Q1 2019 in VC: Bigger (But Fewer) Rounds

What a year 2018 was in the VC/start-up world. Coming into 2019 we all wondered whether the record pace could be sustained. Well, let the wondering end. An awesome report was just put out by Pitchbook and the NVCA on Q1 investment round data which unearthed some really interesting trends, particularly in the early stage space, namely:

·         Overall: fewer, larger venture transactions with deal numbers continuing to shrink even as investment levels maintained their 2018 pace.

·         Angel, seed & first financings: while overall deal count is down broadly, the earliest stage has seen the greatest decline with annual count falling 44% between 2015 and 2018, the take away being that as start-ups face steeper expectations for maturity from investors so capital is being concentrated in fewer but more developed start-ups.

·         Early stage VC: remains strong but has receded from decade peak in Q2 of 2018. The median size of early stage VC financings grew 36% YoY to $8.2m.

·         Sectors:  As huge flows of capital pour into the core software and SaaS companies, many VCs are looking to emerging sectors that are less congested with investments. Some areas to watch include cybersecurity, robotics, the applications of AI & ML, next-generation infrastructure, fintech, healthtech and traditional industries ripe for disruption.  

Some other great data in here around later stage deals, geographic regions, incubators, female founders, corporate VCs, etc.

Buckle-up should be a wild rest of the year!

Following the Leader: Tips for "Passive" Seed Stage Investors

Rob Go, co-founder and partner at NextView Ventures , wrote an interesting article towards the end of 2018, which, among other things, highlighted the fact that of the universe of active investors in the seed space, only a small percentage of those investors take a lead position in their portfolio company investment rounds. I wasn’t surprised by the data, particularly based on my experience representing seed stage investors in early rounds of financings. Often times, those fund clients approach me to “look over their shoulder” as they invest a “modest” check into a round of financing being led by an alternative investor or syndicate of investors. In that capacity, there are 3 key items which become part of a shortlist of paramount points to highlight to ensure a passive investor is receiving the benefits and protections of the bargain they might be expecting:

Major Investor Threshold. Often times, in order to qualify as a “Major Investor” and therefore receive the benefit of participation rights in future rounds, information rights, and, in some cases, RoFR rights set forth in the financing documents, a threshold ownership level is set to correspond to a particular check size in the round. The threshold to qualify obviously varies deal-to-deal but given the importance of these rights, particularly the right to participate in future rounds of financings (a right at the core of a seed investor’s business), this becomes an important hurdle to identify and comprehend. In some cases, even as a minority investor, you may be able to persuade the company (and the lead investor) in setting the hurdle to ensure your check qualifies.

Voting Percentages.  Beyond confirming the amount of $s being allotted to a passive investor in the round, it is important to understand the preferred voting % thresholds on key decisions throughout the documents and what constituency is required to carry those votes, whether particular investor or group of investor holds on a block on such votes, etc. Even in a non-lead position, voting your shares a certain way might have the effect of influencing those decisions. Understanding whether that power would come with your check size is an important point to understand.

Side Letters. The business of entering into “side letters” is a common practice in the investment arena. Often times, lead investors request rights which a company prefer not to incorporate into the primary suite of financing documents distributed to the broader investor group and instead offer to incorporate into a short side letter which would not otherwise be broadcast widely, perhaps in some cases to avoid having all the “other” investors asking for similar rights. It may cover topics around press release control, observer seats, MFNs, special blocking rights, perpetual pro rata rights, etc. The universe of things I see in these letters is endless. As a non-lead investor in the round, however, you have an interest in understanding the landscape into which you are investing. Without knowledge of whether a side letter exists would fall short of delivering a full picture. Therefore, it is always important to confirm whether side letters are being delivered in connection with the round. And in some cases, you might ask for the same rights :)