As software and biotechnology transactions take up an increasing percentage of overall venture capital investment and deal activity, valuations and deal terms will be an important factor in the outlook for exit opportunities and continued investment.
For software companies, the average valuation over the past 18 months totaled $79.5 million, while average biotechnology valuations total $57 million. However, median valuations in biotechnology total $34.7 million, with median software valuations totaling $23.4 million.
Biotechnology deals can be slightly more onerous than Software deals based on the increased use of participating preferred stock
Weighted Average Anti-Dilution protection continues to be the most widely used form of anti-dilution protection across both industries.
Venture Capital Investments
Over the past two years, US venture capital investments in biotechnology sector have surpassed software investments, the historical driver of US venture capital investment activity. For the first six months of 2010, biotechnology venture capital investments totaled $2.2 billion compared to $1.9 billion for software investments, according to The MoneyTree Report from Pricewaterhouse Coopers and the National Venture Capital Association based on data from Thomson Reuters.
Source: The Money Tree Report from PwC/NVCA based on data from Thomson Reuters
Mergers and acquisitions
From an overall M&A perspective, consolidation in the US software sector during the first six months of 2010 totaled $9.8 billion, an increase of more than three times over the comparable period in 2009. There were 66 venture-backed M&A exits in the sector during the first six months of 2010, compared to 41 during the first six months of 2009, an increase of 61%. In biotechnology, US M&A activity totaled $4.2 billion for the first six months of the year, and increase of 99% over the same time in 2009. There were 10 venture-backed M&A exits in the biotechnology sector during the first half of 2010, up from eight in the comparable period in 2009.
Average deal premiums in the software sector this year are 27% over the target stock price one week before announcement, down from 43% during full-year 2009, which saw the highest average deal premiums since full year 2001 and the tail-end of the tech boom. In biotechnology, US deal premiums are 60% over the target stock price one week before announcement, the highest level since full year 2002.
Source: Thomson Reuters
Private company valuations
The valuations of the companies analyzed in this report varied within both industries, with the average valuation above $60 million for both. For software companies, the average valuation over the past 18 months was $79.5 million, while average biotechnology valuations were $57 million. Specifically in software, Radar Medical Systems LLC saw the lowest valuation in the sector at $1.7 million and the high, Silver Spring Networks, Inc. saw a valuation of $1.6 billion. In biotechnology, Louisville, Kentucky-based pharmaceutical company, Pradama Inc., saw the lowest valuation in the sector with $2.6 million, while Amyris Biotechnologies, Inc, a developer of renewable hydrocarbon biofuels which recently raised $84.8 million in an initial public offering on NASDAQ, saw the highest valuation the sector at $341.6 million.
Deal Terms can have an impact on the returns received upon exit. These terms also determine what the "cost" is going to be for an equity stake in a company. This is important for both sides of the table, both the entrepreneur/portfolio company and the investor.
Round of Financing
Based on rounds of financing, the overall breakdown between rounds was split fairly evening between both software and biotechnology companies.
Participating Preferred stock was used more frequently in Biotechnology deals versus the Software deals. This term, Participating Preferred, can have a significant impact on the "cost" of the equity when it comes to the entrepreneur/portfolio company. With the stock being a Participating Preferred, upon liquidation, this allows the holders (investors) to participate in any remaining assets alongside the Common Stock holders on an "as if converted" basis.
Software companies with Participating Preferred stock include, BitTorrent, Inc. located in San Francisco, California, Znode, Inc. located in Dublin, Ohio and Coupa Software, Inc. located in Foster City, California.
Biotechnology companies with Convention Convertible stock included, 23andMe, Inc. located in Mountain View, California, VentiRx Pharmaceuticals, Inc. located in San Diego, California, and Melior Discovery, Inc. located in Exton Pennsylvania.
