Saturday, August 5, 2017

Cooley Q2 2017 Quarterly VC Update: Hans Tung on the State of Venture Capital Investing

Following up on yesterday's "Cooley, LLP on the State Of Venture Capital In Q2 2017".
From Cooley:
A few highlights from Hans:

On valuations: The deals that are getting done are with the better companies that have done well in 2016 and are therefore able to raise money in 2017 at a higher valuation.

On deal terms: We see less SAFE structures than before, especially in early stage deals. The number of these have definitely come down.

On the IPO climate: Investors are more cautious as to what IPO valuations will be, therefore fewer deals are currently getting done. There will definitely be an uptick, given the size of many private companies.

On US-China dealflow: I’m not sure that it will be at a scale of a Uber-DiDi or Baidu-Uber, but I think a China mega deal is likely to happen over the next 24 months.

Full Q&A:
Have you had a chance to look at any of the quarterly financing information that we sent over based on deals we’re seeing?
Some of the numbers seemed a bit surprising to me. Based on what I have seen, I would not recall Q2 2017 as having the highest median pre-money valuations. I don’t know where that data comes from, but Seed, Series A, Series C, its last quarter was the most expensive, and for Series B and D, it’s the second most expensive in the last two years. So that’s definitely not our impression.

The data we shared with you is based on deals that we were involved in in Q2 where we represented either the company or the investor, so it’s only a slice of the macros world. You’re not seeing those trends in median pre-money valuations?
Maybe you’re getting better clients and hotter deals, so we all got higher pre-money valuations!

I don’t know about that. Hans, elaborate a little bit on what you’re seeing as far as valuations across the deal stages
Basically, back in 2015 we see a huge ramp-up in valuations. Based on my recollection, most of the expensive deals raised money in 2015. In 2016, there were fewer deals that got done. As I recall, the first half of that year, the tech market was terrible. People were saying, “This is 2008 all over again.” This year we are seeing that the numbers have crept up, but not to 2015 levels.

That’s across all the deal stages that you’re seeing?
Correct. Across all stages. Now, having said that, one could argue the deal, the down rounds are not being done yet – or not enough of them. Or you’re not representing them. Therefore, the deals that are getting done are the better companies that have done well in 2016 and are therefore able to raise money in 2017 at a higher valuation. Since they’re good companies, they’ve been around for a while and their performance compared to 2015 has been even better, hence the higher rounds. When I see data Series C and B, I can get that. It’s the earlier stage where the picture is less clear.

Right, so those median pre-money valuations in the early stages are a little bit mysterious to you.
Yes. You have all sectors. Life sciences, technology and other industries. We tend to look at IT more, and maybe that explains some of the discrepancies. People are looking for the next big thing – is it AI, is it machine learning, is it autonomous driving? It is possible that there’s some blip that happened this year that somehow accounted for people paying a premium to get into the hotter sector deals, which we’re not part of. Maybe you have clients who are doing that and they’re willing to pay a bit more early on just in case the sector becomes hot.

What about deal terms? What are you seeing as far as trends in deal terms during the quarter?
We see less SAFE than before, in early stage deals. That definitely has come down. The YC type of deals from early 2010 – 2012 tend not to be as popular. We still see them – I’m not saying they all disappeared – but they have happened a lot less.

I think that in later-stage deals, people are expecting some to be done with protections. For the most part, the deals we saw didn’t have that much protection in them. The few that did tended to be in the on-demand services area. Not naming any names, but some of the deals that got done in that bucket had to raise money with favorable terms – very favorable terms – to investors. For the most part, though, they are doing well, or pretty well, or still promising. We don’t see a lot of investor-friendly restrictive terms in them. 

Based on valuations trends in the later stage, what is your view on what that’s going to mean to the IPO market for the rest of this year and 2018?...