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.


Fenwick & West Results: Silicon Valley Venture Capital Survey – Third Quarter 2012

The terms of venture financing for 117 companies headquartered in Silicon Valley that reported raising money in the third quarter of 2012

Overview of Fenwick & West Results

Venture financings in 3Q12 continued to show solid price increases from their prior round, but 3Q12 was not as strong as 2Q12.

  • Up rounds exceeded down rounds in 3Q12, 61% to 17%, with 22% of rounds flat. This was another strong quarter, but not as strong as 2Q12 when 74% of rounds were up, 11% down and 15% flat. This was the 13th quarter in a row in which up rounds exceeded down rounds.

Series B rounds were especially strong, with 92% of Series B rounds up, and Series E (and later) rounds were relatively weak, with only 44% up. However 64% of the Series B rounds were software and internet/digital media companies, while only 39% of the Series E rounds were from those industries, and as described below, software and internet/digital media were the strongest industries.

  • The Fenwick & West Venture Capital Barometer™ showed an average price increase of 78% in 3Q12 – again a solid result but a decrease from 99% in 2Q12. There were three financings in 3Q12 that were up over 750% (two in internet/digital media and one in hardware), and if these three were excluded the Barometer would have been up 50% rather than 78%.
  • The median price increase of financings in 3Q12 was 23%, down from 30% in 2Q12, and the lowest median price increase in the past two years.
  • The results by industry are set forth below. In general the software and internet/digital media industries continued to be the strongest, cleantech showed good results on very low volume, hardware lagged a bit and the life science industry trailed significantly.

Overview of Other Industry Data

The third quarter of 2012 was generally not a strong one for the venture industry, with the upcoming election, the looming “fiscal cliff” and global economic uncertainty perhaps weighing on investors’ minds.

  • Venture investing in the U.S. was down slightly in 3Q12 compared to 2Q12, and 2012 is on track to be below 2011.
  • M&A was down slightly in 3Q12 compared to 2Q12, and was also down slightly in the first nine months of 2Q12 compared to the first nine months of 2011.
  • The number of IPOs was down slightly both in 3Q12, compared to 2Q12, and in the first nine months of 2012 compared to the first nine months of 2011.
  • Venture fundraising in 3Q12 lagged 2Q12, but year to date fundraising in 2012 was above 2011 levels. Funding continues to be concentrated in a limited number of large funds, although less so in 3Q12 than 2Q12.
  • Venture Capital Investment.Dow Jones VentureSource (“VentureSouce”) reported that U.S. companies raised $6.92 billion in 820 venture financings in 3Q12, a 14.6% decrease in dollars and a 5% decrease in transactions from the $8.1 billion raised in 863 financings in 2Q12 (as reported in July 2012). Similarly, venture investment was down 15%, and the number of financings was down 3%, for the first nine months of 2012 compared to the first nine months of 2011.Venture capital investment in Silicon Valley was down 22% from the first nine months of 2012 ($8.2 billion) compared to the first nine months of 2011 ($10.5 billion), although the number of deals was only down 6.5%. That said, Silicon Valley received 39% of all U.S. venture investment in 3Q12.

The median amount raised in a 3Q12 financing round was $3.7 million, the lowest quarterly median amount since 1997. This result was driven in part by first round financings, whose median amount raised is on track to be $2.5 million for 2012, which would be the lowest annual amount since 1992.

The lead venture investors in 3Q12 were Google Ventures with 21 deals, Kleiner Perkins with 17, and 500 Startups and NEA with 16 each. Google Ventures recently announced that it was increasing its annual fund size from $200 million to $300 million, which will allow it to make more late stage investments (Sarah McBride, Reuters, 11/8/12).

Similar to VentureSource, the PwC/NVCA MoneyTree™ Report based on data from Thomson Reuters (the “MoneyTree Report”) reported that $6.5 billion was invested in 890 deals in 3Q12, a 7.1% decrease in dollars and a 1% decrease in transactions from the $7.0 billion raised in 898 deals in 2Q12 (as reported in July 2012). The MoneyTree Report also indicated that venture investing in 2012 is on track to be below 2011 amounts in both dollars and deal volume, and that seed stage venture investing was especially weak.

