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WSGR Entrepreneurs Report Summer 2008

WSGR Entrepreneurs Report Summer 2008

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07/10/2013

 
THE ENTREPRENEURS REPORT:Private Company Financing Trends
Summer 2008
Is Clean Tech Just an InvestmentBubble About to Burst?
By Josh Green, General Partner, Mohr Davidow Ventures 
The two questions that I am asked mostoften are “What is clean tech?” and “Whyisn’t clean tech just another bubble that isabout to burst?” In this brief article, I willendeavor to answer these questions.At MDV, we define clean tech as beingmultiple independent value chains tiedloosely together by the increasing cost ofenergy and the challenge of climate change.Greentech Media recently grouped cleantech into the following eight value chains:While helpful, these definitions remainbroad and abstract. The total size of eachmarket exceeds tens of billions of dollars,and in some cases, hundreds of billions ofdollars. These are the largest markets on theplanet, and the challenge is to identify high-growth opportunities within them.We believe that there are fundamentalstructural shifts currently occurring in thesevalue chains caused by the rapid andsustained increase in the cost of energy, acost that used to be immaterial to manyindustrial processes. While these costs mayswing wildly going forward, we believe thatthe era of cheap energy is over. Whether itis the ever-increasing demand/supplyimbalance or the adoption of cap and trade
continued on page 5 . . .
Feature Articles 
Is Clean Tech Just an InvestmentBubble About to Burst?
By Josh Green, Mohr Davidow Ventures 
................................................Page 1
The Fuss About IFRS
By Packy Kelly, KPMG............................
Page 1
From the WSGR Database:Financing Trends
................................Page 2
Starting Up: Sizing theStock Option Pool
..............................Page 8
Does My Start-Up Qualify forVenture Debt Financing?
................Page 10
Top 10 Intellectual Property Tipsfor Early-Stage Companies
............Page 12
Selecting and Protecting aCompany Name
................................Page 14
In This Issue
continued on page 6. . .
The Fuss About International Financial Reporting Standards
By Packy Kelly, Partner-in-Charge, Western Area and Silicon Valley Venture Capital Practice, KPMG 
During the last 12 months, the buzz infinancial-reporting circles has been aboutInternationalFinancial ReportingStandards (IFRS).Many entrepreneursare asking whatare IFRS and whatdo they need toknow about them.IFRS comprise ahigh-quality,comprehensive, broadly accepted set ofaccounting standards currently used forfinancial reporting by companies based inmany countries outside of the United States.IFRS came to theforefront in the U.S. inDecember 2007, whenthe Securities andExchange Commission(SEC) issued a final rulepermitting foreign privateissuers to file financialstatements in accordancewith IFRS as issued by the InternationalAccounting Standards Board (IASB) withouthaving to reconcile to U.S. generally acceptedaccounting principles (U.S. GAAP). Previously,foreign private issuers were required to reporteither in accordance with U.S. GAAP likedomestic filers or provide a reconciliation ofIFRS financial information to U.S. GAAPfinancial information. As a result, IFRS arenow acceptable alternatives to U.S. GAAP forforeign private issuers for their filings withthe SEC.On the heels of this action, discussion ensuedabout whether domestic companies should begiven this same opportunity. In ongoing
If globally adopted, IFRS’simpact will be felt wellbefore a company plans itsinitial public offering.
• Power generation• Energy storage• Energy infrastructure• Transportation• Water• Materials• Recycling and waste• Services
 
