Venture Capital Deals and Terms in 2012: What’s the Deal?

February 28, 2013 · by · in ,

Continuing my earlier habit of posting a summary of venture capital deals and terms, here is my snazzy new “What’s the Deal” summary on just that.  This is something I’ve done in the past that received a fair amount of comments and traffic, so I’ll keep it going.  Information from Fenwick & West report, which pulls from Down Jones Venture Source($) report and PWC/NCA Money Tree($) report, is the primary source for this information.  The assumptions and commentaries are mine.

Venture Capital Deals and Terms General Comments

  • General industry health –> Stable but weak.  We are still battling a serious cold, but I think we’ve fought our way past the risk of pneumonia.
  • Venture continues to experience consolidation and shrinkage.  While the numbers aren’t optimistic, they do support that the bleeding in the industry has slowed.
  • In 2012 transactions were slightly up while dollars invested were slightly down.  Average deal size was around $7.2 to $8.8 million.
  • Average IPO exit was $$94 million (see note below on outlier) and average M&A exit was $93 million.  I still think the industry, and the entire economy for that matter, continue to  struggle until we get better regulatory grasp on the IPO process.
  • Although the angel and accelerator activity continues to be very strong around seed transactions, closing a Series A financing continues to be a challenge.  With the movement of most venture fund management teams downstream to growth/expansion investing, Series A will continue to be a challenge for the near future.  45% of VCs surveyed expect Series A deals to be the most difficult to close in 2013.
  • Average deal terms appear to be more entrepreneur friendly, but this still isn’t a snuggle bear environment for unsophisticated entrepreneurs.  Also, regional investment activity is very different.  Since almost half of all deals are done in California, California terms tend to overwhelmingly influence this data.  I can promise you that southeast funds structure deals very differently.

Venture Capital Investment Activity

  • Dow Jones reported $29.7B in 3,363 deals for an average deal size of $8.8 million.  This was a 9% decrease in 2011 dollars and a 5% increase in 2011 deals.
  • PWC/NVCA reported $26.5B in 3,698 deals for an average deal size of $7.2 million.  This is a 7% decrease in 2011 dollars invested and approximately the same number of deals.
  • The only sector showing strength was software with digital health showing exceptional growth of 45% from 2011 to 2012.  Life science was weak with both biotech and medical device investing down.  Clean tech continues to decrease significantly.  Even internet investing was slightly down, although 2011 was a record year for that industry.

IPO Market for Venture-Backed Companies

  • Dow Jones reported 50 U.S. venture-backed IPOs, a 10% increase over 2011′s 45, for $11.2 billion.  The average was $225 million per IPO.  OUTLIER ALERT!!!  The Facebook IPO was $6.6 billion of the $11.2 billion total.  That is almost 60% of the total dollars for 2% of the transaction.  If you toss Facebook as an outlier, you have 49 deals generating $4.6 billion in proceeds for an average of $94 million.  I’d take $94 million, but that’s a little “meh.”

M&A Market for Venture-Backed Companies

  • Dow Jones reported 433 acquisitions for $40.3 billion, an average of $93 million.  This represents a 9% decrease in deals from 2011′s 477 and a 16% decrease in dollars from 2011′s $47.8 billion. 
  • PWV/NVCA reported a 1% increase in 2012 to 435 from 429 in 2011.

Venture Fund Fundraising

  • Dow Jones reported 154 funds raising $20.3 billion in 2012 for an average fund size of $132 million, a 14% increase in number of funds and 25% increase in dollars raised.  OUTLIER ALERT!!!  Of the $20.3 billion raised, 11 funds raised $11.3 billion of that amount.  That is 7% of the funds raising 56% of the capital, and at an average fund size of over $1 billion. Whoa…  Take those out and you’ve got 143 funds raising $9 billion in capital for av average fund size of $63 million.
  • PWC/NVCA reported 182 funds raising $20.6 billion in 2012 for an average fund size of $113 million, a 8% increase in funds raised and a 13% increase in dollars from 2011.  I don’t have the data on how concentrated the raising among the top 10%, but I assume it will be similar.
  • NVCA reported membership at 401 for 2012, compared to 470 in 2008.

Q4-12 Average Deal Terms

  • Transaction size:  $9 million in 2012, $8.4 million in 2011
  • Round direction:  71% were up, 21% were flat, and 8% were down
  • Senior liquidation preference:  23% of deals, compared to 34% in Q4-11
  • Liquidation preference size:  only 4% of those with liquidation preference had a greater than 1x, compared to 15% in Q4-11
  • Participating:  40% of deals, compared to same percentage in Q4-11
  • Uncapped participation:  57% of those with participating, compared to 47% in Q4-11
  • Cumulative dividends:  6% of deals, compared to 4% in Q4-11
  • Anti-dilution: 100% of deals with 98% having weighted-average and 2% having full ratchet, compared to 97% and 3% respectively in Q4-11