Thursday, December 13, 2012

Quarterly Venture Capital Update

Below is trendous insight to Venture Funding and how it may effect the market by Tom Scannell.   Tom is seasonedd CFO that provides consulting services to startups to small cap public companies.  I am happy to put you in touch with him if  you are in the market for a CFO.

As usual I feature the speaker’s comments and data from the “Shaking the Money Tree”. In addition to the STMT session I have included material from the Morrison Foerster “IPO University”, the “Fall Liquidity Summit” sponsored by Pillsbury & J.P. Morgan (best quote was “go long on guns and canned goods”). I also reference some interesting articles about Angel Investing vs. Venture Capital, the coming Series A Crunch in Social Media, What has Changed by Fred Wilson on investing in the consumer internet space. Finally there are my usual links to data from WSG&R, Cooley, Fenwick and West and USF/Cannice VC Confidence Survey.

Comments from Shaking the Money Tree Session

“Shaking the Money Tree” is sponsored by PriceWaterhouseCoopers and the National Venture Capital Association. It was hosted this time at Fenwick and West.

Some of the topics discussed were

·        Angel Investing -Is there a bubble?
·        Is the greed of VCs holding back the IPO Market?
·        The “JOBS Act”- Any long term impact on financing of start-ups?
·        What are the trends in “corporate” venture capital?
·        Is FDA bashing overdone in Life Sciences?
·        Was the CEO of NVCA correct in calling it a “Darwinian environment”?
·        Watch out for falling med devices!

The panelists at “Shaking the Money Tree” were
Sam Angus, Fenwick and West
Stephen Bernardez, Onset Venture
Keval Desai, Interwest
Renata Quintini, Felicis Ventures
Sumeet Jain, CMEA Capital
Moderator: Steve Bengston, PriceWaterhouseCoopers LLP

Please note that these summaries are mine and none should be attributed to any individual speaker or their firms.
Angel Investing- Is there a bubble?
·        There was discussion about the John Frankel’s article in Tech Crunch regarding the returns of Angel Funds vs. Venture Funds (  Frankel reviews the literature and concludes that venture capital returns are crappy primarily because the VC industry simply got too big for the number of “investment worthy” portfolio companies. In other words there was “bubble” in the asset class. (Excluding all the firms represented on the STMT panel—of course!)  Frankel’s conclusion matches the analysis of the Kaufman foundation and others.
·        But the main point of the Frankel article is that Angel Investors do better than VCs because there are fewer of them, they are smaller, do more due diligence and stay closer to the companies they invest in (Wow! What a concept!)
·        The problem is that angel investors seem to be repeating the sins of venture capital. They are institutionalizing (see Frankel’s own “angel” firm ff Venture Capital) and there is now too much angel money pursuing too few quality companies-- especially in the social media and consumer web. Is there a “crunch” coming for these firms as they look for their first round of VC funding? See the recent post by Sarah Lacy on the Series A funding for social media companies.  (  and Fred Wilson’s insightful article on the falling investment in consumer web companies (

Is the greed of VC’s holding back the IPO Market?
·        There was a discussion that the venture community itself was a cause of the recent lack of IPOs. One of the panelist said because VC firms have gotten so big and need to make such huge investments they have gotten “too greedy” with the best companies. They keeping good companies private too long in order to “capture” more of the return. This leaves only “second class” companies in the IPO market.
·        There was the usual bemoaning of the passing of the good old days of the “Four Horsemen” investment banks and the small cap IPO. There was even a call from the audience to scrap the decimal system for stock pricing and bringing back the old “eighths” system!
·        There is more IPO news below in the notes on the MoFo “IPO University” and the Pillsbury “Liquidity Summit”

The JOBS Act-Any long-term impact on the funding of start-ups?

