Wilson Sonsini Goodrich & Rosati: The Entrepreneurs Report Q3, 2012

This in-depth report analyzes the key issues and trends the firm has observed in recent private company financings.

Deal Terms

Liquidation preferences. Senior liquidation preferences were used in 39% of all Series B and later deals in the first three quarters of 2012, down from 47% of deals in 2011 and 50% in 2010. The use of such preferences decreased in both up rounds, from 34% of deals in 2011 to 28% in the first three quarters of 2012, and down rounds, from 79% of deals in 2011 to 63% in Q1-3 2012.
Conversely, the use of pari passu liquidation preferences increased to 58% of Q1-Q3 2012 financings from 51% of 2011 financings and 48% of 2010 financings. The percentage increased both for up rounds (69% in Q1-Q3 2012 versus 64% in 2011) and down rounds (34% in Q1-Q3 2012 versus 18% in 2011).
These trends likely reflect the increasing valuations in later-stage rounds in 2012 as compared with 2011 and, thus, the corresponding greater negotiating power of earlier investors.

Participation rights. The proportion of deals with non-participating preferred stock continued to increase in the first three quarters of 2012 as compared with prior years, to 66% in Q1-Q3 2012 from 58% in 2011 and 49% in 2010. The proportion increased both in up rounds, from 59% in 2011 to 68% in Q1-Q3 2012, and in down rounds, from 32% in 2011 to 38% in Q1-Q3 2012. The percentage of deals with capped participating preferred stock remained at 16% in Q1-Q3 2012, the same level as for 2011, while the percentage with fully participating preferred stock decreased from 26% in 2011 to 18% in Q1-Q3 2012. Again, these trends likely reflect the increasing valuations in later-stage rounds in 2012 as compared with 2011 and, thus, the corresponding greater negotiating power of companies and earlier investors.

Anti-dilution provisions. Broad-based weightedaverage anti-dilution protection provisions continued to be overwhelmingly prevalent, being used in 91% of Q1-Q3 2012 deals, the same percentage as in each of 2010 and 2011. Broadbased weighted-average was used in 93% of Q1-Q3 2012 up rounds, as compared with 91% of such rounds in 2011, and in 80% of Q1-Q3 2012 down rounds, unchanged from 2011. The use of full-ratchet anti-dilution stayed level at 3% of financings in Q1-Q3 2012, the same proportion as in 2011.

Pay-to-play provisions. The use of pay-to-play provisions decreased slightly, from 12% of 2011 deals to 11% of those in Q1-Q3 2012. Pay-to-play usage decreased slightly in both up rounds, from 5% of 2012 financings to 4% of Q1-Q3 2012 deals, and down rounds, from 31% of 2011 financings to 29% of Q1-Q3 2012 deals.

Redemption. The use of redemption provisions dropped slightly, from 24% of deals in 2011 to 23% in Q1-Q3 2012. Investor-option redemption (used in 22% of deals) continued to be far more popular than mandatory redemption (1%).

Bridge Loan Terms

For the first time, we include data on bridge loans in the Entrepreneurs Report. Venture stage companies frequently raise funds through such financings, almost always through convertible notes, either before their first true equity financing round (termed “Pre Series
A” in the table below) or to bridge the companies between later-stage equity rounds (“Post Series A”). These financings increasingly are favored because they typically can be negotiated and closed far more quickly and cheaply than priced equity financings, as there are fewer terms and, as a result, much shorter documentation. Clients frequently ask WSGR attorneys for benchmark data on the terms of such bridge loans, including interest rates, maturities, subordination, and conversion prices and discounts, so we are pleased to present the data below as a service to both companies and investors.
The data in the chart is aggregated from 2012 debt financings through September 30, 2012, in which Wilson Sonsini Goodrich & Rosati represented either the company or an investor.


1 Of the Pre Series A bridges that have warrants, 50% also have a discount on conversion into equity. For Post Series A bridges with warrants, 22% also have a discount on conversion into equity.
2 Of the Pre Series A bridges that have a discount on conversion into equity, 7% have warrants. For Post Series A bridges that have a discount on conversion into equity, 20% have warrants.



