
tion
Pref
eren
ce
As economy improves, senior liquidationpreferences are becoming less common
Senior Liquidation PreferenceAcross Rounds
2008 2009 2010 2011 2012 Q1'2013Series 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%
Perc
enta
ge S
enio
r Liq
uida
tion
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
Perc
enta
ge S
enio
r Liq
uida
tion
Pref
eren
ce 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 Preferences2008 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 liquidationpreference in Q1’2013
2008 2009 2010 2011 2012 Q1'2013
Participating v. Non-participating2008 2009 2010 2011 2012 Q1'201358% 51% 50% 42% 33% 32%55%
60%
30%
35%
40%
45%
50%
2008 2009 2010 2011 2012 Q1'2013
Steady decline in participating liquidationpreference
2008 2009 2010 2011 2012 Q1'2013
Cumulative Dividends2008 2009 2010 2011 2012 Q1'20136.00% 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-Dilution2008 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
Redemption2008 2009 2010 2011 2012 Q1'201323% 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
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