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From the WSGR Database: Financing Trends for 1H 2018
For purposes of the statistics and
charts in this report, our database
includes venture financing
transactions in which Wilson
Sonsini Goodrich & Rosati
represented either the company or
one or more of the investors.
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In the second quarter of 2018, the trend towards larger deal sizes continued, but just as we saw in the first quarter, there was a decrease in the volume of transactions. Valuations remained strong across all rounds of financing, with early-stage financings showing the largest increase. Median amounts raised in Series Seed and Series A financings also reached new highs in Q2 2018, and the median amounts raised in Series B and later financings remained strong, though not record-breaking. Even so, in Q2 2018 the percentage of up rounds for Series B and later financings declined significantly, while down rounds became more prevalent.
Up and Down Rounds
Up round financings dropped significantly in Q2 2018, falling from 81% in Q1 to 68% of all financings in the quarter—a low not seen since 2013. The share of down round financings in the quarter went up sharply, from 7% in Q1 2018 to 18% in Q2 2018. Flat rounds were also more common in Q2 2018 than in prior quarters, up from 11% in Q1 2018 to 15% of all financings in Q2. An increasing number of later stage companies that have failed to meet investors’ high expectations have had no choice but to raise money at flat or lower valuations.
 Valuations
Median pre-money valuations for Series Seed and Series A financings outpaced all prior tracked quarters, reaching
medians of $9.3 million and $25.0 million, respectively, in Q2 2018. The median pre-money valuation for Series B rounds also increased, from $40.0 million in Q1 2018 to $56.5 million in Q2, outpacing the full-year 2017 median of $45.0 million. The median pre-money valuation for Series C and later deals declined from $185.0 million in Q1 2018 to $150.0 million in Q2, falling short of the full-year 2017 median of $179.8 million, but well over the five-year median of $110.3 million.
Amounts Raised
Amounts raised in Q2 2018 were up across the board, with Series Seed and
Series A rounds netting record-high median quarterly amounts raised. The median amount raised for Series Seed financings nearly doubled, from $1.6 million in Q1 2018 to $3.0 million in Q2. Median Series A round sizes increased from $6.0 million in Q1 2018 to $8.3 million in Q2—well over the full-year 2017 median of $4.8 million. The median amount raised in Series B financings doubled, from $7.0 million in Q1 2018 to $14.0 million in Q2, exceeding the full-year 2017 median of $10.0 million.
The median amount raised in Series C and later financings in Q2 2018 also increased, from $16.5 million in Q1 2018 to $22.0 million in Q2, but remained under the historic high median of $29.7 million reached in Q4 2017. A handful of mega¬deals raising more than $100 million in Q2 2018 contributed to the high median, but even excluding those deals, the median amount raised remained above average at $21.5 million, exceeding the five-year median of $15.0 million.
Deal Terms - Preferred
 As in 2017, about one-third (35%) of post-Series A rounds used senior liquidation preferences in 1H 2018, with pari passu liquidation preferences increasing slightly from 62% of all such rounds in 2017 to 65% in 1H 2018. The percentage of down rounds with senior liquidation preferences dropped dramatically, from 63% in 2017 to 25% in 1H 2018; meanwhile, the percentage of down rounds with pari passu preferences nearly doubled, from 38% in 2017 to 75% in 1H 2018.
The percentage of financings with no participation increased slightly from 84% in 2017 to 86% in 1H 2018, but the total represents a higher percentage than in any of the previous five full years.
Fewer financings provided dividends in 1H 2018 than in prior years, with 73% offering dividends as compared to 85% of financings in 2017. The use of redemption rights decreased as well, accounting for just 6% of 1H 2018 financings, down from 19% in 2017. The significant drop in the number of deals with redemption rights reflects the continuing leverage that companies have to dictate terms in a strong market.
