azeem.azhar

Cooley’s latest private financings report shows some interesting trends:

So it is not surprising to see the Series A valuations come down, with less capital around investors will drive harsher terms from companies.

It helps inject some perspective into various debates around what exactly VC is from Fred Destin and Fred Wilson.

With a median holding period of around 5 years to exit (according to Thomson), these companies will be exiting in 2014 or so. The deals struck in Q1-Q3 look exceptional expensive, more so that ones in 2007 where the bulk of a series A may have been spent.

Of course those doing deals at the $3.75m can expect to do very much better than those roped in during Q4 2008. Why? Simple maths. If you pay £100 for something at sell it a year later for £150, you have a return of 50%. If you were able to negotiate down to £75 in the first instance and sell for £150 a year later your return is 100%. Having purchased at £75, if you achieved a sale at £112.50 you would have the same return as the first scenario.

In other words, initial purchase (or investment price) is a really huge driver of returns.

For an entrepreneur, the question is where are you better off. In 09Q1 you have sold off a third of your company for basically $1m. In 08Q1, you sold off a third for $3m. So looks like you are worse off?

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I was two parts astonished and one part unsurprised to discover that Google was going to get into corporate venturing.

The traditional case for corporate venturing–which is often based on solid academe (e.g. Block, Chesborough, Birkenshaw, Dushnitsky) goes like this:

• Not all the smart people live inside our company. There are tons of smarts outside our company and venturing or minority-investing will help us access this
• We can leverage our balance sheet without hurting earnings by taking small stakes in emerging companies
• As an quoted, operating company we can’t take the risks or afford the uncertainty that new ventures targeting new customer segments or using new technology create.
• Venturing is a cheap way for us to get a good sense of the dealflow in the market
• It won’t cost anything—even if we fail over several years, we’ll only have a writedown of a few hundred million dollars which in the scale of our company is nothing. And who knows, we might pick the next Facebook, er, Google, and then we’ll look really smart
• We need a full armory of innovation tools to ensure we continue to innovate. That armory includes innovation programmes, brain storms, partnerships, McKinsey, BCG, etc, etc and—of course—a venture program.
• The academic studies do support corporate venturing as a driver of value-add (as measured by Tobin’s Q)

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