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THE ENTREPRENEURS REPORT:Private Company Financing Trends
Summer 2009
Cozying Up to Goliath: The Pros andCons of Taking on a Strategic Investor
By Dave Panos, CEO and Co-founder, Pluck Corporation 
Most early-stage entrepreneurs who arebuilding successful companies will have theopportunity to raise money from a corporatepartner that wants to invest for strategicreasons. You also may find that existinginvestors like the idea of filling out a roundwith a partner that has deep pockets butisn’t very sensitive to valuations. While theprospect of cozying up to a strategic investorinitially sounds appealing, the implicationsare significant and caution is advisable.
The Dance Begins
When in the throes of explicitly raisingmoney or developing a strategic partnership,it is fairly easy to become seduced with theidea of taking a strategic investment from aGoliath partner. Among other things, itrounds out the corporate résumé with a verynice sound bite. You may rationalize thatthere is some sort of
transitive property 
thatmagically will make your company morevaluable—if Goliath thinks it’s worthinvesting in, then the category matters andthis start-up must
really 
matter.The corporate partner’s appetite for this typeof relationship varies wildly according tomarket dynamics and the personalitiesinvolved, but in positive economicenvironments, it is fairly easy to rev upGoliath’s engines. Some large companiesare very aggressive in their pursuit ofstrategic tie-ups at the balance-sheet level.In fact, it isn’t uncommon for them toactually institutionalize the process to alevel where a formal and rigorousconversation around investment must takeplace before any strategic partnering deal isconsummated. However, note that many ofthese companies aren’t investing solely torealize a return on their capital, but ratherare looking to attach themselves to the
(Continued on page 8) 
Feature Articles 
Cozying Up to Goliath: The Pros andCons of Taking on a Strategic Investor
By Dave Panos, CEO and Co-founder,Pluck Corporation 
..................................Page 1
The Non-dilutive Cash Injection:Selling Your Patents
By Kent Richardson and Erik Oliver,ThinkFire Services 
..................................Page 1
From the WSGR Database:Financing Trends
................................Page 2
Is the Government Your NewLead Investor?
.....................................Page 6
Mitigating Risks: ContractingConsiderations in a DownEconomy
............................................Page 10
The Fundraising Process: BestPractices for Entrepreneurs andDirectors
.............................................Page 12
In This Issue
(Continued on page 14) 
The Non-dilutive Cash Injection: Selling Your Patents
By Kent Richardson and Erik Oliver, ThinkFire Services 
Many companies in search of a cash infusionare not aware that they might be sitting on anasset that can be monetized to help meet theirliquidity needs. Whether you are an early- orlate-stage company in need of cash, if youhave a patent portfolio, you might considerselling some of those patents, particularlythose that you do not need today. Indeed, thecash generated from any such sale mayreduce the impact of, or eliminate the needfor, a dilutive down-round financing.
The Market for Patents
We estimate that approximately $1 billion ayear changes hands buying and selling barepatents. These patent sales occur almostexclusively in the information technologysector, including such fields as wirelesscommunications, Web 2.0, SaaS, and LCDTVs. Prices can range from a few thousanddollars to more than $10 million per patent.In the last decade, the growth of this markethas been remarkable. In 1998, only a fewlarge companies, such as Intel, Broadcom, andIBM, were buying or selling patents. Today,there is a robust market of buyers and sellers,along with a developing community of patentbrokers and finders. With the growth of thisemerging market also come the challenges ofvolatile pricing, deal transparency, lack ofstandard terms and conditions, and lack ofstandard processes.
 
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THE ENTREPRENEURS REPORT:Private Company Financing Trends
Summer 2009
The first quarter of 2009 saw a very sharpdecline from previous quarters in both thenumber of equity financings that werecompleted as well as dollars invested. Theacceleration of the decline from the fourthquarter of 2008 to the first quarter of 2009was steep in comparison to the decline fromthe third to fourth quarter of 2008. Thisaccelerated decline in the first-quarter privateequity financing market trails by roughly aquarter the steep decline in the public equitymarkets beginning in September 2008.The backdrop for venture financing in the firstquarter continued to be challenging:• The decline in venture capitalfinancings in the first quarter of 2009that we saw in our database wasconsistent with the declines reportedby VentureSource and MoneyTree.These declines were experiencedacross all sectors and across all stagesof venture capital rounds of financing.• There were no venture-backed IPOs inthe first quarter of 2009, and only oneventure-backed IPO since the firstquarter of 2008. However, there weretwo venture-backed IPOs that priced inMay 2009. While it is too early to tellwhat this portends for future periods, itis safe to assume that a high level ofventure-backed IPOs is not likely toreturn immediately.• According to VentureSource, thenumber of exits in the first quarter of2009 through merger and acquisitiontransactions deceased in comparison tothe fourth quarter of 2008, continuing adownward trend that began in the firstquarter of 2008. The average valuationsof merger and acquisition exits alsodecreased significantly from priorperiods.These and other factors have had a significantnegative impact on venture capital investingin recent periods, which is borne out by thedata from the financing transactions capturedin our database. These trends continue toimpact the rate of return for the venturecapital asset class.The number of financing transactions of alltypes decreased from 151 transactions in thefourth quarter of 2008 to 101 transactions inthe first quarter of 2009, a decline ofapproximately 33%. This decline is evensteeper when compared to the financingtransaction activity in the third quarter of2008, during which 183 transactions werecompleted. The number of transactionscompleted in the first quarter of 2009 wassignificantly lower than the number oftransactions completed in any recent quarter.There was also a steep decline in theaggregate dollars invested in the first quarterof 2009. The $606 million aggregateinvestment amount was nearly 60% less thanthe $1,485 million aggregate investmentamount in the fourth quarter of 2008. The firstquarter saw no megadeals, i.e., singlefinancing transactions involving an amount inexcess of $100 million. The absence ofmegadeals in the first quarter of 2009 hada significant impact on the aggregateinvestment amount (three such megadealsaccounted for approximately $550 million ininvestment amount in the fourth quarter of2008). However, even after eliminating themegadeals from the fourth quarter 2008 data,the decline in investment dollars from
From the WSGR Database: Financing Trends
By Mark Baudler, Partner (Palo Alto Office) 
1Q082Q083Q084Q081Q09 $1,478$1,245$1,616$1,485$606$1,178$1,245$1,294$920$606155162183151101$0$500$1,000$1,500$2,000$2,500
    A   m   o   u   n   t    I   n   v   e   s   t   e    d    (    $    M    )
050100150200
    N   u   m    b   e   r   o    f    D   e   a    l   s
Total Amt. Invested Amt. Invested without MegadealsTotal # of Deals
Q1 08 - Q1 09 Amount Raised - By QuarterFor purposes of the statistics andcharts in this report, our databaseincludes venture financing transactions in which WilsonSonsini Goodrich & Rosatirepresented either the companyor one or more of the investors(although we do not includeventure debt or venture leasing transactions, or financingsinvolving venture debt firms). Thisdata consists of more than 600financings in each of 2005, 2006,2007, and 2008, as well as more than 100 transactions in Q1 2009.
 