Data on deal terms such as liquidation preferences, dividends, and others are set forth in the table below. To see how the terms tracked in the table can be used in the context of a financing, we encourage you to draft a term sheet using our automated Term Sheet Generator, which is available in the Start-Ups and Venture Capital section of the firm's website at www.wsgr.com.
Series Seed and Series A Financings
In recent years, an increasing number of young companies call their first round financing a “Series Seed” rather than a “Series A” financing. As shown below, the median pre-money valuation and amount raised in a Series Seed financing in 1H 2018 look remarkably similar to the same figures for Series A figures in 2013.
Private Company Financing Deal Terms (WSGR Deals)1
|
2013 |
2014 |
2015 |
2016 |
2017 |
1H 2018 |
2013 |
2014 |
2015 |
2016 |
2017 |
1H 2018 |
2013 |
2014 |
2015 |
2016 |
2017 |
1H 2018 |
All Rounds2 |
All Rounds2 |
All Rounds2 |
All Rounds2 |
All Rounds2 |
All Rounds2 |
Up Rounds3 |
Up Rounds3 |
Up Rounds3 |
Up Rounds3 |
Up Rounds3 |
Up Rounds3 |
Down Rounds3 |
Down Rounds3 |
Down Rounds3 |
Down Rounds3 |
Down Rounds3 |
Down Rounds3 |
Liquidation Preferences - Series B and Later |
Senior |
41% |
40% |
33% |
38% |
35% |
35% |
38% |
32% |
31% |
36% |
31% |
32% |
47% |
68% |
35% |
41% |
63% |
25% |
Pari Passu with Other Preferred |
55% |
56% |
62% |
57% |
62% |
65% |
60% |
64% |
66% |
62% |
66% |
68% |
37% |
21% |
53% |
45% |
38% |
75% |
Junior |
0% |
0% |
1% |
1% |
0% |
0% |
0% |
0% |
1% |
0% |
0% |
0% |
0% |
0% |
0% |
5% |
0% |
0% |
Complex |
3% |
2% |
3% |
4% |
3% |
0% |
2% |
2% |
1% |
2% |
4% |
0% |
11% |
5% |
12% |
9% |
0% |
0% |
Not Applicable |
1% |
3% |
1% |
0% |
0% |
3% |
0% |
2% |
1% |
0% |
0% |
0% |
5% |
5% |
0% |
0% |
0% |
0% |
Participating vs. Non-participating |
Participating - Cap |
18% |
12% |
8% |
9% |
6% |
4% |
20% |
14% |
11% |
10% |
7% |
7% |
23% |
13% |
12% |
22% |
31% |
0% |
Participating - No Cap |
12% |
14% |
11% |
11% |
10% |
11% |
10% |
11% |
12% |
13% |
11% |
13% |
30% |
32% |
35% |
4% |
19% |
0% |
Non-participating |
70% |
74% |
81% |
81% |
84% |
86% |
69% |
76% |
77% |
77% |
82% |
80% |
48% |
55% |
53% |
74% |
50% |
100% |
Dividends |
Yes, Cumulative |
12% |
13% |
3% |
6% |
7% |
11% |
12% |
11% |
3% |
7% |
9% |
16% |
13% |
24% |
24% |
22% |
13% |
29% |
Yes, Non-cumulative |
74% |
72% |
82% |
73% |
78% |
62% |
79% |
74% |
86% |
78% |
78% |
59% |
79% |
71% |
76% |
70% |
81% |
57% |
None |
14% |
15% |
15% |
21% |
16% |
28% |
9% |
15% |
11% |
15% |
13% |
25% |
8% |
5% |
0% |
9% |
6% |
14% |
Anti-dilution Provisions |
Weighted Average - Broad |
90% |
85% |
80% |
92% |
94% |
93% |
94% |
90% |
86% |
92% |
96% |
95% |
95% |
92% |
75% |
91% |
100% |
100% |
Weighted Average - Narrow |
3% |
9% |
13% |
1% |
2% |
3% |
3% |
6% |
12% |
1% |
1% |
5% |
0% |
5% |
19% |
0% |
0% |
0% |
Ratchet |
1% |
1% |
1% |
1% |
0% |
0% |
0% |
1% |
1% |
2% |
0% |
0% |
3% |
0% |
0% |
0% |
0% |
0% |
