I hate posting on all the bad news we've been seeing in the Venture Capital world these days, but I thought this article provided the kind of detail that startups are interested in seeing. Not only are the down rounds bad news, but the re-emergence of multiple liquidation preferences doesn't build internal support for startup management and employees. Bad signs here...
http://www.businessweek.com/technology/content/feb2009/tc20090225_653458.htm
Venture Capital and Startups Feel More Pain, Study Says
Startup valuations are falling and venture capitalists are driving harder bargains, according to a survey by California law firm Fenwick & West
By Spencer E. Ante
Like the rest of the economy, the world of venture capital and startups is starting to feel more pain from the deepening global financial crisis.
That's the main takeaway from a new survey detailing trends in venture capital investments during the fourth quarter of 2008 by the California law firm Fenwick & West.
The survey, which analyzed the terms of venture deals for 128 companies headquartered in the San Francisco Bay Area, found that valuations are falling for startups and that venture capitalists are driving harder bargains. The silver lining: The fallout so far is not nearly as bad as it was during the dot-com bust, when hundreds of companies went under and stratospheric valuations came crashing down to earth.
Down Rounds on the Rise
Sure, there were some startups last quarter that secured a higher value on their latest investment round, such as online vacation rental site HomeAway. But, of the 128 companies that received financing, 33% of them experienced so-called down rounds, or an investment that placed a lower valuation on the company than it received in the previous round of investment. More ominous, the percentage of down rounds rose every month at year's end, hitting 45% in December. "Each month things got worse in the fourth quarter," says Barry Kramer, the Fenwick & West partner who runs the survey. The highest percentage of down rounds occurred in the first quarter of 2003, when 73% of the companies surveyed by Fenwick & West suffered down rounds.
With the recession worsening, most financiers and lawyers do not expect the situation to get better anytime soon. They predict valuations will continue to decline until the overall economy begins to improve. "Private values really do lag," says Kate Mitchell, managing director with Scale Venture Partners. "More down rounds will come in 2009."
Overall, the prices venture firms are paying for equity are not rising as much as they have in the recent past. Companies that received venture financing in the fourth quarter saw an average price increase of 25% compared to the previous financing round, a significant decline from the 55% average price increase reported in the third quarter of 2008. One factor that is depressing prices is the continuing lack of an initial public offering market. The prospect of a public offering often helps entrepreneurs to extract higher prices from a venture capitalist. Last year, there were only six public offerings of venture-backed startups, including RackSpace Hosting (RAX), ArcSight (ARST), and IPC The Hospitalist Co. (IPCM).
"Multiple Liquidation" Preferences Gain Favor
As venture capital firms retreat and finance fewer deals, the financiers that do move forward are continuing to extract tough terms from the entrepreneurs they go into business with. Of the companies that received financing, 41% of the deals contained "liquidation preferences," or provisions obligating that the most recent investors get their money back first if the company is sold or acquired. That's about the same rate as the previous two quarters.
However, many more firms that do receive liquidation preference are getting "multiple liquidation" preferences, which state that a venture firm will get back as much as two or three times the amount of capital it invested. In the fourth quarter, 23% of the companies that secured preferences negotiated a multiple preference, up from 16% in the third quarter.
Another painful and little-known practice on the rise is the use of what VCs call "pay-to-play" provisions. When companies can't find new investors to bring into a company, they sometimes will try to corral a new round of financing from existing investors. Some may balk. To force all of the current investors to pony up the money, venture capitalists who are willing to play will create a provision stipulating that if others don't participate, their existing equity, which is usually in preferred stock, will convert into common stock.
Remembering Lessons Learned
Common stock typically has fewer advantages than preferred stock, such as the right to be paid first in the event of a sale. In the fourth quarter, 15% of all financing had pay-to-play provisions, up from 12% in the third quarter and 7% in the second quarter. "Insiders are putting tough terms on each other in order to get them to put money into the company," says Kramer.
About the only good news in the survey is that the venture ecosystem seems to be benefiting from the painful memories of the last bust. Entrepreneurs and financiers say that more firms are likely to survive this crisis since some of them, remembering how hard it was to raise money during the last crisis, brought in money before this downturn. Plus, many startups are getting much more aggressive about cutting costs, which should lower the failure rate. "VCs went through this eight years ago," says Kramer. "The last few years have seen more reasonable valuations. We're not going to fall as much."