Pay-to-Play provisions were present in 21% of the Biotechnology deals and 20% of the Software deals analyzed. The most common Pay-to-Play penalty found within both industries was a "Conversion of Preferred Stock into Common Stock".
Anti-dilution protection is a contractual measure put in place to allow investors to keep a constant share of a portion of equity in an investment. Weighted Average is the more "friendly" of the two when it comes to the founders. Weighted Average tends to have a less harsh effect on the founders as compared to Full Ratchet. Full Ratchet can "cram down" the founders, leaving them with less of an equity stake of their own company.
Dividends that accrue at a fixed rate until paid are "Cumulative Dividends" which are payments to shareholders made with respect to an investor's Preferred Stock. Generally, holders of Preferred Shares are contractually entitled to receive dividends prior to holders of Common Stock. These "Cumulative Dividends" can increase the "cost" of the capital from the entrepreneurs/portfolio company's view. This is more money that could be taken from the pockets of the founders. Of the deals analyzed, "Cumulative Dividends" were present more in the Software deals as compared to the Biotechnology deals.
Private companies in the valuations and deal terms analysis are:
|Company Name||Investment Date||Valuation at Transaction Date (USD Mil)||Company Name||Investment Date||Valuation at Transaction Date (USD Mil)|
|Acquia, Inc.||07/09/2009||25.95||23andMe, Inc.||04/30/2009||128.23|
|Adura Technologies, Inc.||02/23/2010||24.71||12/22/2009||147.97|
|Advanced ICU Care, Inc.||12/15/2009||16.70||Acceleron Pharma, Inc.||12/03/2009||227.21|
|Allocade, Inc.||03/11/2010||14.62||Aciex, Inc.||02/09/2009||43.75|
|Allurent, Inc.||02/03/2010||37.84||Acton Pharmaceuticals, Inc.||01/06/2010||21.18|
|Appirio, Inc.||02/25/2009||54.57||AdvanDx, Inc.||08/18/2009||63.67|
|Azuki Systems||03/19/2009||22.17||Agile Therapeutics, Inc.||10/13/2009||4.11|
|12/31/2009||25.70||Aileron Therapeutics, Inc.||06/08/2009||62.64|
|Bill.com, Inc.||08/04/2009||20.89||Alios BioPharma, Inc.||01/20/2009||10.16|
|BitTorrent, Inc.||03/11/2009||37.90||Alvine Pharmaceuticals, Inc.||09/04/2009||44.56|
|Blekko, Inc.||07/27/2009||49.93||Ampla Pharmaceuticals, Inc.||02/10/2010||13.64|
|Canesta, Inc.||11/06/2009||54.22||AmpliMed Corporation||08/31/2009||24.41|
|Command Information, Inc.||10/12/2009||8.69||Amyris Biotechnologies, Inc.||09/30/2009||341.60|
|CorasWorks Corporation||05/12/2009||10.54||Anacor Pharmaceuticals, Inc.||01/06/2009||260.14|
|Coupa Software, Inc.||08/20/2009||16.58||Anchor Therapeutics, Inc.||05/19/2009||28.09|
|Damballa, Inc.||10/13/2009||20.44||Anexon, Inc.||07/02/2009||5.20|
|Demandware, Inc.||04/13/2009||89.03||Arcxis Biotechnologies, Inc.||01/30/2009||10.69|
|03/26/2010||102.79||Arresto Biosciences, Inc.||02/11/2009||75.00|
|eDo Interactive, Inc.||06/10/2009||15.00||aTyr Pharma, Inc.||06/30/2009||28.07|