Other (Including Blend) |
1% |
1% |
1% |
3% |
1% |
1% |
1% |
1% |
1% |
3% |
1% |
0% |
0% |
0% |
0% |
9% |
0% |
0% |
None |
5% |
4% |
5% |
3% |
3% |
4% |
2% |
2% |
1% |
2% |
1% |
0% |
3% |
3% |
6% |
0% |
0% |
0% |
Pay to Play - Series B and Later |
Applicable to This Financing |
5% |
4% |
5% |
5% |
2% |
5% |
1% |
1% |
3% |
3% |
2% |
0% |
15% |
16% |
18% |
9% |
6% |
0% |
Applicable to Future Financings |
1% |
0% |
1% |
1% |
0% |
3% |
1% |
0% |
0% |
1% |
0% |
5% |
0% |
0% |
12% |
0% |
0% |
0% |
None |
95% |
96% |
94% |
94% |
98% |
92% |
98% |
99% |
97% |
96% |
98% |
95% |
85% |
84% |
71% |
91% |
94% |
100% |
Redemption |
Investor Option |
19% |
17% |
13% |
11% |
12% |
5% |
20% |
22% |
19% |
20% |
19% |
5% |
33% |
24% |
12% |
9% |
20% |
0% |
Mandatory |
1% |
3% |
2% |
2% |
7% |
1% |
2% |
3% |
3% |
3% |
9% |
0% |
0% |
3% |
0% |
0% |
0% |
0% |
None |
80% |
80% |
85% |
87% |
81% |
94% |
78% |
75% |
78% |
77% |
72% |
93% |
67% |
74% |
88% |
91% |
80% |
100% |
| 1 We based this analysis on deals having an initial closing in the period to ensure that the data clearly reflects current trends. Please note the numbers do not always add up to 100% due to rounding. |
| 2 Includes flat rounds and, unless otherwise indicated, Series A rounds. |
| 3 Note that the All Rounds metrics include flat rounds and, in certain cases Series A financings as well. Consequently, metrics in the All Rounds column may be outside the ranges bounded by the Up Rounds and Down Rounds columns, which will not include such transactions. |
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Bridge Loans
While there were fewer bridge loans in Q2 2018 than in Q1, the median amount raised in pre-Series A bridges increased significantly, rising from $0.29 million in Q1 2018 to a record high of $1.00 million in Q2. This trend may reflect a larger amount of funding available for the earliest stage companies, as well as how investors in first round equity financings have a higher expectation of seeing traction before they commit to funding a company. In contrast, the median amount raised in post-Series A bridges fell from $1.35 million in Q1 2018 to $1.00 million in Q2, well under the five-year median of $1.50 million.
 Deal Terms – Bridge Loans
Maturity periods increased for pre-Series A bridge loans in 1H 2018, as did interest rates. The percentage of pre-Series A loans with maturity periods of 12 or more months increased from 77% in 2017 to 100% in 1H 2018, and the percentage of loans with interest rates of at least 8% also increased, from 25% in 2017 to 41% in 1H 2018. The percentage of pre-Series A bridge loans subordinated to other debt fell from 28% in 2017 to 17% in 1H 2018. The number of pre-Series A bridge loans that are convertible to equity at discounted prices fell modestly from 89% in 2017 to 82% in 1H 2018, and the number of such convertible loans receiving a discount rate of 20% or more on conversion also fell, from 84% in 2017 to 66% in 1H 2018.
