Cooley Law: "Q1 2019 Quarterly VC Update: Deal Volumes and Valuations Decrease Slightly 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: Q1 2019 – Deal Volumes and Valuations Decrease Slightly in the New Year
In the first quarter of 2019, deal volumes and aggregate
dollars raised decreased from the historical highs of the final
quarters of 2018. In Q1 2019, Cooley handled 232 disclosable deals
representing more than $5.1 billion of invested capital.
During Q1, median pre-money valuations
also declined across all deal stages from prior quarters. Despite this
decrease, valuations remain robust when compared to levels over the last
several years. Transactions with a median pre-money valuation
greater than $100 million rose to 27% of deals. As another signal of
the strong financing environment, the percentage of up rounds reached
89% of all deals – a level not seen since Q3 2015.
Deal terms continued to favor companies. In Q1, the percentage of deals using full participating liquidation preferences decreased to 8% of transactions. Cooley also saw a decrease in the percentage of deals involving pay-to-play provisions.
In conjunction with our Q1 Venture Financing Report, I sat down with Zack Schildhorn from Lux Capital to get his take on the state of venture capital investing.
A few highlights from Zack Schildhorn:
On the current market: “It’s an ebullient time with plenty of cash in the ecosystem, rising valuations and – importantly – a huge wave of liquidity.” On the future: “It feels like a gold rush mentality
amongst investors right now, who are willing to fund pretty much
anything that moves. What matters is how long that lasts, and it
certainly can’t last forever.” On Lux’s strategy: “Our preference is to invest in
areas where we can maintain some price discipline. This means pursuing
ideas that may be unpopular or outside others’ domains or, in some
cases, ideating and funding companies at inception.” On the proliferation of venture capital: “It’s not
just a great time to be an entrepreneur, but a great time to be a new
GP, in that you’re seeing thousands of new firms get started with
individual partners from larger organizations branching off on their own
or angel investors starting to institutionalize.”
Does the data you have seen from Cooley’s report reflect your experience at Lux in Q1?
Yes, aside from a small pullback in total number of deals and total
dollars, which may be reflective of the public market correction we saw
in Q4, everything is up and to the right. In effect, 90-something
percent of rounds are up rounds, with incredibly favorable terms for
companies across the board. But at some point, this breaks down. If we
know that up to 90% of startups fail, it doesn’t make sense that 90% of
companies continue to be able to raise money at increasing valuations.
Do you make anything of the pre-money valuation decline (it was slight in my view)?
It’s hard to say if that’s noise or signal. If you look at the time
frame and scale of that data, it’s likely insignificant. It could be
some small correlation to stage of deals reviewed or skewed by one mega
deal getting done or not in a particular time period.
Do you see this continuing through 2019? Do you expect anything different?
I think so. There’s always the risk of some exogenous shock to the
system. One could also imagine a situation where a high-flying public
tech company suddenly faces a liquidity or fraud situation and starts to
resemble Icarus more than a unicorn. I think that could be a big yellow
flag for the ecosystem and start to cause a correction.
Of course, all sorts of macroeconomic factors could play a role, but
short of a war, it’s hard to pick that catalyst. Politically, we
shouldn’t expect any major changes this year, and it looks like we’re
going to have to wait for a new election. There’s no major change to interest rates
expected, and generally, dollars keep flowing into market index funds. I
don’t see anything on the immediate horizon that will cause a change,
but that doesn’t mean there won’t be one, right? If you could predict
the future, then we’d all have a much easier job! But you never know
what’s going to happen, and I don’t see anything that would lead me to
believe that 2019 is going to be any different. It’s an ebullient time
with plenty of cash in the ecosystem, rising valuations and –
importantly – a huge wave of liquidity. It feels like a gold rush
mentality amongst investors right now, who are willing to fund pretty
much anything that moves. What matters is how long that lasts, and it
certainly can’t last forever. I don’t know when it will change, and I
don’t know exactly how it will change, but it will change....
