Silicon Valley Venture Capital Survey - First Quarter 2016 [PDF]

Silicon Valley Venture Capital Survey First Quarter 2016 Barry Kramer and Khang Tran

Fenwick fenwick & west llp

Background We analyzed the terms of 148 venture financings closed in the first quarter of 2016 by companies headquartered in Silicon Valley.

Overview of Results The weakening in valuations that began in 4Q15 continued in 1Q16, although the results for 1Q16 are still mostly above our historical averages. §§ Up rounds exceeded down rounds 78% to 11%, with 11% flat in 1Q16. This was a small decline from 4Q15, when up rounds exceeded down rounds 82% to 12% with 6% flat. §§ The average price increase of financings in 1Q16 compared to the company’s prior financing was 53%. This was a decline from the 70% recorded in 4Q15, and the lowest amount since 1Q12. §§ The median price increase of financings in 1Q16 compared to the company’s prior financing was 36%. This was a small decline from the 39% recorded in 4Q15 and the lowest amount since 4Q13. §§ This quarter we have included expanded graphs in the survey showing percentage up rounds, average price change and median price change for each quarter since we began calculating such amounts in 2004. This was done to provide more historical context for the current results, and these new graphs appear on pages 3, 5 and 8, respectively. In summary, the 1Q16 up round percentage was above the historical average (78% vs 66%), the average price increase was slightly below the historical average (53% vs 56%) and the median price increase was above the historical average (36% vs 28%). §§ The software, hardware and internet/digital media industries each led one of the valuation metrics, with the software industry have the largest percentage of up rounds (83%), the hardware industry having the largest average price increase (96%) and the internet/digital media industry having the largest median price increase (65%). The life science industry trailed the other industries in valuation metrics.

silicon valley venture capital survey— first quarter 2016

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Fenwick & West Data on Valuation price change — The direction of price changes for companies receiving financing in a quarter, compared to their prior round of financing. 90% 80% 80%

76%

79%

86%

83%

83%

82% 78%

70% 60% 50%

Up rounds Down rounds

40%

Flat rounds

30% 20% 10%

14%

12%

6%

12%

0% Q2’14

Q3’14

15%

9%

9%

6%

8%

8%

Q4’14

Q1’15

Q2’15

10%

12%

4%

6%

Q3’15

Q4’15

11% 11% Q1’16

The percentage of down rounds by series were as follows: 40% 35% 30% 27%

26% Series B

25%

Series C 20%

20%

Series E and Higher

15% 10% 5% 0%

Series D

12% 9% 6% 4% 3% Q2’14

11%

13% 12% 11% 6%

9% 6%

3% Q3’14

9% 9% 8%

6% 7%

13% 8% 6%

9% 8% 8%

0%

3% 0% Q4’14

11%

0% Q1’15

Q2’15

silicon valley venture capital survey — first quarter 2016

Q3’15

Q4’15

Q1’16

2

expanded price Change change graph — Set forth below the direction in Price Direction fromisPrior Round of price changes for each quarter since 2004. 90% 80% 70%

average percentage of up rounds 66%

60% 50%

Up rounds Down rounds

40% 30%

Flat rounds

20% 10%


’1 6 Q1

’1 5 Q1

’1 4 Q1

’1 3 Q1

’1 2 Q1

’1 1 Q1

’1 0 Q1

’0 9 Q1

’0 8 Q1

’0 7 Q1

’0 6 Q1

’0 5 Q1

Q1

’0 4

0%

3

the fenwick & west venture capital barometer™ (magnitude of price change) — Set forth below is the average percentage change between the price per share at which companies raised funds in a quarter, compared to the price per share at which such companies raised funds in their prior round of financing. In calculating the average, all rounds (up, down and flat) are included, and results are not weighted for the amount raised in a financing. 116%*

120% 113% 110%

115% 107%

100%

100%

90% 80%

79%

70%

70%

60%

53%

50% 40% 30% 20% 10% 0% Q2’14

Q3’14

Q4’14

Q1’15

Q2’15

Q3’15

Q4’15

Q1’16

* One company had an over 3000% up round in 3Q15. If this financing was excluded, the Barometer result for 3Q15 would have been 93%.