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THE ENTREPRENEURS REPORT:Private Company Financing Trends
Summer 2009
$920 million in the fourth quarter of 2008 to$606 million in the first quarter of 2009was significant, representing a decline ofapproximately 34%. The decline in investmentdollars in the first quarter of 2009 issignificant in comparison not only to thefourth quarter of 2008 but also to otherrecent quarters.The number of Series A financing rounds wasdown significantly in the first quarter of 2009when compared to not only the fourth quarterof 2008, but also to each of the other threequarters of 2008. Given the macroeconomicclimate, this is not surprising, but it does shedlight on just how difficult it has been recentlyfor new start-ups to attract venture financing.Not shown in the tables is the significantdecrease of angel-led financing transactions.Our database only recorded two such angelfinancing transactions in the first quarter of2009. There are likely a number of factorscontributing to the paucity of angel financingrounds, including steep declines in manyangels’ personal net worth and increasedconservatism for new investments. As aresult, entrepreneurs are experiencingsignificant difficulties in securing early-stagefinancing for their companies in the currentenvironment.Similarly, the number of Series B and thenumber of Series C and later rounds offinancing have continued to decline fromprior periods. These decreases are likelyattributable to a number of factors, includingheightened conservatism, increased diligencetime prior to making investments, andventure capital firms deploying a greateramount of capital to their existing portfoliocompanies (and often only to certain of theseportfolio companies).The first quarter of 2009 also saw a markeddecrease in the number of bridge transactions.Bridge transactions are often made for thepurpose of providing capital betweeninvestment rounds or to provide capital toenable a company tocomplete an exit transactionor a wind-down. Bridgetransactions also are used insome cases as a means offinancing prior to a firstequity round of financing.This type of seed-investmentbridge financing also declinedsharply in comparison toprior periods.Not surprisingly given theeconomic climate, the percentage of down-round financing transactions—transactionswhere a company’s valuation declines fromthe prior round of financing, resulting in aprice per share of the new security that is lessthan the price of the security issued in theprevious round—has increased significantly.In the first quarter of 2009, slightly over 50%of all Series B and later financings were downrounds, as compared to just over 25% in thefourth quarter of 2008. The percentage ofdown-round financings in the first quarter of2009 is over twice as high as the percentageof down-round financings in the years from2005 through 2008.Further on this point, in the first quarter of2009, only 29% of Series B and later rounds offinancing were up rounds, as compared tofinancings that were down rounds or wherethe per share valuation was flat. Incomparison, at least 65% of such financingswere up rounds in the years from 2005through 2008. This data reflects thedeterioration of the national and globaleconomies combined with the severelychallenged exit opportunities for venture-backed companies.The charts on the next page set forth themedian amounts raised and median pre-money valuations broken down by series ofequity financing. The first quarter of 2009,compared with the quarterly data from 2008,reflects decreases in both median amountsraised as well as median pre-moneyvaluations. The same holds true for Series Bfinancings (with the exception that medianamounts raised in the first quarter of 2009increased slightly in comparison to the datafrom the fourth quarter of 2008) and for SeriesC and later financings. The steepest decline inall of these charts is the median pre-moneyvaluation for Series C and later financings inthe first quarter of 2009 as compared to priorperiods. This ties to the down-round financingdata trends discussed above.In sum, the data shows that the deteriorationin the investment climate that began in 2008accelerated in the first quarter of 2009.
010203040506070Q1 08Q2 08Q3 08Q4 08Q1 09
    #    o    f    d   e   a    l   s
Series ASeries BSeries C and LaterBridge
Number of Deals by Quarter
2005200620072008Q3 2008Q4 2008Q1 2009Down21%21%14%19%16%26%51%Flat14%14%13%12%11%18%20%Up65%65%73%69%73%56%29%
Up vs. Down Rounds*
*Series B and Later
of 00

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