trends in venture capital financings

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 LGrayver@gwtllp.com

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

ANY QUESTIONS OR IF YOUNEED A LAWYER, EMAIL MENEED A LAWYER, EMAIL ME

LGrayver@GWTLLP.com