Don't Move to the Valley Yet - Quarterly Review of Venture Deals in New England and Silicon Valley
The bad new is that I have taken a blogging holiday since February 2. The good news is that the holiday is the result of being pressed on client matters and business travel (including to China). But, it is time to come back.
As I have done each quarter for some time, this blog presents a comparison of the published statistics relating to venture deals from my firm, Foley Hoag LLP, and the west coast firm, Fenwick & West LLP. This time I am not including Cooley LLP because their year end edition has not yet been published.
Here are some general thoughts:
Foley Hoag, in our publication Venture Perspectives, reported on a total of 46 deals in New England. Fenwick reported on 95 deals in the Valley. This puts the New England market at about half the size of the Silicon Valley market -- entirely consistent with historical norms (at least for so long as I have been observing the scene). The new comer, of course, is New York, where, according to Crain’s New York business.com, there were 51 financings in Q4 in New York in the following industries 20 in software, 17 in media and 14 in IT (for sure there were other in other industries).
On the one hand, this might suggest that New England is losing ground to NYC. On the other hand, it suggests that the north east (New England plus New York) is now as big a market as the Valley and is probably growing faster given the velocity in NYC. (I can hear the Valley folks saying you’ve gotta include Seattle and San Diego – whatever. If that is where they take it, they have in effect conceded the point.)
Even more interesting, is that most of the New York deals are software, digital media and IT related. Based on anecdotal evidence there were a significant number of digital media deals in New England (unfortunately, our survey lumps media in with software so I don’t have precise number). According to Fenwick, the most active sectors in the Valley were software followed by cleantech and hardware then came internet and media followed last by biotech.
If I had to pick something hot today, it would be internet and digital media – and the epicenter is not in the Valley! The reasons for this are almost certainly that the advertising industry is headquartered in New York, there are lots of digital and data infrastructure companies in New England, and there is lots of money in New England and New York to fund these businesses. It is efficient to be near the relevant infrastructure (the advertising world). Apologies to Nivi and all the other “you have to move to the Valley” proponents, but if you are working on a digital media company – don’t relo to the Valley quite yet.
So, with that as a background, below is my usual table comparing actual deal terms.
Comparison of Terms for Q4 2010 Venture Deals from Foley Hoag and Fenwick & West
(some percentages are approximate)
|
Term |
Foley Hoag New England Series A |
Foley Hoag New England Series B and Later
|
Fenwick Silicon Valley All Series |
|
Cumulative Dividends
|
70% |
60% |
5% |
|
Preference with Participation
|
45% |
60% |
45% |
|
Redemption
|
67% |
75% |
19% |
|
Pay to Play
|
9% |
19% |
7% |
|
Weighted Average Antidilution
|
X |
X |
95% |
|
Ratchet Antidilution
|
X |
X |
3% |
It pains me every time I write this, but there is a persistent and consistent difference in terms between New England and Valley deals. Look at cumulative dividends and redemption. The numbers are consistent quarter after quarter. At least as to these terms (and painful as it is to admit, I suspect as to others), entrepreneurs get a better deal in the Valley than they do in New England.
Comments (6)
Read through and enter the discussion by using the form at the endpaul pendorf - March 13, 2011 1:25 PM
re;Valley vs Boston comps-logial to compare Valley/SF and Boston/NY as proximate geographically,if Valley opts to include SD then Boston include DC which would put East coast team in lead.
Jon - March 17, 2011 3:50 PM
Dave -- with all due respect, this simply isn't accurate. just take a look at the PWC Moneytree data here https://www.pwcmoneytree.com/MTPublic/ns/nav.jsp?page=region
This data is just for 4Q10 but the trend has been consistent for many years. Total Silicon Valley VC investments are about double NY and New England combined.
here are their geographic definitions:
Silicon Valley: Northern California, bay area and coastline
New England: Maine, New Hampshire, Vermont, Massachusetts, Rhode Island, and parts of Connecticut (excluding Fairfield county)
New York Metro: Metropolitan NY area, northern New Jersey, and Fairfield County, Connecticut
Dave Broadwin - March 17, 2011 4:34 PM
Jon:
Thanks for the thoughtful comment. Here are a couple of thoughts.
(1) Foley's numbers are based upon primary research and we believe they reflect substantially all true venture transactions done in New England in the relevant quarter. They do not include angel deals, corporate restructurings, private equity and other transactions that are not really venture investments.
(2) I have never confirmed with Fenwick how they arrive at their numbers, but I have reason to believe that they also do primary research and that their numbers also reflect substantially all true venture deals done in the valley.
(3) I work with databases like moneytree, dow and others. While they are very useful for any number of things, you have to be very careful about what they catagorize in what way. I will give you a couple of commonly encountered (by us) examples. A transaction in which multiple series of preferred stock are crammed down into a single series A (a restructuring) will often (always?) show up as a Series A investment. Query whether that is a fair characterization or just an artifact of how the database organizes the data. Transactions with odd valuations (usually very high -- sometimes hundreds of millions) that involve the issuance of Series A stock will also often (always?) show up as series A deal. Same question. In the absence of primary research, you cannot determine the true nature of these transactions and whether they should be counted or not.
(4) With respect to New York, I am relying on Crains, without further investigation.
In general, I am confident in our numbers, and, knowing Fenwick, pretty confident in their numbers (but, as I say, I have not communicated with them around how they aggregate their data). Based upon the work I have done with the various data bases, I am of the view that the data base numbers may be very overinclusive.
Jon - March 17, 2011 5:35 PM
Dave - your response doesn't address the simple fact that PWC is reporting far more aggregate VC investment activity than you and Fenwick. you infer that their data is overly broad in its definitions, but the two examples you gave would do not change that fact.
as it turns out, I have had firsthand experience with the PWC raw data, and I can assure you, they are not including any deals that do not meet the definition of a VC deal. here is their definition from their site:
>> The report includes the investment activity of professional venture capital firms with or without a US office, SBICs, venture arms of corporations, institutions, investment banks and similar entities whose primary activity is financial investing. Where there are other participants such as angels, corporations, and governments in a qualified and verified financing round the entire amount of the round is included.
Qualifying transactions include cash investments by these entities either directly or by participation in various forms of private placement. All recipient companies are private, and may have been newly-created or spun-out of existing companies.
The report excludes debt, buyouts, recapitalizations, secondary purchases, IPOs, investments in public companies such as PIPES (private investments in public entities), investments for which the proceeds are primarily intended for acquisition such as roll-ups, change of ownership, and other forms of private equity that do not involve cash such as services-in-kind and venture leasing.
>>
Generally, I would agree that the Boston/NY start-up scene is more vibrant now than it was pre-Internet/mobile. but it still doesn't compare to the scene in Northern California. As they say in another context, everything is bigger in Silicon Valley.
Dave Broadwin - March 17, 2011 5:52 PM
Jon:
This may be one where we have to agree to disagree. Among other things, we check our research against one of the subscription databases and we find that this database consistently includes transactions that we would not characterize as traditional venture investments.
Sima - November 1, 2012 4:34 AM
fantastic issues altogether, you just received
a logo new reader. What may you recommend in regards to your publish that you just made some days ago?
Any positive?