What trends does WSGR see in venture financings?
June 28, 2007
Wilson Sonsini Goodrich & Rosati just published a report on private company financing trends for the period from 2005 through the first quarter of 2007. According to VentureOne, WSGR represents more companies that receive venture financings than any other law firm in the United States. In 2006, WSGR represented companies in over 500 venture equity and debt financings, which was 20.1% market share among U.S. law firms. The reason why WSGR hasn’t published a report like this is probably because everyone has been too busy getting deals done to collect and sort through the data.
The report covers valuation trends, amounts raised by series, up rounds vs. down rounds, liquidation preferences, pay-to-play, dividends, anti-dilution and redemption rights.
A link to the entire report is available on the WSGR web site. [Update: a link to the report for the period from January 1, 2005 to June 30, 2007 is here, a link to the report for the period from January 1, 2005 to September 30, 2007 is here, a link to the report for the period from January 1, 2005 to December 31, 2007 is here, and a link to the latest report for the period from January 1, 2005 to March 31, 2008 is here.] Below is a excerpt from the first report:
Analysis: Looking beyond the Medians. Aggregate industry data for pre-money valuations, financing amounts, and other financing metrics are publicly available from several sources. This data can be quite useful, and many entrepreneurs refer to these sources to set their own expectations as to amounts raised and valuations in future financings. However, our data shows that in many instances, the medians and other aggregate data have little relevance to individual deals. The distributions of deal values and deal sizes do not follow a classic bell curve and do not cluster near the median. On the contrary, the distribution curves are remarkably flat.
For example, although the median Series A pre-money valuation for 2006 was $6 million, almost one-fourth of Series A financings exceeded $12 million in pre-money valuation, more than twice the median value. At the lower end, approximately 19% of Series A financings reflected pre-money valuations of one-half or less than the median valuation. Pre-money valuations in Series B and later-round financings were also widely dispersed relative to the median. Amounts raised per round also vary widely from the median, although to a lesser extent than deal valuations. Aggregate 2005 - 2006 Series A financings, for example, had a median amount raised of $4 million but 16% of Series A financings raised $10 million or more.
In summary, although industry financing statistics are useful as points of reference, their importance can be easily exaggerated. Entrepreneurs should understand that financings vary widely and learn to emphasize the specific economic and other factors pertaining to their particular businesses.
With regard to valuation trends:
Valuation trends. Although median valuations may not be pertinent for individual deals, they are useful as an indicator of industry trends. Our data indicates that the median valuations for later-round deals increased substantially from 2005 to 2006, particularly for later-stage financings. In 2006, 31% of Series B rounds reflected valuations of $30 million or more, and 37% of Series C and later rounds reflected valuations of $61 million or more.
Series A - The median Series A valuation was $6.0 million in 2005 and again in 2006, and decreased to $5.0 million in Q1 2007.
Series B - The median Series B valuation increased from $16.5 million in 2005 to $20.0 million in 2006 and decreased to $12.5 million in Q1 2007.
Series C and later - The median valuation for Series C and later rounds increased from $30.0 million in 2005 to $45.0 million in 2006 and decreased to $37.0 million in Q1 2007.
With regard to amount raised by series:
Amounts Raised - By Series. As indicated in the charts, amounts raised have been widely dispersed relative to the medians. However, despite a strong supply of money in the venture sector, the median amounts raised by series did not change substantially during the period covered by this data set.
Series A - The median amount raised for Series A financings was $4.0 million in 2005 and 2006.
Series B - The median amount raised for Series B financings was $8.0 million for 2005, increasing to $9.0 million in 2006.
Series C and later - The median amount raised for Series C and later-round financings was $10.0 million in 2005 and 2006.
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Excellent site and explanations.
I would like a copy of the WSGR trend report if possible.
Getting industry comps can also be made easier by going to http://www.pedatacenter.com. This company has built a database that actually reveals the individual terms for U.S. venture financings, as well as a valuation. A friend of mine at PWC says they are slowly incorporating this resource into their work because of FAS 157.