The Pitch Book 4Q 2012 Venture Capital Rundown

VC Overview

VC investors completed 685 investments in U.S.-based companies totaling $6.1 billion in 3Q 2012, dramatic drops from the levels achieved in 2Q 2012. The drop-off in dealmaking was not confined to a particular stage of the
investment cycle, as angel/seed, early, and late stage deal volume all fell by approximately one-third. It’s important to put this decline into context, as VC investment year-todate is still even with 2011.
The second quarter of 2012 registered the most VC financings of all-time for a single quarter, so a pullback should not be too alarming. Furthermore, activity had increased 30% from 4Q 2011 to 2Q 2012, which has led some to speculate that VCs took advantage of the summer months to recharge before a push at the end of the year.
VC deal flow has been on a general upward trajectory since the beginning of 2011, but the total amount of money invested through VC deals has been trending downward since 1Q 2011.
A contributing factor has been that angel and seed stage deals have grown from 17% of financings in 3Q 2011 to 23% in 3Q 2012, while the typically larger late stage financings have contracted from 36% to 31% during the same period.
On a yearly basis, it will be difficult for 2012 to surpass the record-breaking numbers posted in 2011. Still, deal-making has been strong despite the disappointing 3Q figures, and 2012 could still prove to be the second-best year for VC investments by both deal count and capital invested.

Industry Rundown

It should come no surprise that the IT industry accounted for the majority of VC investment during 3Q 2012, representing 50% of deal flow and 48% of the capital invested. The proportion of VC money flowing into the IT industry has steadily been rising since dipping to 33% in 2Q 2011 and now sits at its highest level since 3Q 2006.
One of the most significant trends in VC investing has been the increasing prevalence of deals being executed in the B2C space, particularly in the earlier stages. Since 1Q 2009, B2C has expanded from 14% of VC financings to 20% in 3Q 2012. Over the same period, B2C grew from 10% to 16% of capital invested. For the first time ever, B2C now accounts for a higher proportion of VC deals (20% through the first three quarters of the year) than the Healthcare industry (17%). However, Healthcare companies continue to attract significantly more
dollars as the bulk of the industry’s financings come in the later stages.
Renewable energy and clean tech are commonly thought of as a prime spaces for VC investment, but the data tell a different story. Investors closed just 16 Energy deals totaling $298 million in 3Q 2012, representing a measly 2% of deal flow and 5% of capital invested.

VC exits

At first blush, the quarterly exit numbers seem abysmal with a 75% drop-off in capital exited from 2Q to 3Q. However, the quarterly comparisons for exit activity are a bit muddled due to the $16 billion Facebook IPO in 2Q. With that deal removed, the decline in capital exited is a much more tolerable 8%. Still, exit volume did fall substantially from 113 deals in 2Q 2012 to 96 in 3Q. The outlook is much better when looking at the data on a yearly basis; 2012 has already broken the record for most capital exited with $35.5 billion and the  final exit count should be on par with the two preceding years. Corporate acquisitions continue to be the exit method of choice for VC companies, but the exit strategy has fallen to 72% of activity, the lowest level since 2Q 2007. IPO activity declined slightly in 3Q, but 2012 has already seen 36 VC-backed IPOs, which is the highest total for the first three quarters of a year since 2000.

Private equity firms have increasingly been turning to the VC space to source deals and set a new record (42) for VC-backed company buyouts in the first three quarters of 2012.
While VC investment activity is driven by IT, the industry plays an even larger role when it comes to exits. IT companies have accounted for 57% of exit volume and 78% of the capital exited through the first three quarters of the year.


Numbers: startup deals in Brazil vs VC investment deals in the U.S. 2012

Croudsourced compilation of Brazilian  investments in startups by Diego Gomes (Everwrite) Startup Dealbook Brazil data shows number of deals last year to previous year  increased 346%.

In Brazil 50 deals officially announced by the end of 2012/07.  Total sum of USD 258,54 m ( USD 130,3 m and BRL 259,6 m (USD 128,24 m)) invested in 12 deals and 38 deals investment amount undisclosed.