The MoneyTree Report also reported that software and internet/digital media investing remained strong in 3Q12 at $2.1 billion, but both industries declined in dollar terms from 2Q12 amounts. Life science investing, led by follow-on biotech financings, increased in dollar terms from 2Q12, but is down 19% year-to-date compared to the first nine months of 2011. Cleantech investing declined 20% in dollars compared to 2Q12, but saw an increase in the number of deals as investing in this sector appears to be shifting to smaller, less capital intensive deals.

  • Merger and Acquisitions Activity. Dow Jones reported 99 acquisitions (including buyouts) of venture-backed U.S. companies for $13 billion in 3Q12, a 10% decrease in transactions, and a 5% decrease in dollars from the 110 transactions for $13.7 billion reported in 2Q12 (as reported in July 2012). Nearly half of the companies acquired this quarter were based in California. For the first nine months of 2012, there were 314 acquisitions of venture backed companies for a total of $39.5 billion, a decrease from the 404 acquisitions for $40.6 billion in the first nine months of 2011.

Similarly, Thomson Reuters and the NVCA (“Thomson/NVCA”) reported 96 venture-backed acquisitions in 3Q12, a 6% decrease from the 102 reported in 2Q12 (as reported in July 2012). IT companies dominated the acquisition environment in 3Q12, with 70 of the 96 transactions.

