Valuations on the Rise, According to Fenwick & West

In late May Mountain View, Calif.-based law firm Fenwick & West , published the results of a venture capital survey which indicated that valuations have increased by 64 percent. The survey analyzed the valuations and terms of venture financings for 101 technology and life science companies headquartered in Silicon Valley/San Francisco Bay Area during the first quarter of 2006.

The results showed a continuation of rising valuations over the last two-plus years and the largest increase since the survey began.

It also found that "up" rounds exceeded down rounds for the ninth consecutive quarter, 74 percent to 15 percent, also the largest differential since the survey began. (An up round is one in which the price per share at which a company sells its stock has increased since its prior financing round, as opposed to the other way around.)

Other U.S. venture industry related results for the quarter included the following:
"?¢ The amount invested by venture capitalists in the U.S. in 1Q06 was approximately $6 billion, an improvement over $5.1 billion in 1Q05, and on par with the last 3 quarters of 2005.(1)
"?¢ Acquisitions of venture-backed companies in the U.S. in 1Q06 totaled $7.5 billion in 92 transactions. This was flat with $7.5 billion in 93 transactions in 1Q05, and with 2005 on the whole, but is a significant improvement over $4.8 billion in 86 deals in 4Q05. (1)
"?¢ There were 13 IPOs of venture-backed companies in the U.S. in 1Q06, of which 8 were healthcare companies. This was an improvement over the 8 IPOs in 1Q05, and generally flat with the last half of 2005. (1)
"?¢ Nasdaq was up 6% in 1Q05, but is down 7% in 2Q06 to date.

In comparision, the results of last year´s survey found that that share price of companies funded during the last quarter of 2004 increased by 36 percent and that up rounds outpaced down rounds, 60 percent to 28 percent.

The authors´ indicated that this could have been attributed to the use of tougher deal terms such as senior liquidation preferences, multiple liquidation preferences, ratchet anti-dilution, and pay-to-play provisions declined from the prior quarter. The fact that these non-price terms were down is a further indicator of growing investor confidence.

The Fenwick & West Quarterly Venture Capital Survey and the Life Sciences Venture Capital Valuation Survey is co-authored by law firm partners Barry J. Kramer and Michael J. Patrick. Because it focuses exclusively on trends in venture financing and valuations, the firm considers it a complement the economic data presented in the Ernst & Young/Venture One U.S. Venture Capital Survey and the MoneyTree"?¢ Survey by PricewaterhouseCoopers, Thomson Venture Economics, and the National Venture Capital Association.

Complete survey results are posted on Fenwick & West's website at www.fenwick.com/vctrends.htm.