Venture Deal Terms Relaxed, Pre-Money Valuations Rose In 2011, Study Finds

Private company valuations rose, up rounds trounced down rounds and venture partners de-emphasized pay-to-play and fully participating preferred deal terms.

Last year was a period of rising optimism in venture circles, according to survey conducted by Cooley. The survey examined 400 transactions the law firm handled during 2011 in which startups raised more than $6 billion.

The year was a striking departure. Deals with pre-money valuations of more than $100 million increased substantially, to 17% of transactions, a level not seen since 2005.

Meanwhile, up rounds made up 69% of the year’s fundings, an increase from 2010, and 75% of those in the fourth quarter. Across all deal stages, pre-money valuations rose, the study found. For Series A deals, the median increased to $8 million, while the median for Series B was $22.2 million and the median for Series C was $52 million.

Deals terms also relaxed and the number of recapitalization fell. Venture deals with participating preferred requirements dropped to 23% of transactions, a percentage not seen in five years. Pay-to-play provisions were in just 6% of deals.

“The robust financing activity we saw in 2011, both in deal numbers and aggregate dollars raised, as well as the increasingly company-friendly deal environment, shows that venture investors and entrepreneurs seemed to be more focused on upside than on downside in 2011,” said Craig Jacoby, a partner at the firm. “We expect that to translate into an active venture financing environment in 2012.”