Maturity periods also increased for post-Series A bridge loans in 1H 2018, although interest rates remained flat. The percentage of post-Series A loans with maturity periods of 12 or more months increased from 60% in 2017 to 75% in 1H 2018, with 43% of loans having interest rates of at least 8%, as compared to 44% in 2017. The percentage of pre-Series A bridge loans subordinated to other debt rose from 33% in 2017 to 55% in 1H 2018. More post-Series A bridge financings had warrants in 1H 2018 than in 2017, increasing from 16% in 2017 to 25% in 1H 2018, all of which had warrant coverage greater than 25%. The percentage of post-Series A bridge loans that are convertible to equity remained steady at 95% in 1H 2018, although the percentage of those subject to a price cap decreased sharply, from 34% in 2017 to 11% in 1H 2018.
Bridge Loans – Deal Terms (WSGR Deals)1
Bridge Loans |
2013
Pre-Series
A |
2014
Pre-Series
A |
2015
Pre-Series
A |
2016
Pre-Series
A |
2017
Pre-Series
A |
1H 2018
Pre-Series
A |
2013
Post-Series
A |
2014
Post-Series
A |
2015
Post-Series
A |
2016
Post-Series
A |
2017
Post-Series
A |
1H 2018
Post-Series
A |
Interest rate less than 8% |
70% |
72% |
74% |
76% |
75% |
58% |
46% |
43% |
54% |
52% |
56% |
58% |
Interest rate at 8% |
29% |
22% |
19% |
19% |
17% |
33% |
34% |
42% |
33% |
30% |
27% |
32% |
Interest rate greater than 8% |
1% |
6% |
7% |
5% |
8% |
8% |
20% |
15% |
13% |
17% |
17% |
11% |
Maturity less than 12 months |
3% |
12% |
17% |
17% |
22% |
0% |
29% |
24% |
34% |
29% |
41% |
25% |
Maturity at 12 months |
19% |
16% |
9% |
5% |
8% |
17% |
38% |
39% |
8% |
23% |
19% |
20% |
Maturity more than 12 months |
78% |
71% |
74% |
78% |
69% |
83% |
33% |
37% |
58% |
49% |
41% |
55% |
Debt is subordinated to other debt |
25% |
22% |
15% |
20% |
28% |
17% |
56% |
48% |
38% |
45% |
33% |
55% |
Loan includes warrants2 |
4% |
5% |
3% |
8% |
0% |
8% |
34% |
19% |
25% |
17% |
16% |
25% |
Warrant coverage less than 25% |
0% |
20% |
100% |
80% |
N/A |
0% |
50% |
69% |
47% |
23% |
43% |
0% |
Warrant coverage at 25% |
0% |
0% |
0% |
0% |
N/A |
0% |
12% |
0% |
7% |
15% |
14% |
0% |
Warrant coverage greater than 25% |
100% |
80% |
0% |
20% |
N/A |
100% |
38% |
31% |
47% |
62% |
43% |
100% |
Principal is convertible into equity3 |
100% |
98% |
93% |
97% |
97% |
100% |
94% |
94% |
86% |
92% |
92% |
95% |
Conversion rate subject to price cap4 |
68% |
67% |
64% |
79% |
74% |
67% |
14% |
23% |
26% |
29% |
34% |
11% |
Conversion to equity at discounted price5 |
91% |
81% |
78% |
82% |
89% |
82% |
59% |
73% |
71% |
74% |
76% |
89% |
Discount on conversion less than 20% |
17% |
10% |
11% |
12% |
16% |
33% |
16% |
25% |
25% |
25% |
20% |
13% |
Discount on conversion at 20% |
60% |
72% |
73% |
76% |
74% |
44% |
46% |
44% |
47% |
49% |
50% |
50% |
Discount on conversion greater than 20% |
22% |
17% |
16% |
12% |
10% |
22% |
38% |
32% |
27% |
26% |
30% |
38% |
Conversion to equity at same price as other investors |
9% |
16% |
18% |
13% |
3% |
9% |
35% |
24% |
25% |
19% |
24% |
0% |
1 We based this analysis on deals having an initial closing in the period to ensure that the data clearly reflects current trends. Please note the numbers do not always add up to 100% due to rounding.
