Software valuations average nearly $80M

Michael Ostendorff · October 7, 2010 · Short URL:

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.





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.



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.



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".




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.




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, 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

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