Notes provided by Tom Scannell BOD member and AC chair for various companies:
As usual, I feature speaker’s comments from the “Shaking the Money Tree” session with some links to interesting articles from the quarter, data from the quarterly NVCA data, and links to data/comments from WSG&R, Cooley, Fenwick and the USF VC Confidence Survey.
Comments from “Shaking the Money Tree” and some interesting articles
Some of the topics discussed were
· Do you put a promise of “secondary market” for top management shares in a VC term sheet?
· Is there a “bubble” in the market for Software Engineers in San Francisco/Silicon Valley?
· What’s the status of the Angel Round Bubble (aka Series A Crunch)?
· Is the JOBS Act finally starting to get some traction?
· Anything new on the “shrinkage” of the Venture Capital ecosystem?
I also highly recommend the YouTube video below of Nicola Tesla trying pitch a VC firm. It really hits home!
PriceWaterhouseCoopers and the National Venture Capital Association sponsored the “Shaking the Money Tree” session this quarter. It was hosted this time at Cooley Godward
The panelists were
Gordon Ho, Cooley
Ho Nam, Altos Ventures
Ted Driscoll, Claremont Creek Ventures
Steve Eskenazi, Angels Forum
Hrach Simonian, Canaan Partners
Moderator: Steve Bengston, PriceWaterhouseCoopers LLP
Please note that these comment summaries below are mine and no particular viewpoint should be attributed to any individual speaker or their firms.
Do you put the promise of a “secondary market” for top management shares in a VC term sheet?
· A few years ago, a discussion of “secondary market” would have generated a heated debate and have split the panel. On one side would have been the the “old school” panelists saying absolutely “ no” to the idea that management being allowed to take some funds off the table prior to the investors, with the “new school” panelists defending the practice. The idea that an actual market place for these shares was needed would have caused even more heated discussion.
· This time the “old school” people were gone.
· The panel all agreed that allowing top management to take an “appropriate” amount off the table at the “appropriate” time helps them focus on the longer term and actually aligns management’s interests with the investors. The also talked about the most efficient way of doing this qs through 3rd party market makers.
· Several panelists said that the recruiting environment was so tough now the promise of secondary market for top management are appearing in their term sheets
· See this article from the Wall Street Journal http://online.wsj.com/article/SB10001424127887324034804578344460249529702.html#printMode?cb=logged0.6889594024249511
Is there a “bubble” in the market for Software Engineers in San Francisco/Silicon Valley?
· The general consensus was “yes”
· Some panelists felt that the bubble will pop by competition from India and China. Other panelist disagreed saying that you cannot do the sort of coding currently being done on an international scale. The coders have to be in the same room (the Yahoo “no working from home” effect).
· Some felt that if the latest immigration bill in D.C. is passed it might open the spigot a bit. Others agreed, but said that the impact of the immigration bill is too far in the future to affect the current bubble.
· Others felt that the popping of the bubble will be a secondary effect of the popping of the Angel Round Bubble (see below)
What’s the status of the Angel Round Bubble (aka Series A Crunch)?
· Most of the panelists agreed that the reported “Angel Round Bubble” or “Series A crunch” for social, mobile and local companies (especially in San Francisco—see above) is quite real.
· The current Shaking the Money Tree data and the Cooley data supports this view.
· One panelist said that his firm is getting much more picky with Series A investments. He said Series A now looks much more like Series B a few years ago in regards to the maturity of the products and markets.
Is the JOBS Act finally starting to get some traction?
· Everyone agreed that most companies approaching the public market are using the JOBS act provisions that allow them to file confidentially and/or “test the market” prior to going public. It is helping them avoid the cost/public relations hit of a “failed IPO”
· Crowdfunding continues to be “stuck on the shelf” at the SEC awaiting regulations. Some panelist felt that this feature may never get implemented due to hard core resistance in the bureaucracy of the SEC/Congress
· See interesting article from CFO magazine below
Anything new on the “shrinkage” of the Venture Capital ecosystem
· No, not really—according to the panelists it’s happening to everyone—except the folks on the panel—of course!
· With that said, the data shows (see below) that there is still an enormous amount of money going into Venture from limited partners and from Venture firms to companies.
· Several panelists said that the VC market is continuing the trend towards the structure of a “lopsided barbell”. There will be 20-25 “super firms” which will control 80%-90% of the money with several hundred small “artisan funds” controlling the rest.
· A panelist suggested that only 20% of the companies funded have the goal of “building a real company” or an IPO in mind. Most companies just want to build a product and “flip” it. Other panelists disagreed-- saying that 20% was too high and 5% to 10% was closer to the truth!
· Panelists felt that a positive sign for the VC industry is the continuing improvement in the capital efficiency of the “social-local-mobile” software start-ups. One panelist said that it only costs about $8K to get the first line of code now compared to $80K 10 years ago.
