Wilson Sonsini: 2020 Q3 - Down Rounds are Down and Up Rounds are Up
Wilson Sonsini published its Q3 2020 edition of The Entrepreneurs Report, and to sum it up, valuations are definitely up. Wilson Sonsini’s report indicates that deal volume, valuations, and amounts raised in venture financings persisted through Q3 2020, but yet, deal volume for venture financings was healthy. The report analyzed the data on venture financing transactions in which the firm was involved during Q3 2020 and also data from Beauhurst, a searchable database of the UK’s high-growth companies on UK equity investment in Q3 2020. The key highlights of the report are as follows:
The proportion of up-round financings increased in Q3 2020, rising from 80% of Series B and later financings in Q2 2020 to 87% of such financings in the quarter. The share of down-round financings decreased, from 11% in Q2 2020 to 8% in Q3 2020. Flat rounds also decreased slightly, from 9% of financings in Q2 2020 to 5% in Q3 2020.
Median pre-money valuations for Series A and later financings in Q3 2020 retreated somewhat from Q2 2020 levels and Pre-money valuations of Series Seed financings, however, declined substantially, with the median falling from $11.0 million in Q2 2020 to $6.9 million in Q3 2020.
64% of all post-Series A rounds used pari passu liquidation preferences in Q1-Q3 2020, and for down rounds, those with senior liquidation preferences decreased significantly, from 63% in 2019 to 46% in Q1-Q3 2020. The percentage of down rounds with pari passu preferences increased from 37% in 2019 to 54% in Q1-Q3 2020.
The percentage of financings with no participation increased slightly, from 85% in 2019 to 88% in Q1-Q3 2020. Dividends were less prevalent in Q1-Q3 2020, with 48% of financings including dividends, compared to 61% in 2019. The use of redemption rights increased moderately, being included in 20% of Q1-Q3 2020 financings, up from 14% in 2019.
The median amount raised in pre-Seed bridges remained stable in Q3 2020 at $0.50 million, compared to $0.51 million in Q2 2020. In comparison, the median amount raised in post-Seed bridges decreased significantly, from $3.93 million in Q2 2020 to $1.50 million in Q3 2020.
The percentage of pre-Seed bridge loans with maturity periods of 12 or more months increased from 87% in 2019 to 89% in Q1-Q3 2020, with 85% of loans having interest rates below 8%, as compared to 87% in 2019. The percentage of post-Seed bridge loans with maturity periods of 12 or more months increased from 74% in 2019 to 78% in Q1-Q3 2020, with 51% of loans having interest rates below 8%, as compared to 70% 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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Wilson Sonsini’s reprt (The Entrepreneurs Report – Q3 2020) can be found here: https://www.wsgr.com/en/insights/the-entrepreneurs-report-q3-2020.html