The Barometer results by series are as follows: 212%* 200%

192% 169%

173% 160%

141% 126% 129%

120%118% 95%

126%

113% 93%

81%

80% 61%

68%

45%

64%

40% 37%

Q2’14

Q3’14

Series C

101% 82%

50%

Series D Series E and Higher

81% 57%

39%

63% 55% 38% 35%

16%

13%

0%

Series B

106% 88%

Q4’14

Q1’15

Q2’15

Q3’15

Q4’15

Q1’16

* Please note that the above-mentioned over 3000% up round financing in 3Q15 was a Series B round. If this financing was excluded, the Barometer result for Series B rounds in 3Q15 would have been 132%.


4

expanded barometer graph — Set forth below is the average percentage price change for each quarter since we began calculating this metric in 2004.

Average Price Change from Prior Round

120% 100% 80% 60%

average 56%

40% 20% 0%

16 Q1 ’

15 Q1 ’

14 Q1 ’

13 Q1 ’

12 Q1 ’

11 Q1 ’

10 Q1 ’

09 Q1 ’

08 Q1 ’

07 Q1 ’

06 Q1 ’

05 Q1 ’

Q1 ’

04

-20%

results by industry for price changes and fenwick & west venture capital barometer™ — The table below sets forth the direction of price changes and Barometer results for companies receiving financing in this quarter, compared to their previous round, by industry group. Companies receiving Series A financings are excluded as they have no previous rounds to compare. Down Rounds

Up Rounds

Software

83%

8%

9%

65%

54

Hardware

82%

18%

0%

96%

11

Life Science

65%

18%

17%

7%

23

Internet/Digital Media

80%

10%

10%

61%

20

Other

71%

0%

29%

16%

7

Total all Industries

78%

11%

11%

53%

115


Flat Rounds

Barometer

Number of

Industry

Financings

5

down round results by industry — The table below sets forth the percentage of “down rounds,” by industry groups, for each of the past eight quarters. Down Rounds

Q2'14

Q3'14

Q4'14

Q1'15

Q2'15

Q3'15

Q4'15

Q1'16

Software

8%

8%

7%

8%

3%

6%

9%

8%

Hardware

9%

8%

6%

6%

25%

0%

18%

18%

Life Science

0%

21%

6%

13%

12%

6%

25%

18%


7%

14%

6%

12%

9%

4%

6%

10%

Other

0%

25%

0%

9%

11%

0%

10%

0%

Total all Industries

6%

12%

6%

9%

8%

4%

12%

11%

barometer results by industry — The table below sets forth Barometer results by industry group for each of the last eight quarters. Barometer

Q2'14

Q3'14

Q4'14

Q1'15

Q2'15

Q3'15

Q4'15

Q1'16

Software

114%

78%

134%

103%

107%

88%

60%

65%

Hardware

87%

85%

61%

92%

67%

67%

100%

96%

Life Science

75%

26%

39%

22%

110%

76%

25%

7%

169%

139%

178%

124%

125%

136%

111%

61%

65%

56%

83%

155%

108%

509%*

53%

16%

113%

79%

115%

100%

107%

116%*

70%

53%

Internet/Digital Media Other Total all Industries

* If the above-mentioned over 3000% up round financing in 3Q15 was excluded, the Barometer results for companies in the “Other” industry group and for all reviewed companies in 3Q15 would have been 47% and 93%, respectively.

A graphical representation of the above is below. 200% 175% 150% 125% Software 100%

Hardware Life Science Internet/Digital Media

75% 50% 25% 0%

Q2’14

Q3’14

Q4’14

Q1’15

Q2’15


Q3’15

Q4’15

Q1’16

6

median percentage price change — Set forth below is the median percentage change between the price per share at which companies raised funds in a quarter, compared to the price per share at which such companies raised funds in their prior round of financing. In calculating the median, all rounds (up, down and flat) are included, and results are not weighted for the amount raised in the financing. Please note that this is different than the Barometer, which is based on average percentage price change. 80%

74%

75%

70%

62%

61%

60%

51%

50%

39%

43%

40%

36%

30% 20% 10% 0% Q2’14

Q3’14

Q4’14

Q1’15

Q2’15

Q3’15

Q4’15

Q1’16

median percentage price change results by industry — The table below sets forth the median percentage price change results by industry group for each of the last eight quarters. Please note that this is different than the Barometer, which is based on average percentage price change. Median % Price Change

