Fenwick published its interim report to highlight changes in the Silicon Valley venture capital environment in light of the COVID-19 pandemic. The report focuses on May 2020 financing activity and stated the following:
Financing deal volume continued at levels similar to pre-pandemic levels, but May 2020 valuation results were weaker than April 2020 and significantly trailed 2019 results.
However, overall financing volume is stable as the number of financings in May 2020 was flat with April 2020, with 70 in each month. There was an average of 65 deals per month in 2019, although May 2019 had 75 financings.
The percentage of late-stage financings declined to close to pre-pandemic levels. The percentage of Series D/E+ financings declined to 31% of all financings in May, compared to 38% in April. As the average percent of D/E+ financings in 2019 was 26%, a reversion to the mean is expected. This probably indicates that venture capitalists who were focused on securing financing for their older, existing investments earlier in the pandemic are now returning their focus to earlier stage opportunities.
Valuations weakened as the percentage of up-rounds declined modestly from 71% in April 2020 to 67% in May 2020, but continued noticeably lower than the 83% up-rounds on average in 2019. The 67% up-rounds in May 2020 was the lowest monthly amount since August 2018, when only 66% of financings were up-rounds.
Software and life sciences deal volume is strong. Software companies accounted for 54% of May 2020 financings, above 46% they accounted for in 2019. Life sciences financings also were above average, at 19% of May 2020 financings, compared to 14% in 2019.
What does this all mean for values generally and 409A specifically? For companies that have recently raised money on higher valuations, we would expect that a reasonable application of the OPM Backsolve method will result in higher fair market value determinations.
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Fenwick’s survey (Silicon Valley Venture Capital Flash Report - May 2020) can be found here: https://www.fenwick.com/insights/publications/silicon-valley-venture-capital-flash-report-may-2020