In its Fourth Quarter 2008 Silicon Valley Venture Capital Survey, national law firm Fenwick & West LLP analyzed the terms of venture financings for 128 companies headquartered in the San Francisco Bay area that reported raising money in the fourth quarter of 2008. The firm found that up rounds exceeded down rounds by the smallest margin in nearly five years — 54% vs. 33% — with another 13% flat. That’s the lowest ratio of up to down rounds since the third quarter of 2004. Perhaps more ominously, down rounds increased each month throughout the fourth quarter. During December 2008, 45% of all financings were down rounds, compared to 48% up and 7% flat.

By industry, Web 2.0/digital media was by far the strongest industry for financings. Excluding this category of companies from the results, up rounds decreased to 46% and down rounds increased to 39%, with 15% flat. The Fenwick & West Venture Capital Barometer also showed an average price increase of 25% for companies receiving venture capital during the fourth quarter of 2008 compared to their prior financing round – a significant decline from the 55% reported in the third quarter of 2008 and the lowest reported average price increase total since the first quarter of 2005. Factoring out Web 2.0/digital media financings, the Venture Capital Barometer would have been flat. In total dollars by industry segment, venture investment in IT fell 15% in 2008 from 2007 levels, with the software segment being especially hard hit. Conversely, investment in the Web 2.0/digital media segment increased 17% from 2007 to 2008. Health care investments fell 22%, while energy investments more than doubled, from $1.7 billion in 2007 to $3.6 billion in 2008.

Anecdotal evidence suggests a flight to quality, according to Fenwick & West. VCs are focusing on funding their most promising companies and pulling forward financings for those firms to survive a challenging financing environment that may continue for a prolonged period or even worsen. Combined with the significant reduction in U.S. venture investment during the fourth quarter of 2008, the data could indicate that less promising companies are not being funded at all — as opposed to being funded at lower valuations — which could skew results in a positive direction. The survey revealed a number of other U.S. VC-related data for the quarter and the year. Venture capitalists invested some $5.5 billion during the fourth quarter of 2008, a significant decline from the $7.6 billion invested during the previous quarter and the $7.9 billion invested during the same period a year earlier. VC investments for 2008 totaled $28.8 billion compared to $31.4 billion in 2007. Fundraising by U.S. venture capitalists was $24.7 billion during 2008 — the lowest amount raised in a year since 2004. In addition, the Silicon Valley Venture Capitalists Confidence Index, produced by the University of San Francisco, reported the confidence level of Silicon Valley VCs during the fourth quarter at 2.77 on a 5-point scale — a decline from 2.89 during the previous quarter and the lowest confidence level since the index was launched in 2004. Additionally, the age of acquired companies increased for the seventh straight year. The median time from initial equity funding to acquisition reached 6.5 years during 2008.

Go to: Fenwick & West, LLP

Posted March 18th, 2009 under Tech Transfer

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