Q2'14

Q3'14

Q4'14

Q1'15

Q2'15

Q3'15

Q4'15

Q1'16

Software

94%

49%

79%

72%

74%

51%

29%

42%

Hardware

78%

40%

53%

44%

29%

45%

63%

56%

Life Science

30%

0%

26%

18%

61%

13%

23%

20%


99%

54%

56%

99%

97%

83%

95%

65%

8%

38%

29%

92%

77%

36%

44%

2%

75%

43%

61%

62%

74%

51%

39%

36%

Other Total all Industries

A graphical representation of the above is below. 116% 90% 64%

Software Hardware

38%

Life Science Internet/Digital Media

12% 0% -14% Q2’14

Q3’14

Q4’14

Q1’15

Q2’15

Q3’15


Q4’15

Q1’16

7

expanded median price change graph — Set forth below is the median percentage price change for each quarter since we began calculating this metric in 2004.

Median Price Change from Prior Round

80% 70% 60% 50% 40% 30%

average 28%

20% 10%

’1 6 Q1

’1 5 Q1

’1 4 Q1

’1 3 Q1

’1 2 Q1

’1 1 Q1

’1 0 Q1

’0 9 Q1

’0 8 Q1

’0 7 Q1

’0 6 Q1

’0 5 Q1

Q1

’0 4

0%

financing round — This quarter’s financings broke down by series according to the chart below. Series

Q2'14

Q3'14

Q4'14

Q1'15

Q2'15

Q3'15

Q4'15

Q1'16

Series A

23%

28%

27%

25%

18%

23%

28%

22%

Series B

21%

21%

21%

29%

28%

22%

22%

27%

Series C

26%

20%

19%

18%

20%

19%

24%

29%

Series D

13%

14%

9%

13%

16%

14%

11%

8%

Series E and Higher

17%

17%

23%

16%

17%

22%

15%

14%


8

Fenwick & West Data on Legal Terms liquidation preference — Senior liquidation preferences were used in the following percentages of financings. 50% 45% 40%

35%

35% 30% 26% 25%

32%

31%

29%

29%

25%

20%

19%

15% 10% 5% 0% Q2’14

Q3’14

Q4’14

Q1’15

Q2’15

Q3’15

Q4’15

Q1’16

The percentage of senior liquidation preference by series was as follows: 80%

60% 52% 50%

50% 46%

41% 40%

39% 35%

24% 22% 20% 17%

Series C

39% 38% 35%

37% 31%

Series B

40% 38% 36%

Series D Series E and Higher

32%

26% 22% 21%

23%

26%

24% 20%

22%

16%

16% 13% 9%

7% 0% Q2’14

Q3’14

Q4’14

Q1’15

Q2’15


Q3’15

Q4’15

Q1’16

9

multiple liquidation preferences — The percentage of senior liquidation preferences that were multiple liquidation preferences were as follows: 30% 25% 20% 17% 15%

12%

11%

10% 5%

5%

8%

14%

6%

5%

0% Q2’14

Q3’14

Q4’14

Q1’15

Q2’15

Q3’15

Q4’15

Q1’16

Of the senior liquidation preferences that were a multiple preference, the ranges of the multiples broke down as follows: 100%

100%

100%

90% 80% 70%

67%

67%

67%

75%

75%

60%

>1x - 2x

50% 40%

33%

30%

25%

20%

33% 33%

0% Q2’14

0% 0% Q3’14

0% 0% Q4’14

Q1’15

0%

0%

Q2’15

Q3’15


>3x 25%

25%

10% 0%

>2x - 3x

50%

0% Q4’15

25%

0% Q1’16

10

participation in liquidation — The percentages of financings that provided for participation were as follows: 60% 50% 40% 30% 22% 20%

24%

20%

17%

22%

25% 18% 14%

10% 0%

Q2’14

Q3’14

Q4’14

Q1’15

Q2’15

Q3’15

Q4’15

Q1’16

Of the financings that had participation, the percentages that were not capped were as follows: 70%

70%

65%

63%

60%

53%

50%50%

63%

52% 50%

40% 30% 20% 10% 0%

Q2’14

Q3’14

Q4’14

Q1’15

Q2’15

Q3’15

Q4’15

Q1’16

cumulative dividends – Cumulative dividends were provided for in the following percentages of financings: 10% 9%