  • IPO Activity.VentureSource reported 10 IPOs of U.S. venture-backed companies raising $807 million in 3Q12. This was a slight decrease from the 11 IPOs raising $7.7 billion ($6.8 billion was Facebook) in 2Q12 (as reported in July 2012).Similarly, Thomson/NVCA reported 10 IPOs raising $1.1 billion in 3Q12, compared to 11 IPOs raising $1.3 billion in 2Q12. (It appears that Thomson/NVCA includes sales by shareholders in their calculation of the amount raised). Six of the IPOs were in the IT industry, six were from companies based in California and all were from companies in the U.S. For the first nine months of 2012, there were 40 IPOs compared to 41 IPOs in the first nine months of 2011.
  • Venture Capital Fundraising. Thomson/NVCA reported that 53 U.S. venture funds raised $5.0 billion in 3Q12, a 15% decrease in dollars but a 40% increase in funds from the $5.9 billion raised by 38 funds in 2Q12 (as reported in July 2012). Fundraising for the first nine months of 2012 was $16.2 billion raised by 148 funds, a 31% increase in dollars from the $12.4 billion raised in the first nine months of 2011, but a 13% decrease in funds. The concentration of fundraising by a few large funds decreased a bit in 3Q12, where the top five funds accounted for 55% of fundraising, as compared to 2Q12 when they accounted for 80% of fundraising, but was still significant.Thomson/NVCA also reported that the number of mid-sized venture funds ($250-800 million in size) raising funds has declined significantly over the past five years, with 41 and 45 raising money in 2006 and 2007 respectively, while only 16 raised money in 2011 and only 10 raised money in the first half of 2012 (Private Markets, Mark Boslet, 10/2/12).Dow Jones reported generally similar fundraising results, finding that $4.73 billion was raised in 3Q12 (but by only 37 funds) and that fundraising for 2012 to date was $17.5 billion versus $12.7 billion in the first nine months of 2011. However Dow Jones found that 9% more funds raised money in 2012 to date compared to the same period in 2011.Venture fundraising again lagged venture investment in 3Q12 by a significant amount.
  • Developments in Non-IT Fundraising. With traditional fundraising by non-IT venture funds (e.g. life science, cleantech and hardware funds) especially challenging, some alternative funding mechanisms are appearing. This funding is often by entities, such as large corporations and governments, that have motives for investing in addition to financial return (e.g. filling product pipelines, diversifying a nation’s economy), or that have a longer time horizon.For example Thomson/NVCA has reported that corporate venture capitalists participated in 17.5% of life science financings in 2011 through the first half of 2012, up from 15.3% in the 2010/2011 time frame. Large pharmaceutical companies are also expanding their investments in, and forming closer ties with, traditional venture capitalists (Timothy Hay, VentureWire, 10/9/12). Johnson & Johnson is even creating early stage “innovation centers” in life science hubs such as San Francisco, Cambridge, London and China to improve access to early stage life science companies. (Brian Gormley, VentureWire, 9/18/12).Similarly, in the cleantech area, Broadscale Investment Network has been formed to connect large energy corporations with energy start-ups for investing and partnership purposes, and well known companies like GE and Duke Energy have paid to participate in this venture. (Yuliya Chernova, Venture Wire, 9/24/12).In sovereign investing, the Russian government backed fund of funds, RVC-USA, has committed up to $400 million to U.S. start-ups focused in medical devices, IT infrastructure, energy efficiency technologies and telecommunications. Similarly, another Russian fund, Rusnano has invested hundreds of millions in U.S. venture funds, especially those focused in the life sciences (Jonathan Shieber, LBO Wire, 9/11/12).
  • Kauffman Report on Immigrant Entrepreneurs.A recent Kauffman Report by Vivek Wadhwa concludes that the U.S. is becoming less attractive to foreign entrepreneurs. The report found that the percentage of Silicon Valley-based companies with a foreign born founder decreased from 52% over the period 1995-2005 to 43% over the period 2005-2012. Visa/immigration problems was listed as a major problem. The improvement in the entrepreneurial environment in countries outside the U.S. was also a likely factor. The report found that by far the largest number of entrepreneurial immigrants to the U.S. came from India (33%), followed by China (8.1%), the U.K. (6.3%), Canada (4.2%), Germany (3.9%), Israel (3.5%) and Russia (2.4%).
  • Accelerators and Angels.As noted above, early stage venture investing has declined recently, but the growth of early stage non- venture funding is continuing and may be offsetting this trend.For example, the number of accelerators and incubators continues to grow, with worldwide estimates ranging from 200-700. There is concern, however, about the value of some of these accelerators. A recent study by Kauffman Fellow Aziz Gilani of venture firm DFJ Mercury analyzing 29 accelerators found that 45% failed to produce even one graduate that obtained venture funding. David Cohen of Techstars has encouraged accelerators to publish their track records, so that entrepreneurs can be better informed in their selection process. A possible trend in the accelerator environment is increased specialization, with accelerators focusing on assisting entrepreneurs in a specific industry. (Tom Stein, Private Markets, 9/512; Mark Boslet, Private Markets, 10/2/12).Angel investing also continues to grow, increasing 3.1% in the first half of 2012 over the first half of 2011, with 40% of such funding going to seed and early stage companies. Jeffrey Sohl, “The Angel Investor Market in Q1/Q2 2012: A Market in Steady Recovery”, Center for Venture Research, October 10, 2012.
  • Venture Capital Return.Cambridge Associates reported that the value of its venture capital index increased by 0.61% in 2Q12 (3Q12 information has not been publicly released) compared to -5.06% for Nasdaq. The venture capital index was also slightly higher Nasdaq for the 12 month period ended June 30, 2012, 6% vs. 5.82%, but still lagged for the ten year period ending June 30, 2012, 5.28% to 7.21% per year. The Cambridge Associates venture index is net of fees, expenses and carried interest.
  • Venture Capital Sentiment.The Silicon Valley Venture Capitalist Confidence Index™ produced by Professor Mark Cannice at the University of San Francisco reported that the confidence level of Silicon Valley venture capitalists was 3.53 on a 5-point scale in 3Q12, a small increase from the 3.47 reported in 2Q12. Venture capitalists expressed concern about high valuations, macro economic uncertainty and life science funding, but felt positive about the depth and breadth of innovation in Silicon Valley, especially in the mobile, cloud and payment industries, and the availability of strategic acquirors with substantial cash holdings.
  • Nasdaq.Nasdaq increased 6.1% in 3Q12, and is flat in 4Q12 through November 8, 2012.


