There is no doubt that innovation is a critical driver of a nation’s long-term economic growth and competitive advantage. The question lies, however, in identifying the optimal organizational form for nurturing innovation. While corporate research laboratories account for two-thirds of all U.S. research, it is not obvious that these innovation incubators are more efficient than independent investors such as venture capitalists. In our paper, Corporate Venture Capital, Value Creation, and Innovation, forthcoming in the Review of Financial Studies, we explore this question by comparing the innovation productivity of entrepreneurial firms backed by corporate venture capitalists (CVCs) and independent venture capitalists (IVCs).
Posts Tagged ‘Venture capital firms’
We analyzed the terms of 156 venture financings closed in the first quarter of 2014 by companies headquartered in Silicon Valley.
Overview of Fenwick & West Results
Valuation results in 1Q14 were very strong.
- Up rounds exceeded down rounds 76% to 8% with 16% flat. The 68 point difference between up and down rounds was the largest since 2Q07, when the spread was 70 points
- The Fenwick & West Venture Capital Barometer™ showed an average price increase of 85%, a significant increase from 57% in 4Q13.
- The median price increase of financings in 1Q14 was 52%, a significant increase from 27% in 4Q13 and the highest amount since we began calculating medians in 2004.
- Software and internet/digital media continued to be the strongest industry sectors, with life science, cleantech and hardware lagging but showing respectable results. The percentage of all financings that are for software companies has trended up in recent years, hitting 45% in this quarter.
- The use of senior liquidation preference fell for the third quarter in a row, an indication of companies having leverage in negotiations with investors.
In our paper, Has Persistence Persisted in Private Equity? Evidence from Buyout and Venture Capital Funds, which was recently made publicly available on SSRN, we use detailed cash-flow data to study the persistence of buyout and VC fund performance over successive funds. We confirm the previous findings that there was significant persistence in performance, using various measures, for pre-2000 funds—particularly for VC funds. Post-2000, we find that persistence of buyout fund performance has fallen considerably. When funds are sorted by the quartile of performance of their previous funds, performance of the current fund is statistically indistinguishable regardless of quartile. At the same time, however, the returns to buyout funds in all previous performance quartiles, including the bottom, have exceeded those of public markets as measured by the S&P 500.
The importance of small businesses in America is unquestionable—they are the foundation of today’s economy and are responsible for many of the new jobs created each year in the United States. And angel investors play a vital role in the development of small businesses by nurturing them at their earliest, most vulnerable stages when they may have little more than the next great idea. For early stage entrepreneurs, angels often are the only ones willing to listen to their business pitch, provide advice, and put in that crucial infusion of capital that is needed to transform an idea into a thriving new business. Yahoo, Google, Facebook, Home Depot—these are just some of the titans of today’s corporate America that, at an earlier stage of their development, were first backed by angel investors.  Equally impressive are some of the statistics about the impact of angel investing—by one estimate, in the first half of 2013 alone, angels invested approximately $9.7 billion in over 28,000 ventures, with over 111,000 new jobs created as a result of these investments. 
2013 was the strongest year for venture-backed initial public offerings (IPOs) in almost a decade: 82 deals (the most since 2007) generated aggregate proceeds of over $11.2 billion, an average offering amount of $137.2 million. At least one venture-backed company went public each month in 2013, and the pace of IPOs has accelerated in the first three months of 2014.
It is often argued that venture capital (VC) plays an important role in promoting innovation and growth. Consistent with this belief, governments around the world have pursued a number of policies aimed at fostering local venture capital activity. The goal of these policies has been to replicate the success of regions like Silicon Valley in the United States. However, there remains scarce evidence that the activities of venture capitalists actually play a causal role in stimulating the creation of innovative and successful companies. Indeed, venture capitalists may simply select companies that are poised to innovate and succeed, even absent their involvement. In this case, efforts by policy-makers to foster local venture capital activity would be misguided. In our paper, The Impact of Venture Capital Monitoring: Evidence from a Natural Experiment, which was recently made publicly available on SSRN, we examine whether the activities of venture capitalists do indeed affect portfolio company outcomes.
We analyzed the terms of venture financings for 128 companies headquartered in Silicon Valley that reported raising money in the third quarter of 2013.
Overview of Fenwick & West Results
Valuation results in 3Q13 showed a noticeable increase over 2Q13, including the greatest difference between up and down rounds in over six years. The software industry was especially strong, not only valuation-wise, but also in the number of deals.
Here are the more detailed results:
Research on the composition and structure of the board of directors is a thriving subject in the aftermath of the financial crisis. The discussion thus far has assumed that finding the right board members is extremely important because they tend to enhance corporate strategy and decision-making. Consider the case of Apple’s board. Following Steve Jobs’ return to the firm in 1997, he understood well the important role of the board of directors to both improve company productivity and build relationships with its suppliers and customers. In order for the board of directors to become a competitive advantage and help carry Apple forward, its members needed to have a thorough understanding of the computer industry and the firm’s products. Accordingly, a change in the composition of the board of directors was arguably a necessary first step to bring back focus, relevance and interaction (with the outside world) to the company in its journey to introduce disruptive innovations and creative products to its customers. The result was impressive: Between August 6th, 1997 (the day the “new” board was introduced) and August 23rd, 2011 (the last day of Jobs as the CEO of Apple), the stock price soared from $25.25 to $360.30, increasing 1,327 per cent.
On August 16, 2013, the Delaware Court of Chancery issued a much-anticipated post-trial decision in In Re Trados Incorporated Shareholder Litigation, holding that the sale of Trados to SDL was entirely fair to the Trados common stockholders and that the Trados directors had not breached their fiduciary duties in approving the transaction.  The case involved a common fact pattern: the sale of a venture-backed company where (1) the holders of preferred stock, with designees on the board, receive all of the proceeds but less than their full liquidation preference, (2) the common stockholders receive nothing, and (3) members of management receive payments under a management incentive plan.
In Q2 2013, up rounds (including several second-stage seed financings) as a percentage of total deals increased modestly compared with Q1 2013. While pre-money valuations remained strong for both venture-led and angel Series A deals that had closings in Q2, valuations of companies doing Series B and later rounds declined significantly. Median amounts raised increased modestly for angel-backed Series A deals but fell for venture-backed companies, while amounts raised increased for Series B deals, but fell for Series C and later rounds.
Deal terms remained broadly similar in 1H 2013 as compared with 2012, with a couple of notable exceptions. First, the use of uncapped participation rights in both up and down rounds continued to decline. Second, down rounds also saw a shift away from the use of senior liquidation preferences.
Up and Down Rounds
Up rounds represented 67% of all new financings in Q2 2013, an increase from 60% in Q1 2013 but still down markedly from the 76% figure for up rounds in Q4 2012. Similarly, down rounds as a percentage of total deals declined from 26% in Q1 2013 to 18% in Q2 2013, but were still higher than the 14% figure for Q4 2012. The percentage of flat rounds grew slightly, from 14% of all deals in Q1 2013 to 15% in Q2 2013.