WSGR – Entrepreneurs Report (Q1-2013)

Wilson Sonsini Goodrich & Rosati presents the latest edition of The Entrepreneurs Report. In this issue, they’ve compiled a range of data on venture financing transactions in which the firm was involved in Q1 2013, with the objective of identifying relevant trends in activity and valuation levels for the U.S. venture capital industry in general. They also include data on bridge loans, an examination of how pre-money valuations vary across industries, a comparison of capitalization outcomes involving convertible notes versus preferred stock in seed round financings, and a look at the risks of different types of contract formation.

The number of deals and the total funds raised in equity venture financings in which Wilson Sonsini Goodrich & Rosati represented one of the principals declined significantly from Q4 2012 to Q1 2013. This decrease was consistent with the declines reported by industry-wide surveys such as PricewaterhouseCoopers’ MoneyTree Report.

While equity venture activity declined, the dollar amount of bridge loans increased significantly, particularly post-Series A loans, which doubled between Q4 2012 and Q1 2013. The increase in bridge loans reflected both continuing activity by angel investors in early-stage deals and the necessity for existing investors to provide continuing financing to carry portfolio companies through a slowdown in equity investments by new investors. However, even with the increase in debt deals, combined debt and equity financings were still well below 2012 levels.

The decline in the volume of venture financings was accompanied by a small increase in the absolute number of down rounds, which, combined with a decrease in the aggregate number of deals, led to a significant increase in down rounds as a proportion of total deals. Median amounts raised fell for Series B and later rounds, although there was a small increase in the median amounts raised in Series A financings led by venture firms and for bridge financings. Despite the increase in the number of down rounds, pre-money valuations remained strong for both venture-led Series A deals and Series C and later rounds. Series B rounds posted a modest decline in valuations.

Deal terms remained largely unchanged when looking at all rounds in the aggregate. However, there were significant shifts in the terms for down rounds, with a notable decline in the number of deals with senior liquidation preferences and an increase in the percentage of capped participating preferred. This may be a consequence of a smaller number of down rounds in prior quarters.

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SOURCE: Wilson Sonsini Goodrich & Rosati