Venture Capital IPO Report For Technology Companies Based In The United States – 2012,1st Half

During the first half of calendar year 2012, 30 venture capital-backed U.S. technology companies went public, raising a total of $18.6 billion in gross offering proceeds. This compares quite positively to the $2.19 billion raised during the second half of 2011. $16 billion of the difference was attributable to one oversized deal, the Facebook IPO. Stripping out that large transaction from the aggregate dollar amount, the IPO market showed a sequential increase of 18%.

Eight Digital Media and Internet venture-backed companies had IPOs garnering $16.7 billion total consideration. 11 Software, Financial Services, IT and Mobile companies secured $1.1 billion during the period. 5 life science companies went public, raising $331 million in gross proceeds. 6 companies in the remaining industries of Electronics, Alternative Energy, Manufacturing and Networking raised $468 million.

With respect to pricing, of the 30 total IPOs, 15 priced above their expected range. 3 priced within the expected original or revised range and the remaining 12 companies priced below the original range sought. There was a much higher percentage of companies pricing their offerings either above or below their range and relatively few within their original expectations, suggesting significant pricing volatility. Also, as of 7.31.2012, 22 of 30 (73%) IPO share prices were higher than their initial flotation price, little improved when compared to 69% of positive IPOs in the second half of 2011.


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.


The Pepperdine Private Capital Martkets Project. 2013 Capital Markets Report

The Pepperdine private cost of capital survey (PCOC) is the first comprehensive and simultaneous investigation of the major private capital market segments. The survey deployed in September 2012, specifically examined the behavior of senior lenders, asset‐based lenders, mezzanine funds, private equity groups, venture capital firms, angel investors, privately‐held businesses, investment bankers, business brokers, limited partners, and business appraisers. The Pepperdine PCOC survey investigated, for each private capital market segment, the important benchmarks that must be met in order to qualify for capital, how much capital is typically accessible, what the required returns are for extending capital in today’s economic environment, and outlooks on demand for various capital types, interest rates, and the economy in general.

Findings indicate that the cost of capital for privately‐held businesses varies significantly by capital type, size, and risk assumed. This relationship is depicted in the Pepperdine Private Capital Market Line, which appears below.

Of the 71 participants who responded to the venture capital survey, approximately 28% of respondents expect a shrinking of the venture capital industry. The majority (55%) of respondents plan to make five investments or more over the next 12 months.

Other key findings include:

  • The types of businesses respondents plan to invest in the next 12 months are very diverse with over 33% targeting information technology and another 23% planning to invest in health care or biotech. Approximately 44% of  respondents plan to make new investments outside of the U.S.
  • Respondents’ exit strategies include selling to a public company (40%) followed by selling to a private company (25%).
  • Respondents believe access to capital is the most important issue facing privately‐held businesses today.Domestic economic uncertainty is indicated as the most important emerging issue.


The University Of New Hampshire CVR Full Year 2011& Q1Q2 2012 Angel Market Analysis Reports


Market Size

The angel investor market in Q1,2 2012 showed signs of a continued steady recovery since the market correction in the second half of 2008 and the first half of 2009. Total investments in Q1,2 2012 were $9.2 billion, an increase of 3.1% over Q1,2 2011, according to the Center for Venture Research at the University of New Hampshire. A total of 27,280 entrepreneurial ventures received angel funding in Q1,2 2012, a 3.7% increase from Q1,2 2011, and the number of active investors in Q1,2 2012 was 131,145 individuals, an increase of 5% from Q1,2 2011. The increase in total dollars and the matching increase in total investments resulted in a deal size of $336,390 in Q1,2 2012, comparable to the deal size in Q1,2 2011 of $338,400. These data indicate that angels remain major players in this investment class and at valuations similar to Q1,2 2011. While the market exhibited a stabilization from Q1,2 2011, when compared to the market correction that occurred in 2008, these data indicate that the angel market has demonstrated a steady recovery since 2008.



