Survey Finds Venture Deal Terms Improving, But Still Below Historical Levels

Even though venture capital funding plunged dramatically in 2009, it was nevertheless encouraging when the VC surveys that came out in January showed an uptick in venture deals during the fourth quarter—like a ski jump into 2010.

Now the Cooley Godward Kronish Venture Financing Report for the fourth quarter of 2009 gives us another piece of the puzzle. One noteworthy aspect of the report, in fact, is how the contours of 2009 fit with 2008.

Venture funding was on a near-record pace during the first three quarters of 2008 before the bottom fell out in the fourth quarter. Last year was like a mirror image. The climate for venture investments during the first nine months was difficult, even scary, before signs of improvement emerged in the fourth quarter—with both the deal count and dollars invested up significantly over the previous quarter.

The real insight of Cooley’s report, though, is in its analysis of deal terms. Cooley says its report is based on an analysis of the 376 venture deals nationwide that its lawyers worked in 2009. Those deals led to venture investments of more than $3.8 billion during the year. One general finding: if you’re an entrepreneur, deal terms during the fourth quarter showed signs of slow improvement, although terms are not as good as they were a few years ago. Some more specific highlights:

—The trend in median pre-money valuations is improving, although still below recent historical annual averages. Cooley says it saw steady increases in median pre-money valuations for all venture investments during the fourth quarter.

—Up rounds (in which the value of investors’ shares has appreciated from one financing to another) increased to 45 percent in the fourth quarter—compared to 26 percent during the first three quarters. But the percentage of down or flat rounds continues to outpace the number of up rounds.

— 58 percent of fourth-quarter deals included fully participating preferred, which are terms that typically benefit investors at the expense of founders. That’s better than the previous three quarters, when 60 percent of the deals were fully participating preferred. But in 2007, just 53 percent of the deals were fully participating preferred. (A great explanation of the term from Brad Feld is here.)

In short, Cooley concludes that while valuations remain below their historical levels, the overall trend looks promising.

Author: Bruce V. Bigelow

In Memoriam: Our dear friend Bruce V. Bigelow passed away on June 29, 2018. He was the editor of Xconomy San Diego from 2008 to 2018. Read more about his life and work here. Bruce Bigelow joined Xconomy from the business desk of the San Diego Union-Tribune. He was a member of the team of reporters who were awarded the 2006 Pulitzer Prize in National Reporting for uncovering bribes paid to San Diego Republican Rep. Randy “Duke” Cunningham in exchange for special legislation earmarks. He also shared a 2006 award for enterprise reporting from the Society of Business Editors and Writers for “In Harm’s Way,” an article about the extraordinary casualty rate among employees working in Iraq for San Diego’s Titan Corp. He has written extensively about the 2002 corporate accounting scandal at software goliath Peregrine Systems. He also was a Gerald Loeb Award finalist and National Headline Award winner for “The Toymaker,” a 14-part chronicle of a San Diego start-up company. He takes special satisfaction, though, that the series was included in the library for nonfiction narrative journalism at the Nieman Foundation for Journalism at Harvard University. Bigelow graduated from U.C. Berkeley in 1977 with a degree in English Literature and from the Columbia University Graduate School of Journalism in 1979. Before joining the Union-Tribune in 1990, he worked for the Associated Press in Los Angeles and The Kansas City Times.