The number of startups that are shut down is likely to climb in 2009, and some venture firms may also disappear. But many venture capitalists say that is not such a bad thing. A pruned tree will be healthier, so goes the thinking. "The most healthy thing for this industry would be a clearing out of people who don't have the stomach for it," says Paul Holland, a general partner with Foundation Capital. "It's a very healthy sign for our business."
Ante is an associate editor for BusinessWeek.
Friday, February 27, 2009
Venture Academics - A New Model Emerges
I thought that given the upheaval in today's venture environment, that it was important to note the emergence of some new models for Venture Capital. This is one of them - and I believe there's a lot of potential here.
http://www.forbes.com/forbes/2009/0316/100_venture_academics.html
Venture Academics
Jonathan Fahey, 02.25.09, 06:00 PM EST Forbes Magazine dated March 16, 2009
A new firm thinks it has found a way to turn inventions from the nation's biggest research institutions into cash.
After ten years of research, David Martin, a materials scientist at the University of Michigan, came up with a polymer that could help deaf people hear and blind people see. His poly (3,4-ethylenedioxythiophene), or Pedot, could coat the electrodes used for stimulating and recording from the brain, making them smaller, more sensitive and more effective at treating deafness, blindness and Parkinson's disease, among other conditions. How was Martin to turn Pedot into a commercial product? "I don't have an M.B.A., and I never wanted one," he says. A venture capital firm told him to come back when his invention was further advanced.
Martin had entered what technology transfer officers refer to as the valley of death, the barren gulf between the basic science and a prototype good enough to pique the interest of an established company or a venture capital firm.
But stepping into this void came a new company--half VC, half private equity firm--called Allied Minds, of Quincy, Mass. Allied created a company called Biotectix around Martin's discovery. It put up $750,000 to hire Martin's lab colleagues and run the first animal trials. With promising results Biotectix moved into its own labs and landed its first commercial contract (with the Australian medical device maker Cochlear) to incorporate its invention in cochlear implants. The polymer dramatically increases the sensitivity of the implant, while reducing its size.
In funding the commercialization of academic research, Allied Minds has an ample assortment of targets, given the paucity of bank credit and the preference of VC firms for big, quick investments. But it's a territory littered with failures. Two and a half decades ago University Patents was a glamorous pioneer in this business, with a share price of $24.50. All that's left is a moneylosing firm called Competitive Technologies (amex: CTT - news - people ), which sells for 95 cents a share and is at distinct risk of being delisted from the New York Stock Exchange.
Allied claims it has a new approach, imported from the U.K. The company has agreements with 31 U.S. universities and national labs, including powerhouses Harvard, Yale, the University of Michigan, most of the University of California schools and the national laboratories Lawrence Berkeley and Los Alamos, to periodically survey discoveries and pick a few to develop. The company will initially invest $1 million or so in a project and aims to create six to eight new companies a year.
Instead of operating as a fund, with a specific end date by which it must pay back its investors, Allied Minds is structured like a holding company. It creates subsidiary companies that it owns along with the university and the researcher. Allied Minds, as parent, provides interim management and back-office functions such as legal and payroll to the subsidiary as it "de-risks" the technology on the cheap. As the companies mature, Allied Minds will profit if the companies sell or license products to bigger players, or if the companies go public.
Allied was founded by the British venture capitalist Mark Pritchard and funded largely by Neil Woodford, an investment chief at Invesco, the U.K. asset management firm. Allied Minds won't say how much it has raised, but the number appears to be $50 million. Since its founding in 2005 the company has created 15 subsidiary companies based on technology like magnetoresistive random access memory from New York University and a salt-intake monitoring system from Cornell University. None has made money, but these projects are still in their early years.
"We are in uncharted territory with all of our technologies," Pritchard acknowledges. "But it should not be that hard. There is phenomenal innovation going on in these schools, and the world and companies need innovations."