2
THE ENTREPRENEURS REPORT:Private Company Financing Trends
Summer 2008
From the WSGR Database: Financing Trends
2,089915115998501,96813434559888105001,0001,5002,0002,500Total value ofall deals
      D    e    a      l    v    a      l    u    e      (      $      M      )
Value of all bridgefinancingsValue of allSeries A dealsValue ofSeries B dealsValue of Series Cand later deals1H 20071H2008
The value of all Series A deals reflected in this chart includes the value of financings ledby angel investors as well as institutional venture capital funds.The total value of all deals reflected in this chart, as well as the value of Series C andlater deals, has been revised to exclude a single financing in the first half of 2008involving an investment of $300 million. This exclusion was made so that the data in thischart is consistent with the data we used in calculating the average pre-money valuationand the average amount raised for Series C and later deals shown on the next page.
1H 20071H2008253 2534481566768784858050100150200250300Total numberof dealsNumber of bridgefinancingsNumber ofSeries A deals*
*The number of Series A deals reflected in this chart includes financings led byangel investors as well as institutional venture capital funds.
Number of allSeries B dealsNumber of Series Cand later deals
       N     u     m       b     e     r     o       f       d     e     a       l     s
Number of Venture Deals by Series*1st Half 2007 vs. 1st Half 2008Total Amounts Raised by Series
† †
1st Half 2007 vs. 1st Half 2008
For this report, we have compiled a range ofdata on financing transactions for the first sixmonths of 2008, with the objective ofidentifying relevant trends in activity andvaluation levels for the U.S. venture capitalindustry in general. The first half of 2008 isnotable as a turbulent period that has severelybuffeted the national and world economies.Against this backdrop, we have compared thefirst half of 2008 with the comparable periodin 2007. Surprisingly, the U.S. venture capitalindustry has shown remarkable resilienceduring this time, based on indications withinour database. We offer some observationsand interpretations of this information thatmay be useful to our audience ofentrepreneurs and investors.For purposes of the charts in this report, ourdatabase includes all venture financingtransactions in which Wilson Sonsini Goodrich& Rosati represented either the company orthe issuer (although we do not include venturedebt or venture leasing transactions, orfacilities involving venture debt firms). Fordata involving averages, we use a truncatedaverage, discarding the two or three highestand lowest figures to exclude the effect oftransactions that are, in our judgment,unusual.Total activity levels for the first and secondhalves of 2008 and 2007 were flat; there werea total of 253 financings reported in the firsthalf of both years. When broken down byquarter for the first half of 2008, our internaldata indicates a 17% decline in the secondquarter—115 financings in the second quartercompared to 138 financings in the first quarterof the year. By aggregate amount of investedcapital, the first half of 2008 decreased toapproximately $2.0 billion compared to anaggregate of $2.1 billion in the first half of2007 (but see the footnote relating to theexclusion of an unusual financing transaction).We believe that the economy in generalcontinues to be a factor in the modest declinein activity level. In addition, the completedisappearance of the IPO market for venture-
 
The data in our reports is derived from financing transactions for the period from2004 to the present in which Wilson Sonsini Goodrich & Rosati representedeither the company or the investor. This data consists of more than 400 financing transactions in 2004, more than 600 transactions in each of 2005 and 2006, andmore than 800 transactions in 2007. Data is reported on financings throughouttheUnitedStates,withoutdistinctionbygeography.
 
3
THE ENTREPRENEURS REPORT:Private Company Financing Trends
Summer 2008
1H 20071H20089.35.722.09.760.412.71.910.65.624.612.277.014.81.80102030405060708090Pre-moneySeries AAmount raisedSeries APre-moneySeries BAmount raisedSeries BPre-moneySeries Cand laterAmount raisedSeries Cand laterBridges amountraised
      $      M
*The data shown in both charts on this page is based on averages that (i) exclude data resultingfrom financings led by angel investors, and (ii) exclude a single financing in the first half of 2008involving an investment of $300 million, which we considered anomalous for purposes of the charts.
Average Pre-MoneyValuation and AmountRaised by Series*1st Half 2007 vs. 1st Half 2008
020406080100Series A Series B Series C and later2005200620071H 20088.310.09.610.621.325.928.224.648.256.860.377.0
      $      M
Pre-Money Averages by Series*2005, 2006, 2007, and 1st Half 2008
continued on page 4. . .
For purposes of comparison, the chart above compares pre-money valuationaverages for the first half of 2008 against averages for each of the full years of2005, 2006, and 2007, broken out by stage of financing.The period-to-period increase in pre-money valuation is dramatically true for laterrounds of financing involving the sale of Series B Preferred or Series C Preferredand later. In the Series C Preferred and later rounds, the increase in the size of thefinancing and the pre-money valuation are even more pronounced, as investorscontinue to support their company portfolios.backed private companies in the secondquarter of 2008 and the continued soberoutlook for the U.S. public equity markets intechnology represent a challenge forcompanies seeking working capital, as well asa concern for investors who traditionally haverelied upon the domestic public equitymarkets for liquidity.In our database, there are diverging trends infirst-round financing transactions involving thesale of Series A Preferred to institutionalinvestors. This is a particularly importantcomponent of the venture industry, sincethese financings are an indicator of innovationand growth. Although the total number ofSeries A Preferred financings has declinedmodestly in the first half of 2008 compared to2007—78 compared to 81 financings, a 4%decline—the average pre-money valuationnegotiated by early-stage venture-backedcompanies engaged in institutional Series A-round financings increased 15%—from $9.25million to $10.62 million—when comparingthe first half of 2007 to the first half of 2008.This increase in pre-money valuation may beattributable to a basic imbalance in supplyand demand, i.e., the substantial amount ofmoney available for investment by the ventureindustry against a relatively smaller number ofcompanies that merit venture capital.Finally, we note that the number of bridgefinancings—financing transactions involvingthe issuance of promissory notes convertibleinto the first/next round of equity—increasedby 55% in the first half of 2008 in comparisonwith last year, from 44 to 68 transactions.Bridge transactions are useful as a temporaryfinancing tool for a number of reasons,including the speed with which they can becompleted, the senior protection they offer toinvestors, and, in the case of initial start-ups,avoidance of the need to establish anycompany pre-money valuation as the basis forthe investment.

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