|Enclarity, Inc.||03/06/2009||19.00||Aviir, Inc.||10/19/2009||24.16|
|Envista Corporation||04/10/2009||13.66||Cell Biosciences, Inc.||04/09/2009||70.71|
|Evernote Corporation||11/16/2009||29.73||Celladon Corporation||01/29/2009||81.42|
|EveryZing, Inc.||05/11/2009||34.49||Cortria Corporation||07/10/2009||6.00|
|FirstBest Systems, Inc.||03/09/2009||18.23||DesignMedix, Inc.||04/13/2009||3.54|
|Fulcrum Microsystems, Inc.||03/15/2010||88.87||EmSense Corporation||11/03/2009||35.54|
|Get Well Network, Inc.||03/03/2009||53.26||Excaliard Pharmaceuticals||06/01/2010||24.40|
|Host Analytics, Inc.||05/21/2009||21.15||EyeGate Pharmaceuticals, Inc.||12/21/2009||58.04|
|Integral Development Corporation||06/01/2009||120.91||Gene Security Network, Inc.||01/07/2009||30.27|
|IntegriChain, Inc.||05/12/2009||16.76||GlobeImmune, Inc.||05/14/2009||104.65|
|Jambool, Inc.||08/18/2009||16.41||Gloucester Pharmaceuticals, Inc.||08/14/2009||124.34|
|Likewise Software (FKA: Centeris Corporation)||03/27/2009||28.00||Helixis, Inc.||10/22/2009||20.39|
|MashLogic, Inc.||09/02/2009||5.66||Hydra Biosciences, Inc.||11/16/2009||56.90|
|Open Kernel Labs||01/15/2009||17.60||Juvaris BioTherapeutics, Inc.||09/23/2009||21.45|
|OptionEase||05/13/2009||7.90||LigoCyte Pharmaceuticals, Inc.||07/31/2009||45.50|
|Payvment, Inc.||01/28/2010||4.52||Limerick BioPharma, Inc.||07/14/2009||30.73|
|Radar Medical Systems LLC||02/19/2010||1.68||Liquidia Technologies, Inc.||01/21/2010||35.51|
|RingCube Technologies, Inc.||04/27/2009||36.58||04/20/2010||61.78|
|SEPATON, Inc.||03/20/2009||125.16||NanoString Technologies, Inc.||06/08/2009||34.08|
|Silver Spring Networks, Inc.||12/15/2009||1610.13||Neotropix, Inc.||05/01/2009||25.53|
|04/17/2009||562.27||NextWave Pharmaceuticals, Inc.||06/25/2009||89.30|
|Silverlink Communications, Inc.||08/14/2009||58.66||Numerate, Inc.||02/18/2009||20.03|
|Socialtext, Inc.||04/08/2009||11.52||Perfinity Biosciences, Inc.||06/23/2010||4.70|
|SpaceClaim Corporation||03/31/2009||20.09||Pradama, Inc.||11/19/2009||2.62|
|Talyst, Inc.||03/19/2009||420.00||ProCertus BioPharm, Inc.||06/30/2009||9.29|
|Transera Communications, Inc.||03/12/2009||57.16||Promedior, Inc.||02/12/2009||31.18|
|Watercooler, Inc.||10/25/2009||17.91||Proteon Therapeutics, Inc.||03/03/2009||72.51|
|WebLayers, Inc.||01/13/2009||25.90||Proteostasis Therapeutics, Inc.||04/20/2009||32.10|
|Worksoft, Inc.||11/06/2009||38.70||Seahorse Bioscience||02/10/2010||42.00|
|XinLab, Inc.||08/10/2009||19.10||Sierra Neuropharmaceuticals, Inc.||01/22/2009||16.98|
|Xobni Corporation||04/15/2010||63.45||Stemgent, Inc.||01/22/2009||20.63|
|Tetraphase Pharmaceuticals, Inc.||09/09/2009||20.00|
|Theraclone Sciences, Inc.||03/17/2010||48.54|
|VentiRx Pharmaceuticals, Inc.||01/08/2010||64.08|
|Verax Biomedical, Inc.||04/02/2009||46.47|
|Vicept Therapeutics, Inc.||08/04/2009||10.46|
|Yaupon Therapeutics, Inc.||08/17/2009||35.24|