Software valuations average nearly $80M

A look at deal terms and valuations for software and biotech companies in the past 18 months

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.

 

 

Source: VCExperts.com

 

Deal Terms

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.

 

Source: VCExperts.com

Preferred stock

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.

 

Source: VCExperts.com

Pay-to-play provisions

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".

 

Source: VCExperts.com

 

Anti-dilution protection

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.

 

Source: VCExperts.com

Dividends

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.

Source: VCExperts.com

Private companies in the valuations and deal terms analysis are:

Software				Biotechnology
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
Edioma, Inc.	05/31/2010	2.51			04/28/2010	82.95
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
Fliqz, Inc.	01/19/2009	11.26			06/14/2010	3.67
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
Iovation, Inc.	01/29/2010	21.00			01/19/2010	162.15
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
Turbine, Inc.	07/23/2009	156.57			07/30/2009	38.23
Unidesk Corporation	01/14/2010	27.26			03/01/2010	51.49
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
Zendesk, Inc.	07/27/2009	21.00			04/28/2010	32.35
				Synovex Corporation	06/26/2009	17.29
				Tetraphase Pharmaceuticals, Inc.	09/09/2009	20.00
				Theraclone Sciences, Inc.	03/17/2010	48.54
				Trevena, Inc.	06/30/2009	29.97
				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
				Zogenix, Inc.	09/21/2009	139.65
					12/07/2009	201.70