2 Of the 2013 post-Series A bridges with warrants, 24% also had a discount on conversion into equity. Of the 2014 post-Series A bridges with warrants, 38% also had a discount on conversion into equity. Of the 2015 post-Series A bridges with warrants, 58% also had a discount on conversion into equity. Of the 2016 post-Series A bridges with warrants, 33% also had a discount on conversion into equity. Of the 2017 post-Series A bridges with warrants, 60% also had a discount on conversion into equity. Of the 1H 2018 post-Series A bridges with warrants, 60% also had a discount on conversion into equity.
3 Of the 2016 pre-Series A convertible bridges, 93% had automatic conversion and 7% had voluntary conversion. Of the 2017 pre-Series A convertible bridges, 94% had automatic conversion and 6% had voluntary conversion. Of the 1H 2018 pre-Series A convertible bridges, 100% had automatic conversion and 0% had voluntary conversion. Of the 2016 post-Series A convertible bridges, 97% had automatic conversion and 3% had voluntary conversion. Of the 2017 post-Series A convertible bridges, 93% had automatic conversion and 7% had voluntary conversion. Of the 1H 2018 post-Series A convertible bridges, 89% had automatic conversion and 11% had voluntary conversion. The 2016 median dollar threshold for a qualified financing in pre- and post-Series A bridges was $1 million and $5 million, respectively. The 2017 median dollar threshold for a qualified financing in pre- and post-Series A bridges was $2 million and $10 million, respectively. The 1H 2018 median dollar threshold for a qualified financing in pre- and post-Series A bridges were both $5 million.
4 The 2016 median price cap in pre- and post-Series A bridges was $6 million and $25 million, respectively. The 2017 median price cap in pre- and post-Series A bridges was $10 million and $25 million, respectively. The 1H 2018 median price cap in pre-Series A bridges was $13 million. Due to the small number of post-Series A bridges with price caps in 1H 2018, we did not calculate the median.
5 Of the 2013 post-Series A bridges that had a discount on conversion into equity, 15% also had warrants. Of the 2014 post-Series A bridges that had a discount on conversion into equity, 10% also had warrants. Of the 2015 post-Series A bridges that had a discount on conversion into equity, 21% also had warrants. Of the 2016 post-Series A bridges that had a discount on conversion into equity, 8% also had warrants. Of the 2017 post-Series A bridges that had a discount on conversion into equity, 13% also had warrants. Of the 1H 2018 post-Series A bridges that had a discount on conversion into equity, 19% also had warrants.
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WSGR Methodology
The Up/Down/Flat analysis is based on WSGR deals having an initial closing in the period reported to ensure that the data clearly reflects current trends. The median pre-money valuation is calculated based on the pre-money valuation given at the time of the initial closing of the round. If the issuer has a closing in a subsequent quarter, the original pre-money valuation is used in the calculation of the median for that quarter as well. A substantial percentage of deals have multiple closings that span fiscal quarters. The median amount raised is calculated based on the aggregate amount raised in the reported quarter. For purposes of this report, Series Seed transactions are included with Series A transactions.
This report is based on detailed deal data provided by the firm’s corporate and securities attorneys and analyzed by the firm's Knowledge Management department.
To learn more about WSGR's full suite of services for entrepreneurs and early-stage companies, please visit the Start-Ups and Venture Capital section of wsgr.com.
For more information about this report or if you wish to be included on the email subscription list, please email us at EntrepreneursReport@wsgr.com. There is no subscription fee. |
This communication is provided as a service to our clients and friends and is for informational purposes only. It is not intended to create an attorney-client relationship or constitute an advertisement, a solicitation, or professional advice as to any particular situation.
© 2018 Wilson Sonsini Goodrich & Rosati, Professional
Corporation
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