Up Rounds Are Up

The venture capital investment climate was pretty robust in the second quarter, with deal volume increasing and valuations on the rise.

Those were some of the findings and observations from a Q2 venture financing report published this morning by law firm Cooley and a conversation with partner Craig Jacoby. The report identifies trends based on more than 100 transactions handled by the firm during that period.

Overall, the findings pointed to an optimistic venture funding environment. Up rounds increased to more than 72% of financings in Q2, the highest percentage in more than a year. Average valuations for Series A deals were $8 million, the highest in three quarters. About 16% of deals, across all stages, had a pre-money valuation of $100 million or more – fueled by heightened appetites for hot, later-stage deals.

“One of the real striking features was the amount of large, later stage rounds, which, in our view, really demonstrate that investors coming into those deals seem to be reasonably confident about the availability of near-term liquidity,” Jacoby says.

Yet Jacoby has observed somewhat of a “barbell effect” in recent quarters in terms of where venture dollars are allocated. Early stage deals involving proven entrepreneurs and businesses with substantial initial traction are generating lots of interest, as are later-stage rounds for hot companies with potential to go public. Companies at the Series C-or-so stage, with strong technologies but some work ahead in gaining market traction, are seeing softer demand.

Jacoby says there’s also a bit of a division in deal-making style between West Coast investors and East Coast investors. The East Coast investors typically are tougher on terms and will negotiate harder on governance terms. Typically West Coast investors, on the other hand, have been more interested in getting in early on the right deal.

“What our report shows is that there’s been a slow, but relatively steady move on terms toward the West Coast point of view,” Jacoby says. There was a decrease in deals utilizing pay-to-play provisions, to the lowest level since Q4 2007. For the most sought-after deals, investors are increasingly accepting terms entrepreneurs put forth, or something close to them, rather than negotiating ones that are significantly more VC-friendly.

“Sometimes that turns out great; sometimes it doesn’t,” he says.