Pritchard decided to start the company after a 2003 visit to Purdue University on behalf of a British company he was funding. The mechanism for getting technology out of the university was sclerotic. Except for the Massachusetts Institute of Technology and Stanford University, which have developed strong networks of fundraisers, most research institutions, he found, were grasping for help getting technology off their shelves.
"If you look at what comes out of U.S. universities in terms of creation of products and companies, it's a pretty poor return on taxpayer money," says Pritchard.
It's hard to judge that, but according to the Association of University Technology Managers, the biggest research universities in the U.S. received $28.5 billion in federal funding in 2007, along with $3 billion from industry. They received $2 billion in licensing revenue, and 502 companies were started that year to capitalize on academic science. The U.K. has at least two public companies (ip Group and Imperial Innovations) built around university technology development; the only public U.S. company that focuses on very-early-stage university discoveries appears to be the ailing Competitive Technologies.
The little money now being invested in professorial startups comes from state and university grants, angel investors, seed venture capital funds and, occasionally, big traditional venture capital funds. Some schools, like Boston University, have started in-house venture funds.
E. Jonathan Soderstrom, who runs Yale University's technology-transfer office and is the president of the Association of University Technology Managers, says that the problem of raising money has never been as acute as now. "The gap is widening as the market continues to punish risk-taking," he says. "This is a concern of every single tech-transfer office in the world right now. The system is broken, and none of us know how to fix it." Perhaps Allied does.
Finding the Jewels
Recent Graduates
A few of Allied Minds' 15 subsidiary companies, tapped from the nation's universities.
SaltCheck
Based on research from Cornell University, the company is developing a way to monitor salt intake that can be performed at home or in a doctor's office instead of by sending samples to labs.
RF Biocidics
These University of California, Davis researchers have a way to disinfect nuts, grains and other foods, using quick, targeted blasts of heat that kill pathogens but leave food alone.
AXI
An entry in the race for biofuels, AXI is using University of Washington expertise to create algae strains with certain characteristics, like the ability to produce fats or oils.
Illumasonix
A University of Colorado engineering professor is working on a noninvasive system to map blood flow of cardiovascular patients, using ultrasound and microbubbles injected into the bloodstream.
Cephalogics
From a radiology professor at Washington University in St. Louis, a neuroimaging device in the form of a wearable cap. Could be especially useful in monitoring newborns.
ProGDerm
Cancer researchers at Lawrence Berkeley National Laboratory are using a discovery that a certain protein induces fat-cell generation, to develop an antiwrinkle treatment.
http://www.forbes.com/forbes/2009/0316/100_venture_academics.html
Venture Academics
Jonathan Fahey, 02.25.09, 06:00 PM EST Forbes Magazine dated March 16, 2009
A new firm thinks it has found a way to turn inventions from the nation's biggest research institutions into cash.
After ten years of research, David Martin, a materials scientist at the University of Michigan, came up with a polymer that could help deaf people hear and blind people see. His poly (3,4-ethylenedioxythiophene), or Pedot, could coat the electrodes used for stimulating and recording from the brain, making them smaller, more sensitive and more effective at treating deafness, blindness and Parkinson's disease, among other conditions. How was Martin to turn Pedot into a commercial product? "I don't have an M.B.A., and I never wanted one," he says. A venture capital firm told him to come back when his invention was further advanced.
Martin had entered what technology transfer officers refer to as the valley of death, the barren gulf between the basic science and a prototype good enough to pique the interest of an established company or a venture capital firm.
But stepping into this void came a new company--half VC, half private equity firm--called Allied Minds, of Quincy, Mass. Allied created a company called Biotectix around Martin's discovery. It put up $750,000 to hire Martin's lab colleagues and run the first animal trials. With promising results Biotectix moved into its own labs and landed its first commercial contract (with the Australian medical device maker Cochlear) to incorporate its invention in cochlear implants. The polymer dramatically increases the sensitivity of the implant, while reducing its size.
In funding the commercialization of academic research, Allied Minds has an ample assortment of targets, given the paucity of bank credit and the preference of VC firms for big, quick investments. But it's a territory littered with failures. Two and a half decades ago University Patents was a glamorous pioneer in this business, with a share price of $24.50. All that's left is a moneylosing firm called Competitive Technologies (amex: CTT - news - people ), which sells for 95 cents a share and is at distinct risk of being delisted from the New York Stock Exchange.
