svod13: "trends in venture capital financings", leonard grayver
DESCRIPTION
SVOD 2013: "Trends in Venture Capital Financings", Leonard Grayver, Esq. June 11, 2013 http://svod.org/TRANSCRIPT
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Trends in Venture CapitalFinancingsFinancings
Leonard Grayver, Esq.June 11, 2013
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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]
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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
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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
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BAROMETER OF 2012-13 BAROMETER OF 2012-13 VC ACTIVITY
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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
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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
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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
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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
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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
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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
$4.00 Pr
e-m
oney
val
uatio
n
Non-technology products had the highestvaluations
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Industry ValuationLife Sciences 5.10$ 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%
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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
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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+
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… 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
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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+
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… 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
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SEED ROUND INVESTMENTSSEED ROUND INVESTMENTS
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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
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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
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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
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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
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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
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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
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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.
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SEED INVESTMENT DEAL TERMSSEED INVESTMENT DEAL TERMS
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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
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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
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Convertible Note Financings
Used in !35% of all seed financings Used in !35% of all seed financings
Probably in most seed financings < $250k
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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%
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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
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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 %
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Valuation Caps
Over 2010 – 2012, valuation caps were Over 2010 – 2012, valuation caps wereused in 85% of deals
The median valuation cap was $6M
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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
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VENTURE ROUND DEAL TERMSVENTURE ROUND DEAL TERMS
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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
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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
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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
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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
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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
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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
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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