Survey Finds Venture Deal Terms Improving, But Still Below Historical Levels

Even though venture capital funding plunged dramatically in 2009, it was nevertheless encouraging when the VC surveys that came out in January showed an uptick in venture deals during the fourth quarter—like a ski jump into 2010.

Now the Cooley Godward Kronish Venture Financing Report for the fourth quarter of 2009 gives us another piece of the puzzle. One noteworthy aspect of the report, in fact, is how the contours of 2009 fit with 2008.

Venture funding was on a near-record pace during the first three quarters of 2008 before the bottom fell out in the fourth quarter. Last year was like a mirror image. The climate for venture investments during the first nine months was difficult, even scary, before signs of improvement emerged in the fourth quarter—with both the deal count and dollars invested up significantly over the previous quarter.

The real insight of Cooley’s report, though, is in its analysis of deal terms. Cooley says its report is based on an analysis of the 376 venture deals nationwide that its lawyers worked in 2009. Those deals led to venture investments of more than $3.8 billion during the year. One general finding: if you’re an entrepreneur, deal terms during the fourth quarter showed signs of slow improvement, although terms are not as good as they were a few years ago. Some more specific highlights:

—The trend in median pre-money valuations is improving, although still below recent historical annual averages. Cooley says it saw steady increases in median pre-money valuations for all venture investments during the fourth quarter.

—Up rounds (in which the value of investors’ shares has appreciated from one financing to another) increased to 45 percent in the fourth quarter—compared to 26 percent during the first three quarters. But the percentage of down or flat rounds continues to outpace the number of up rounds.

— 58 percent of fourth-quarter deals included fully participating preferred, which are terms that typically benefit investors at the expense of founders. That’s better than the previous three quarters, when 60 percent of the deals were fully participating preferred. But in 2007, just 53 percent of the deals were fully participating preferred. (A great explanation of the term from Brad Feld is here.)

In short, Cooley concludes that while valuations remain below their historical levels, the overall trend looks promising.

Bruce V. Bigelow was the editor of Xconomy San Diego from 2008 to 2018. Read more about his life and work here. Follow @bvbigelow

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