Valuations stay strong in Silicon Valley venture rounds

November 18th, 2011

Fenwick sign MOUNTAIN VIEW, CA – Fenwick & West,a law firms providing comprehensive legal services to high technology and life science clients says the results of its Third Quarter 2011 Silicon Valley Venture Capital Survey shows strong valuations for venture financings continued during the third quarter in the Valley. Internet, digital media and software firms performed best.

The Third Quarter 2011 survey analyzed the valuations and terms of venture financings for 113 technology and life science companies headquartered in the Silicon Valley that reported raising capital in the third quarter of 2011.

Up rounds exceeded down rounds

“During the third quarter of 2011, up rounds exceeded down rounds 70% to 15% with 15% flat. This was an increase from the second quarter of 2011, when up rounds exceeded down rounds 61% to 25%, with 14% flat.

Series B rounds were especially strong with 89% up rounds. The was the ninth consecutive quarter in which up rounds exceeded down rounds,” said Barry Kramer, partner in the Corporate Group of Fenwick & West and co-author of the survey.

An up round is one in which the price per share at which a company sells its stock has increased since its prior financing round. Conversely, a down round is one in which the price per share has declined since a company’s prior financing round.

The Fenwick & West Venture Capital Barometer™ – which measures the change in share price of Silicon Valley companies funded during the quarter compared with the share price of their previous financing round – showed a 69% average price increase for the quarter, a slight decrease from the 71% reported in the second quarter of 2011.

Additionally, one of the companies in the internet/digital media industry had a 1,500% up round, and were this company excluded the Barometer would have been 54% for the quarter.

“This was also the ninth consecutive quarter in which the Venture Capital Barometer was positive,” said Kramer.

Internet, digital media, software best performing

“The best performing industries in the quarter from a valuation perspective were internet/digital media and software (including a significant number of “software as a service” companies and companies building applications for mobile devices), which substantially outpaced the other industries, followed by hardware and cleantech, while the life science industry continued to lag,” added Michael Patrick, partner in the Corporate Group of Fenwick & West and co-author of the survey.

“The third quarter of 2011 was a mixed quarter for the venture capital industry, with healthy valuations, solid amounts of investing and an improved M&A environment. However fundraising by venture funds, IPOs, venture capitalists’ confidence level and Nasdaq, were all off significantly.

Nasdaq has recovered significantly in 4Q11 to date, and Groupon had a successful IPO, but the macro environment continues to be unpredictable, and accordingly the future direction of the venture environment is uncertain,” added Patrick.

Both venture capitalists and entrepreneurs tells us that valuations on the East Coast and the Southeast are not on a par with those on the West Coast, particularly in Silicon Valley. Perhaps that will bring more West Coast VCs into the heartland and the opposite coast to hunt deals, but they do seem to have an aversion to too many cross-country flights.

Complete results of the survey with related discussion are posted on Fenwick & West’s website atwww.fenwick.com/vctrends.htm.