·        The general conclusion of this panel was that the JOBS act will not have a big impact on financing for start-ups
·        With that said, many panelists said that portfolio companies were taking advantage of both the opportunity to do “pre-IPO” roadshows and “stealth” SEC filings. They said that these two features could be having a positive impact on deal pricing.
·        It was predicted that only a very small number of companies will be involved with rule that raised the allowable number of private company investors.
·        There were further predictions of the death of the “second market” firms.
·        Not many companies have taken advantage of the relaxation of the pre and post IPO accounting reporting requirements for “emerging growth” companies. They seem to be afraid of Wall Street buy side reaction.  

What are the trends in “corporate” venture funding?
·        It was noted that the membership was rapidly growing in the corporate investor NVCA subgroup and the group is meeting more frequently.
·        Several of the panelists said that “corporate” or strategic investors are more willing to participate in earlier stage syndications and follow through on their syndication commitments
·        Fenwick and West’s Venture Capital report (see below) also had several interesting comments about trends in corporate venture capital investing

Is FDA bashing overdone in Life Science?
One of the panelists who is still actively investing in life sciences said that “FDA bashing” has been overdone as the source of the funding problems for life sciences companies. He said the FDA approval cycle, while unpleasant, is a manageable process. He noted that it “softens” and “hardens” over time. Investors just have to manage it.

Headline data from the Shaking the Money Tree Report
 Venture Capital fundraising- down QoQ and lowest since Q211; again dominated by few large funds. A “Darwinian environment”?
According to NVCA and PWC Money tree report, VCs raised  $5.0B in Q312. This is significantly down from a revised $6.0B in Q2112. Five firms accounted for 55% of total fundraising compared to Q2’s 80% figure. There were a total of 53 funds raised in Q312 and there were “new” funds. These numbers represent a 17% QoQ decrease in dollar commitments but a 23% increase in the number of funds raised. Mark Heesen, president of the NVCA, looking for some positive news said, “For the last several years we have watched carefully the consolidation of dollars into the hands of fewer firms. While more than half of the dollars raised this quarter were placed in five funds, it was less concentrated than previous quarter and allows for the distribution of capital across a more diverse base of funds”.  But he was also quoted as saying “We’re unquestionably in a Darwinian environment right now”.

Venture Capital Exits –# of M&A deals down while # of IPO deals were essentially flat. IPO average deal $ fell for third straight quarter while M&A $ were up slightly.

The # of IPOs fell by one this quarter (11 to 10) but if you remove the “ great white whale” of the Facebook IPO from Q212 they were flat. Once again excluding Facebook, the average IPO offering size was down slightly to $109M from $115M last quarter.

The number of M&A deals fell to 96 in Q312 from a revised 116 in Q212. The average deal size rose to $253M from $201M last quarter.  

VC Investments-Nationwide
  • Overall – In Q312 there was $6.5B invested in 890 deals nationwide down from Q2’s revised $7.3B and 935 deals.

·       By Industry –Watch out for falling med devices!
In Q312 “Software” continued in its #1 slot at $2.1B, 304 deals and 32% of the total investment. These $ were down 12% from Q212 while the number of deals were up slightly at 1%. Biotech was #2 this quarter at $1.2B and 19% of the total. Med devices continue their sharp decline, falling 37% in dollars and 27% in investments in Q312. Med devices had its lowest level of investing since 2004.

  • By Stage of Development – Down in $ and  # in all stages
The combined amount invested in “Seed” and “Early Stage” rounds were down significantly this quarter to $1.9B compared to Q212’s $2.4. The number of deals and average deal size fell significantly in both categories. These two categories represented about 29% of the total invested and about 52% of deals. Expansion deals ($2.6B) were slightly down—3% in $ and 1% in number of deals. Later stage deals ($2.0B) dropped 4% in # and 10% in dollars. $2.0B went to 187 deals and represented 21% of total deals and the value 27%

  • By Sequence – Later stages again dominate $ and first stage deals continue small
The “5th and beyond” sequence ($2.9B and 225 deals) continued to lead the rankings. “First sequence” fundings were $1.0B with 297 deals The dollars were down 13% from Q212 The average size of the first sequence deals continues small.