In the second quarter of 2012 according to NVCA & PwC MoneyTree Report  venture capitalists in the United States  invested $7.0 billion in 898 deals.

Preqin’s Deal Flow Data: Venture Capital Deals Activity Edges Up in Q2 2012

Number and value of VC deals increase by 16% against Q1 2012 figures.

Preqin’s deal flow data shows that there were 1,249 venture capital financings announced during Q2 2012, representing an aggregate value of $10.9bn. This is a 16% increase in both the number and value of VC deals in comparison to Q1 2012, and is the largest amount of aggregate capital committed by VC firms since Q3 2011.

Other Key Facts:

  •  67% of the number and 75% of the aggregate capital of VC deals announced in Q2 2012 occurred in North America, with 839 VC financings in the region valued at $8.2bn during the quarter. This is a 14% increase in comparison to the previous quarter, when 734 VC financings valued at $7.2bn were announced.
  • European VC activity experienced a 23% rise in the number and a 25% increase in the value of VC deals in comparison to the previous quarter. A total of 252 European deals took place during Q2 2012, valued at $1.4bn.
  • The number of Chinese VC deals continued its slide in Q2 2012, with 27 VC deals announced in the country during Q2 2012. This represents a 20% drop from Q1 2011 levels and a 42% decrease from Q4 2011, largely due to investor worries regarding the Chinese exit market.
  • However, while the number of VC deals in China dipped in Q2 2012, deal value almost doubled in comparison to the previous quarter, with $545mn invested in the region. This is up from $280mn in Q1 2011, but still lower than the $798mn worth of VC deals completed in Q4 2011, and is in large part due to the $216mn Series C financing of Xiaomi.
  • 75 VC deals were announced in India during Q2 2012, a 32% increase from the previous quarter, representing the most active quarter for Indian deal flow during the 2010 – H1 2012 period in terms of number of deals.
  • 17 VC deals were reported in Israel during the period, matching activity in the region witnessed in recent quarters, representing an aggregate value of $200mn.
  • A third of all deals globally during Q2 2012 were Angel, Seed or Series A deals, displaying investors’ attraction towards very early stage investments. Additionally, Series B, C, D and later investments accounted for less than 20% of the number of all deals.
  • Venture capital-backed add-on deals made up 7% of all VC transactions in Q2 2012.
  • The average VC deal value in 2012 YTD has been $14.1mn per deal. This is down on 2011, when the average VC investment totalled $17.9mn per round, but very similar to deal values witnessed during 2010. In Q2 2012, more than a quarter of the total number and aggregate value of financings globally was invested in the internet sector, which includes social networking and e-commerce deals.
  • The healthcare and software sectors each accounted for around 16% of the total number of VC deals, while clean technology companies accounted for 13% of the aggregate value of investments.


Preqin Special Report: Venture Capital 2012

Preqin Special Report: Venture Capital draws exclusively on the following sources of information:Venture Deals Analyst – The most extensive, detailed source of information on venture capital deals in the world.
This comprehensive product contains in-depth data for over 21,000 venture capital transactions across the globe and comprehensive portfolios for the top 50 VC firms. Deal profiles include information on value, buyers, sellers, financing, financial and legal advisors, exit details and more.
Investor Intelligence – The most comprehensive database of current and potential institutional investors in private equity, featuring in-depth profiles of more than 4,000 actively investing LPs, and over 1,000 that have put their investments on
hold, including investment preferences, future plans, key contact details and more.
Funds in Market – This constantly updated resource includes details for 1,850 funds of all types being raised worldwide, with key information on strategy, target sizes, interim closes, placement agents, lawyers, and LPs.
Fund Manager Profiles – With detailed profiles for over 6,250 GPs, including key strategic and investment preferences, Fund Manager Profiles is the foremost source of data on private equity and venture capital fund managers worldwide.

Performance Analyst – The industry’s most extensive and transparent source of net-to-LP private equity fund performance, with full metrics for over 5,800 named vehicles. In terms of capital raised, Performance Analyst contains data for over 70% of all funds raised historically.