Cooley Q1 Report Shows Venture Investment Terms Continue to Improve
Venture financing is not out of the woods yet, but there are fewer trees, according to a report issued today that analyzes 83 VC transactions with a total value of $935 million. The Cooley law firm’s Venture Financing Report shows “continuing improvement” in VC deals nationwide during the first three months of 2010. Cooley, which recently shortened its name from Cooley Godward Kronish, has made a complete version of the report available here.
A lower percentage of deals were distressed financing rounds for existing companies, and a higher percentage were “up rounds” with higher company valuations, says Craig Jacoby, a partner in Cooley’s San Francisco office who heads the firm’s emerging companies practice. About 58 percent of the first-quarter deals were characterized as up rounds—in comparison to 16 percent in the first quarter of 2009. The percentage of up rounds has been increasing over the past year, and 45 percent were up rounds in the fourth quarter of 2009.
“I don’t think [the percentage of flat or down rounds] is fully out of the system yet, but I think we’re moving to a healthier environment,” Jacoby says.
“There certainly is some movement in the credit markets,” Jacoby adds. “Credit is more available to companies than it was in 2009, and certainly in 2008. We’re seeing not easy credit, but easier credit than we have in the past couple of years.”
With respect to available capital, Jacoby says the sources of capital for funding new technology companies are becoming more varied. “We’re seeing a rise of the angel class of investors who are stepping in at an earlier stage with entrepreneurs.”
The report shows deal terms reflected increased optimism among investors. The percentage of recapitalization transactions declining to 7 percent (the lowest rate since mid-2008) and an overall decrease in the use of “pay to play” provisions that require existing investors to participate in follow-on rounds (in which the company sells newly issued shares) to retain preferred shares that help preserve the valuation of their investment stake.
Not all data, however, point to an improving environment for venture financings. Pre-money valuations in early and mid-stage rounds were flat or down in comparison with the last three months of 2009. The percentage of deals that were structured in tranches, which has steadily increased since 2007, remains high at 31 percent. Tranching signals continued caution by investors.
The report is based on private company transactions in which Cooley served as counsel to either the issuing company or the investors.