Foley Hoag, a respected securities law firm, has posted a report on B round venture capital investments in the New England area. Unfortunately, the data is based off of June 2008 data, so it appears a bit dated at this point; it will be much more interesting to see what the results look like for Q3 and Q4 ‘08… I’ll keep on top of this.
However, their partners do provide some interesting commentary that fit with my current experiences, “we are seeing some bridge note rounds intended to stretch the company to the next round, where a year ago or earlier in 2008 we might have expected to go straight to a B round.”
One of the trends that I am currently noticing (keep in mind I probably don’t have long enough of a time horizon to really have an opinion on this) is that VCs are hesitant to have their companies go out for a B round in the current environment. This seems to be for 2 key reasons - 1) valuations are really down, and VCs do not wish to be diluted/realize the decrease in value or 2) fear that a deal just isn’t going to get done in a reasonable time frame given the current fear in the market. Nine months ago a solid venture backed company with a legitimate, named series A investor could have expected to raise a reasonable up round from a decent venture firm in a reasonable time frame. These days, that isn’t necessarily the case.
As a result of this, I’m seeing a lot of B or later rounds done internally as convertible notes. Sometimes these are called A+ or B+ deals, sometimes they are simply called bridge notes. Either the notes take on the same form as the previous preferred venture shares (i.e. a flat valuation) or they are convertible notes with no valuation attached. These notes will convert at the next, outside led round, into that next round’s preferred securities, usually with a bit of a valuation discount. Note that this pushes off the day of reckoning - the value doesn’t have to get reset until the point in the future when an outsider comes in and leads a new round. The hope would be that the market returns to normal as the company hits some metrics that make it more valuable (or just plain old justify the original valuation!)
This is a good reason to have synciated your Series A venture round!
If your startup suddenly needs you original investors to support it for more time with less outside money, you are going to be much better off if you’ve got multiple venture fundsn your first round. It will make it all that much easier to tap the well once again - two deep pockets are much better in these times than a single deep pocket.