  • Size – “Falling”
The median amount invested in Q312 was $2.5M down the $3.0M from Q112 and Q212. The mean size fell to $7.3M from a revised $7.8M in Q411. 

VC Investments-Silicon Valley
  • Overall – “not too bad overall but down from Q3”
VC Investments here in Silicon Valley in Q112 were $2.6B down from an unusually high $3.2B in Q211. The number of deals also fell-- from 288 to 268. 

  • Percentage of Total – “popping back up”
The percentage of nationwide VC $ going to Silicon Valley in Q312 popped up to 40% after Q312’s 36%

  • Series – “Up a bit”
The dollars going to Series A in Silicon Valley rose to $523K this quarter in 93 deals. It’s nice to see a sequential rise in this number

Fall 2012 Liquidity Conference

This session was sponsored by Pillsbury, NYSE, Deloitte, RR Donnelly, Connor Group and J.P. Morgan

The first session covered the current IPO market and the fourth session covered Life as A Pubic Company. As you can imagine in a conference sponsored by the above firms there was plenty of talk in the first session about how “strong” the IPO market was.  “If you’ve got a good company, the IPO window is always open…blah, blah, blah”. Putting my cynicism aside, J.P. Morgan did present some encouraging data that showed that 70% of the tech IPOs YTD were above their IPO price as of the date of the seminar. (Didn’t make any comment about the face plant of Facebook) If we could keep that statistic going we would have gone a long way towards solving the IPO “problem”. The rest of the sessions covered the “standard topics” of IPO readiness and being a newly public company. More on that below in the comments about the MoFo “IPO University”

The second panel covered the world economic condition—Europe, China and the Fiscal Cliff in the U.S. This was a very depressing session, especially the comments by Jim Van Horne of Stanford. As one of the participants said “go long on guns and canned goods”.

The third panel was on the state of the M&A market. This was also a relatively downbeat session. Tech M&A is down both in value and the number of transactions with not much good news on the horizon.  Several speakers commented that it should be a more robust M&A market given cash on the balance sheets and need for new products. But they all said that the larger firms know it is a “buyers” market. As a result they are very slow, low balling valuations and refusing to share the upside (so what else is new?). Their advice to companies that were looking to M&A was also pretty standard--start networking earlier, look to fit known “holes” in acquirers portfolios, make sure there is competition for you and be prepared for due diligence (yes, do Sarbanes Oxley). There was also the standard advice regarding post acquisition integration.  They were strong consensus that buy-outs were bad for all parties involved.

IPO University

This session was sponsored by Morrison Foerster.

This was a good session covering the IPO process itself, the roles of the essential players (accountants, lawyers, investment bankers), the keys to success, the SEC process and finally the impact of the JOBS act on the IPO process. With the exception of the JOBS act it was startling to see how little the qualification, preparation and the process of IPO has changed over the years.

It will be interesting to see how the SEC implements the “research” portion of the JOBS act. The act allows broker dealers to publish research reports and participate in meetings about qualifying “emerging growth companies”. I think this may be the most important part of the JOBS act.

Some web references:

·       PWC and NVCA Shaking the Money Tree Report (
·       University of San Francisco Venture Capital Confidence Index /Dr. Cannice showed a slight increase in his Venture Capital Confidence Index after a sharp fall off in Q2. . Dr. Cannice’s said that the results “suggest a possible stabilization in confidence at level somewhat lower than its nearly nine year average”. His respondents were still very cautious.

·       The Wilson Sonsini Entrepreneurs Report is available at  ( reported “Our quarterly survey of venture investment activity, like other surveys recently released, shows a meaningful decline in number of transactions and aggregate dollars invested across all sectors”. On the positive side they reported that the transactions they reviewed show a “relatively stable, company-favorable market in key deal metrics”

·       The Fenwick & West Venture Report: A good report showing both NVCA and Thompson Reuters data.

·       The Cooley-Godward Venture Report:


Tom Scannell & Associates, Inc.