Interesting Data for Technology Entrepreneurs
VentureWire this morning published the results of a recent survey called the Dow Jones Venture Capital Deal Terms Report. The good news for entrepreneurs - a relative return to "normal" terms where a dollar invested buys closer to a straight dollar's worth of equity - most likely driven by the high number of funds chasing a relatively limited number of deals. For the synopsis in VW today, click to the rest of the text below. To read the full coverage, go to VentureWire and sign up.
The quoted text below are from the email from VentureWire today. The report is called the Dow Jones Venture Capital Deal Terms Report. The report is published by Dow Jones & Co., publisher of VentureWire, the fifth edition of the report surveyed 375 U.S. and European companies that closed venture rounds from July 2006 through June 2007.
Entrepreneurs are selling less of their companies to venture investors in a strong market for promising start-ups, according to the latest Dow Jones Venture Capital Deal Terms Report, which is being released today.The median share of companies sold to investors in first rounds has declined to 38% from 50% two years ago. Company-unfriendly provisions that gained notoriety after the tech bubble burst remained relatively rare, affecting mostly companies whose business had faltered.
Published by Dow Jones & Co., publisher of VentureWire, the fifth edition of the report surveyed 375 U.S. and European companies that closed venture rounds from July 2006 through June 2007.
Three quarters of U.S. companies closing second rounds, which are a strong indicator of the state of the venture industry, said their valuations increased. And 80% of U.S. companies said they received a term sheet from at least one potential new investor, indicating healthy interest from company outsiders.
In most U.S. deals, investors settled for liquidation preferences equal to the amount they invested. Only 20% of companies reported a preference higher than 1x and most of those said it was 2x or less. Company-unfriendly full-ratchet dilution protection appeared in 16% of financings surveyed, most often in financings where the company's valuation fell from its prior round.
Pay-to-pay provisions, aimed at keeping investment syndicates on the same page if a company runs into trouble, are becoming less common. Only 21% of U.S. respondents said their term sheet included this clause, down from a high of 37% in the survey covering April 2003 through March 2004. Under this provision, investors who fail to participate in a subsequent round in which the company's valuation falls, can have their preferred shares converted to common stock or stripped of certain rights.
The report also found that founders and prior investors usually did not sell shares to investors in the latest round, despite a longer wait for liquidity. But with more founders bootstrapping companies before seeking an initial venture financing, the rate was highest in first rounds with 16% of those deals affording founders the opportunity to sell some stock.