9% 8% 7%

7% 6% 6%

6%

6%

6%

5%

5%

5% 4% 3% 2% 1% 0%

Q2’14

Q3’14

Q4’14

Q1’15

Q2’15


Q3’15

Q4’15

Q1’16

11

antidilution provisions –The uses of (non-IPO) antidilution provisions in the financings were as follows: 100% 98%

99%

98%

98%

96%

98%

100% 98%

80% Ratchet

60%

Weighted Average None

40% 20% 1% 0% 1% Q2’14

2% 0% Q3’14

1% 0% Q4’14

2%

3%

2% 0% Q1’15

1% Q2’15

0% Q3’15

0% 0% Q4’15

2% 0% Q1’16

Please note that the chart above only applies to non-IPO anti-dilution provisions. In other words, the chart refers to anti-dilution provisions that protect the investor against a future venture financing at a price below what the investor paid. The chart does not include anti-dilution provisions designed to protect against an IPO at a price below the price paid by the venture investor (e.g., an IPO ratchet), because those provisions are generally only negotiated/included in very late stage, high value deals. We believe it would not be useful to provide a percentage of all financings that have IPO anti-dilution provisions, because it will provide a result that is artificially low. An analysis of IPO anti-dilution provisions is included in our Unicorn Survey, which by its nature is focused on late stage, high value deals.

pay-to-play provisions – The percentages of financings having pay-to-play provisions were as follows: 20% 16% 12% 9%

8% 4%

4%

5%

4%

2% 0%

Q2’14

4% 2%

Q3’14

Q4’14

Q1’15

Q2’15

2% Q3’15

Q4’15

Q1’16

redemption – The percentages of financings providing for mandatory redemption or redemption at the option of the investor were as follows: 20% 15%

12%

Q2’14

15% 9%

9%

10% 8% 5% 0%

14%

13%

8%

Q3’14

Q4’14

Q1’15

Q2’15


Q3’15

Q4’15

Q1’16

12

corporate reorganizations – The percentages of post-Series A financings involving a corporate reorganization (i.e. reverse splits or conversion of shares into another series or classes of shares) were as follows: 15% 12% 9%

8%

7% 6%

5%

6%

5% 4%

5%

4%

3% 0%

Q2’14

Q3’14

Q4’14

Q1’15

Q2’15

Q3’15

Q4’15

Q1’16

§§ About our Survey The Fenwick & West Venture Capital Survey was first published in the first quarter of 2002 and has been published every quarter since then. Its goal is to provide information to the global entrepreneurial and venture community on the terms of venture financings in Silicon Valley. The survey is available to all, without charge, by signing up at www.fenwick.com/vcsurvey/sign-up. We are pleased to be a source of information to entrepreneurs, investors, educators, students, journalists and government officials. Our analysis of Silicon Valley financings is based on independent data collection performed by our lawyers and paralegals, and is not skewed towards or overly representative of financings in which our firm is involved. We believe that this approach, compared to only reporting on deals handled by a specific firm, provides a more statistically valid and larger dataset. For purposes of determining whether a company is based in “Silicon Valley” we use the area code of the corporate headquarters. The area codes included are 650, 408, 415, 510, 925, 916, 707, 831 and 209. §§ Note on Methodology When interpreting the Barometer results please bear in mind that the results reflect the average price increase of companies raising money in a given quarter compared to their prior round of financing, which was on average about 18 months prior. By definition the Barometer does not include companies that do not do follow-on financings (which may be because they went out of business, were acquired or went public). Accordingly we believe that our results are most valuable for identifying trends in the venture environment, as opposed to calculating absolute venture returns. Please also note that our calculations are not “dollar weighted,” i.e. all venture rounds are treated equally, regardless of size.


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§§ Disclaimer The preparation of the information contained herein involves assumptions, compilations and analysis, and there can be no assurance that the information provided herein is error-free. Neither Fenwick & West LLP nor any of its partners, associates, staff or agents shall have any liability for any information contained herein, including any errors or incompleteness. The contents of this report are not intended, and should not be considered, as legal advice or opinion. To the extent that any views on the venture environment or other matters are expressed in this survey, they are the views of the authors only, and not Fenwick & West LLP. §§ Contact/Sign Up Information For additional information about this report please contact Barry Kramer at 650-335-7278; bkramer@ fenwick.com at Fenwick & West. To view the most recent survey please visit fenwick.com/vcsurvey. To be placed on an email list for future editions of this survey please visit fenwick.com/vcsurvey/sign-up. © 2016 Fenwick & West LLP


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