Market Size

The angel investor market in 2011, following a considerable contraction in investment dollars in 2008 and 2009, exhibited the upward trend that began in 2010 in investment dollars and in the number of investments. Total investments in 2011 were $22.5 billion, an increase of 12.1% over 2010, according to the Center for Venture Research at the University of New Hampshire. A total of 66,230 entrepreneurial ventures received angel funding in 2011, an increase of 7.3% over 2010 investments. The number of active investors in 2011 was 318,480 individuals, a substantial growth of 20% from 2010. The significant increase in total dollars, coupled with the rise in the number of investments resulted in a larger deal size for 2011 (an increase in deal size of 4.7%  from 2010). These data indicate that angels have significantly increased their investment activity, and are committing more dollars resulting from higher valuations. It appears that an optimism in angel investing is taking hold.


Cambridge Associates: U.S. Venture Capital Index and Benchmark Statistics

U.S. Venture Capital

  • Fund Index Analysis
  • Fund Since Inception Analysis
  • Company Analysis

Venture Capital Index

Cambridge Associates U.S. Private Equity and Venture Capital Benchmark Commentary Quarter Ending June 30, 2012

Second Quarter 2012 Highlights:

  •  As of June 30, 2012, the private equity benchmark outperformed indices tracking large and small public companies in six of the nine time horizons listed in the table above with the exceptions being the year-to-date, one-year, and three-year periods ended June 30, 2012. For two of those time periods, the one-year and three year horizons, the results were mixed against the public markets. Similarly, the venture capital index beat out the public markets in six of the nine time periods, with shortfalls in the year-to-date, three-year, and ten-year time horizons. The recent mixed performance of the private equity and venture capital indices relative to the public markets is worth monitoring. Over the ten-year period, the venture index’s performance against public equities was mixed. It equaled the S&P 500 but trailed the small company index, the Russell 2000, and the technology heavy NASDAQ Composite.
  • The ten-year return for the venture capital index has improved as the poor performance from the technology bust starting in 2000 gets removed from the ten-year calculation. In the first quarter of 2012, the ten-year return hit its highest mark since September 30, 2009 when it was 6.7%. Since bottoming out at -4.6% during the third quarter of 2010, the ten-year return has risen 9.9%.
  • The spread between the private equity and venture capital ten-year returns stood at 7.5% as of the second quarter, down from 12.7% when the venture index hit its nadir in the third quarter 2010.
  • As of June 30, 2012, public companies accounted for about 20.7% of the private equity index, a decrease of nearly 2.0% from the first quarter. Public company representation in the venture capital index dropped to 17.0% from about 21.8% last quarter. Non-U.S. company exposures in the private equity and venture capital indices remained about the same as they were during the prior three quarters, 18.8% in the private equity benchmark and approximately 9.6% in the venture index

Second Quarter 2012 USPE and VC Benchmark Commentary

RSCH and ACEF Returns To Angel Investor In Groups 2007

One of the most significant studies on angel investment returns.

Findings in this study are based on the largest data set of accredited angel investors collected to date, with information on exits from 539 angels. These

investors have experienced 1,137 “exits” (acquisitions or Initial Public Offerings that provided positive returns, or firm closures that led to negative returns) from their venture investments during the last two decades, with
most exits occurring since 2004.
Analysis of the data revealed important details of the investment outcomes for angel investors connected to angel organizations:

• The average return of angel investments in this study is 2.6 times the investment in 3.5 years— approximately 27 percent Internal Rate of Return
(IRR). This average return compares favorably with the IRRs of other types of private equity investment.
• The distribution of returns for this type of investment is quite varied. Like venture capital, “average return” may not describe the performance of most angels in the study. The analysis identified a wide range of performance
for the investment exits in the study:

– Fifty-two percent of all of the exits returned
less than the capital the angel had invested in
the venture.

– Seven percent of the exits achieved returns of
more than ten times the money invested,
accounting for 75 percent of the total
investment dollar returns.

Three factors that appear to impact these angel investors’ outcomes:
1. Due diligence time: More hours of due diligence positively relates to greater returns.
2. Experience: An angel investor’s expertise in the industry of the venture in which they invest also is related to greater returns.
3. Participation: Angel investors that interacted with their portfolio companies at least a couple of times per month by mentoring, coaching,
providing leads, and/or monitoring performance experienced greater returns.