Monday, May 21, 2018

Cooley Law: "Venture Financing Report – Q1 2018 – Valuations Continue to Rise in the New Year "

Our Cooley boilerplate:
Cooley is one of the big dogs of the VC legal eagle biz. Something like a third of the unicorns on the WSJ's Billion Dollar Startup Club list have used Cooley for one purpose or another.
Additionally, 20 or 21 of the companies on the "Technology Review's 50 Smartest Companies 2017" list have been represented or counseled by the firm. As I said, one of the biggies.
From Cooley, May 9, 2018:
In the first quarter of 2018, both deal volumes and aggregate dollars raised remained robust, though slowing from the torrid final quarters of 2017. In Q1 2018, Cooley handled 205 disclosable deals representing more than $4.9 billion of invested capital.

During Q1, median pre-money valuations continued to rise to record levels. We witnessed an increase in median pre-money valuations across all deal stages, with the exception of Series C transactions. Valuations for Series A deals hit levels not seen in 14 years of reporting. Up rounds remained at high levels, as 83% of transactions were up rounds during the quarter. We also saw a decrease in transactions structured in tranches across all industries.
Download the full PDF.

And from CooleyGO:
In conjunction with our Q1 Venture Financing Report, I sat down with Matthew Howard from Norwest Venture Partners to get his take on the state of venture capital investing.

A few highlights from Matthew Howard
On his market outlook: Overall, I am extremely bullish as technology continues to be a major contributor to the US economy, and I do think disruptive technology and business models will continue to change many aspects of healthcare, consumer and enterprise opportunities.

On valuations: With so much capital deployed over the past several years, valuations seem to have cooled for some companies needing more time to get aligned with the “rule of 40” metrics.

On sector trends: There continues to be a demand for breakout enterprise security opportunities, multitenant cloud-based applications, artificial intelligence augmentation and robotics. We also see a huge white space in solving real-world consumer problems like urban mobility, living spaces and the future of work. We’re also tracking innovative technologies that will make healthcare more personalized, efficient and cost effective.

On exit routes: I expect, based on 2016 and 2017 data, that more often than not, companies will go the M&A route.

On M&A: Q1 2018 saw a huge increase in the tech M&A market from non-tech buyers. Transactions led by non-tech buyers nearly tripled from Q4 2017.

As far as VC deal terms, is the pendulum favoring companies or investors?
It really depends on the company. At Norwest, we like to take a long-term view and relatively patient approach. Regarding Q1, we are not seeing any material trend changes from Q4 2017 to Q1 2018.

Will this continue through 2018?At this moment, we expect mid- to late-stage venture investing to track the macro US economy as we gauge how the Federal Reserve manages interest rates.

Are there noticeable trends that differ for early stage deals compared to later?In general, we continue to see very straightforward and “clean” terms for seed to classic Series A investing. From time to time, we do see structured deal terms in pre-IPO rounds. As mentioned, we have not noticed any material changes quarter over quarter.

Any current trends standing out to you in Q1 that are changes from 2017?
Yes, we’re starting to see IPOs pick up steam after a slow 2016/2017, and M&A activity is continuing to grow. M&A deal volume was strong in Q1 2018, but average deal values remain flat. Interesting to note is that Q1 2018 saw a huge increase in the tech M&A market from non-tech buyers. Transactions led by non-tech buyers nearly tripled from Q4 2017.

Deal pace is trending upwards in Q1 2018, but average deal size remained relatively flat. Q1 2018 showed increases in both deal pace and size on a quarter-over-quarter basis, but only because Q4 2017 was a very quiet quarter.

The software sector will continue to lead the way with regards to both deal volume and size. The most notable software transaction of Q1 2018, and the largest, would be Salesforce’s $6.5 billion acquisition of Mulesoft.

Additionally, there are always situations where there are material, unrealistic valuation expectations among investors and entrepreneurs. However, there continues to be massive demand for high-quality opportunities that drive up valuations in an accelerated manner. It’s important to be judicious about the valuations while keeping a close eye on public market expectations and comparables....MUCH MORE