Venture Capitalists Raising the Bar for Investment Targets
Despite the credit crunch, the fund-raising climate for start-ups remained favorable through the first half of the year, according to Dow Jones VentureWire.
Valuations, terms on financings and ownership stakes for entrepreneurs all pointed to start-ups having an easy time raising money. But industry participants expect these metrics to shift in favor of investors as companies find it harder to raise capital in the wake of the Wall Street blow-up.
What we’re seeing with venture investors is a raising of the bar for the type of companies that they would invest in, looking at capital-efficient models, looking at companies that have already shown an ability to sell a product, looking at companies that are strategically focused in industries that have shown an ability throughout history to grow in times of economic strain. – Scott Ring, general counsel, Bessemer Venture Partners.
Of U.S. companies raising a follow-on round during the 12 months ending with June, 82.5% said they closed it at a higher valuation than their prior financing, up from 69.8% last year, according to the latest Venture Capital Deal Terms Report, published by Dow Jones & Co.
Use of participating preferred securities, which give investors another chance to harvest assets of a liquidated company after collecting their liquidation preference, was as common in the U.S. as last year, at 62.3%, but they were less likely to be capped than in the prior survey. The cap, however, was more likely to be just two times the amount invested, rather than a higher level, limiting the amount VCs can hope to collect if the company falters.
Also, founders owned more of their companies after first and second rounds, evidence that they were building more valuable businesses before taking venture capital, or that investors were competing harder for these deals. The median share of U.S. companies owned by founders was 40% after a first, or Series A, round and 19.5% after a second, or Series B. Last year the medians were 35.5% and 15%, respectively.
For details see The Venture Capital Deal Terms Report.
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