Headline data from the Shaking the Money Tree Report
The National Data
Venture Capital fundraising –The “barbell” & consolidation continue
VCs raised $4.1B in Q113 up from $3.3B in Q412, but down from a revised $4.7B in Q112. The real remarkable number was the number of “funds raised” and how few of them were first time funds. Q113 had only 35 funds raised and only 5 of them were first time funds. This compares to 44 and 18 last quarter and 53 and 14 from Q112. Q113 has the lowest number of funds raised since the early ‘00s and the last time the first time funds were this low was in ’06. The “barbell” continues with >50% ($2.2B) of Q113 funds were garnered by just 4 firms.
Venture Capital Exits—# of M&A exits down sharply while # of IPOs flat for the quarter. $ values for both down sharply.
The number of VC backed IPOs in Q113 was flat with Q412 at 8 and down from 18 in Q112. Dollar value of the IPOs was $.7B in Q113 vs. $1.4B in Q412 and $1.7B in Q112. This meant that the average amount of the IPO was $84M in Q113 vs. $176M in Q412 and $87M in Q112.
The number of M&A deals in Q113 was 77 vs. 117 in Q412 and 114 in Q112. The average deal size ($) fell in Q113 to $98M from $130M in Q412 and $131M in Q112.
Nationwide there was $5.9B invested in Q113 down from $6.4B invested in Q412 and also down from Q112’s $6.3B.
By Industry – Software takes a big jump and life sciences/med tech drop off
In Q113, software continued in its longstanding #1 slot with $2.3B. This represented 40% of the total. This compares to Q412’s numbers of $2.1B and 33% of the total investment. Biotech continued at #2 this quarter with 15% of the total and $.9B compared to last quarter’s at 20% and $1.3B. Medical Devices was in #3 slot with 9%. Overall, investments in these two Life Sciences sectors fell 28% in dollars and 23% in the number of deals. Cleantech investments continue their shrinkage at only $368M in Q113 vs. $571M in Q412 and $947M in Q112.
By Stage of Development – VC Seed Investments almost gone but still pouring money into late rounds.
In Q113 seed stage continued at its low pace at $178M and 3% of the total compared to Q412’s $157M and $180M in Q312. Early Stage was at $1.5B down from $1.9B in Q412. Expansion was at $2B down 13% from Q412. Finally Later stage was at $2.2B up slightly from $2.0B in Q412.
The mean deal size inched up hitting $6.8B in Q113 vs. $6.6M in Q412 vs. $7.1M in Q312.
VC Investments-Silicon Valley
VC Investments here in Silicon Valley were down in Q113 at $2.2B and 274 deals vs. Q412’s $2.5B and 309 deals.
Percentage of Total –
The percentage of nationwide VC $ going to Silicon Valley in Q412 was 38% down slightly from a revised 39% in Q412 but up a couple of points from Q112.
The dollars going to Series A in Silicon Valley was down to $264M and 86 deals in Q313 vs. $387M with 102 deals.
Some web references:
PWC and NVCA Shaking the Money Tree Report (https://www.pwcmoneytree.com)
University of San Francisco Venture Capital Confidence Index http://www.usfca.edu/faculty/business/Mark_Cannice/ /Dr. Cannice noted the third quarter in a row of a slight increase in his VC “confidence index”. Not able to explain why. Triumph of hope over reality?
The Fenwick & West Venture Report:
“At the big picture level, it was a tough quarter for the venture environment, with venture investing, acquisitions and IPOs all down compared to the last quarter of 2012. And while valuations were reasonably healthy this quarter, they declined from last quarter. But with the macro environment appearing to stabilize, and Nasdaq up both in the first quarter and second quarter to date, there is reason to believe that the venture environment will improve”
The Cooley-Godward Venture Report:
Their report focuses on deals in which Cooley was directly involved. The issued a mildly discouraging report:
“Overall, our data pointed to a quarter marked by decreasing deal volumes and aggregate dollars raised. Median pre-money valuations decreased across all deal stages with the exception of Series A transactions. In fact, valuations for Series A deals rose to a level not seen in over a decade. We also saw a slight decrease in up versus flat/down rounds from the prior quarter. Up rounds represented 75% of all financings in Q1… Deal terms in Q1 2013 moved away from the company-friendly terms we observed through much of 2012. We observed increases in the use of participating preferred and pay-to-play provisions in Q1, compared to the prior quarter. The data also pointed to increased utilization of greater than 1x liquidation preferences in early stage transactions during the quarter”
The Wilson Sonsini Report
also reports only on the deals they were directly involved in.
“The number of deals and the total funds raised in equity venture financings in which Wilson Sonsini Goodrich & Rosati represented one of the principals declined significantly from Q4 2012 to Q1 2013. This decrease was consistent with the declines reported by industry-wide surveys such as PricewaterhouseCoopers’ MoneyTree Report.”
The also reported a large increase in the number of Post Series A bridge loans—Series A Crunch in action?