Allied claims it has a new approach, imported from the U.K. The company has agreements with 31 U.S. universities and national labs, including powerhouses Harvard, Yale, the University of Michigan, most of the University of California schools and the national laboratories Lawrence Berkeley and Los Alamos, to periodically survey discoveries and pick a few to develop. The company will initially invest $1 million or so in a project and aims to create six to eight new companies a year.
Instead of operating as a fund, with a specific end date by which it must pay back its investors, Allied Minds is structured like a holding company. It creates subsidiary companies that it owns along with the university and the researcher. Allied Minds, as parent, provides interim management and back-office functions such as legal and payroll to the subsidiary as it "de-risks" the technology on the cheap. As the companies mature, Allied Minds will profit if the companies sell or license products to bigger players, or if the companies go public.
Allied was founded by the British venture capitalist Mark Pritchard and funded largely by Neil Woodford, an investment chief at Invesco, the U.K. asset management firm. Allied Minds won't say how much it has raised, but the number appears to be $50 million. Since its founding in 2005 the company has created 15 subsidiary companies based on technology like magnetoresistive random access memory from New York University and a salt-intake monitoring system from Cornell University. None has made money, but these projects are still in their early years.
"We are in uncharted territory with all of our technologies," Pritchard acknowledges. "But it should not be that hard. There is phenomenal innovation going on in these schools, and the world and companies need innovations."
Pritchard decided to start the company after a 2003 visit to Purdue University on behalf of a British company he was funding. The mechanism for getting technology out of the university was sclerotic. Except for the Massachusetts Institute of Technology and Stanford University, which have developed strong networks of fundraisers, most research institutions, he found, were grasping for help getting technology off their shelves.
"If you look at what comes out of U.S. universities in terms of creation of products and companies, it's a pretty poor return on taxpayer money," says Pritchard.
It's hard to judge that, but according to the Association of University Technology Managers, the biggest research universities in the U.S. received $28.5 billion in federal funding in 2007, along with $3 billion from industry. They received $2 billion in licensing revenue, and 502 companies were started that year to capitalize on academic science. The U.K. has at least two public companies (ip Group and Imperial Innovations) built around university technology development; the only public U.S. company that focuses on very-early-stage university discoveries appears to be the ailing Competitive Technologies.
The little money now being invested in professorial startups comes from state and university grants, angel investors, seed venture capital funds and, occasionally, big traditional venture capital funds. Some schools, like Boston University, have started in-house venture funds.
E. Jonathan Soderstrom, who runs Yale University's technology-transfer office and is the president of the Association of University Technology Managers, says that the problem of raising money has never been as acute as now. "The gap is widening as the market continues to punish risk-taking," he says. "This is a concern of every single tech-transfer office in the world right now. The system is broken, and none of us know how to fix it." Perhaps Allied does.
Finding the Jewels
Recent Graduates
A few of Allied Minds' 15 subsidiary companies, tapped from the nation's universities.
SaltCheck
Based on research from Cornell University, the company is developing a way to monitor salt intake that can be performed at home or in a doctor's office instead of by sending samples to labs.
RF Biocidics
These University of California, Davis researchers have a way to disinfect nuts, grains and other foods, using quick, targeted blasts of heat that kill pathogens but leave food alone.
AXI
An entry in the race for biofuels, AXI is using University of Washington expertise to create algae strains with certain characteristics, like the ability to produce fats or oils.
Illumasonix
A University of Colorado engineering professor is working on a noninvasive system to map blood flow of cardiovascular patients, using ultrasound and microbubbles injected into the bloodstream.
Cephalogics
From a radiology professor at Washington University in St. Louis, a neuroimaging device in the form of a wearable cap. Could be especially useful in monitoring newborns.
ProGDerm
Cancer researchers at Lawrence Berkeley National Laboratory are using a discovery that a certain protein induces fat-cell generation, to develop an antiwrinkle treatment.
Subscribe to:
Posts (Atom)
Posts
