Venture Capital Trends That Might Surprise You

In June, 2011, Fenwick & West LLP, one of the nation’s premier law firms providing comprehensive legal services to high technology and life science clients, published the results of its First Quarter 2011 Silicon Valley Venture Capital Survey.  The survey/barometer analyzed the valuations and terms of venture financings for 122 technology and life science companies headquartered in the Silicon Valley that reported raising money in the first quarter of 2011.  The Barometer includes an initial angel/seed financing survey and also examines information derived from 3rd party sources (Dow Jones’ VentureSource and The Money Tree Report from Thomas Reuters, to name a few) such as total venture capital investments throughout the U.S., merger & acquisitions activity, initial public offerings, and fundraising.

The Barometer showed that during the first quarter of 2011, up rounds exceeded down rounds 67% to 16% with 17% flat.  An up round is one in which the price per share at which a company sells its stock has increased since its prior financing round while a down round is one in which the price per share has declined since a company’s prior financing round.  The Barometer showed a 52% average price increase for Quarter 1, 2011, less than the previous quarter, but still very healthy.  “This was the seventh consecutive quarter in which the Venture Capital Barometer was positive,” said Barry Kramer, partner at Fenwick & West and co-author of the survey.

From a valuation perspective, the best performing industries in the quarter were software (including a significant number of ‘software as a service’ companies and companies building applications for mobile devices) and Internet/Digital Media, followed by hardware and cleantech, while the life science industry continued to lag behind.

As a result of a number of factors (including the fact that venture capital has become harder to obtain for initial financing), the Fenwick & West initial angel/seed financing survey reported the following changes in that environment:

1)    A shift in the composition of investors, from friends and family and wealthy individuals to a larger percentage of professional angels, seed funds and venture capital funds.

2)    The amounts raised can exceed $1 million due to the fact that investors in these financings have deeper pockets.

3)    Financing terms are currently more sophisticated since investors wish to be more active in overseeing their investments.

The Barometer also found that in the first quarter, 2011, there was a significant increase in commitments to venture capital funds and that the monies raised were concentrated in a few large funds such as Bessemer, Sequoia and JP Morgan, all together accounting for over 55% of the total amount raised.

According to Dow Jones’ VentureSource, VCs invested $6.4 billion in 661 deals in the U.S. in Quarter 1, 2011, compared to $7.6 billion in 735 deals in Quarter 4, 2010.

If you like this information, you’ll really like “Top 10 Mistakes That Cause Investors to Shoot Down Deals”.

About the author: David Brode is the Principal of the Brode Group. An economist by training, Brode has over two decades of experience helping ventures develop and communicate business strategies through financial models so they can launch, grow, and sell businesses.  Brode’s financial forecasting models have been through due diligence dozens of times and have been successful in securing over $11 billion in financing for projects worldwide.  Brode has a B.A. degree in Economics from the University of Michigan.

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