SAN FRANCISCO, CA--(Marketwired - Apr 4, 2013) - Silicon Legal Strategy, the premier boutique law firm serving technology startups, innovative entrepreneurs and seasoned investors, today released a report analyzing seed financings from 2010 through 2012. Calling its report "Seed Financings: Three Years in Startup Land," the firm hopes to provide entrepreneurs with a comprehensive map of the startup landscape as they navigate the difficult road of raising seed capital.
The report covers 298 rounds of seed financing by software, digital media and internet companies based in the San Francisco Bay Area, Los Angeles and Seattle. "Seed financings" are a company's first round of debt or equity financing, of up to $2,500,000, led by a professional investor. Many of the recent venture funding reports have been focused on what happens after a company's seed round. Yet, it is also important -- and timely -- to dig deeper into the very, very early stage of the startup lifecycle.
"Until recently, those outside of tech were only fascinated with successful tech visionaries, but now people are equally as interested in fledgling tech company founders," said Andre Gharakhanian, founder and partner at Silicon Legal Strategy. "From documentaries and reality TV, to the JOBS Act, to Kickstarter, the idea of leaving a 9-to-5 job and building a new company is taking hold. People are intrigued by the hustle and the struggle, and we wanted to provide a more comprehensive look inside the very early stage seed funding space."
Examining the data over the past three years, Silicon Legal Strategy was able to draw the following conclusions:
- Amounts raised in convertible note rounds are on the rise -- median convertible note raise in 2012 was $725,000, up from $600,000 in 2010. Valuation caps for the convertible notes are trending more favorably for companies as well -- median valuation cap for convertible notes in 2010 was $3,000,000 and has remained steady at $6,000,000 for the past two years.
- On the equity side, pre-money valuations have slightly increased -- median in 2010 and 2011 was $5,000,000; median in 2012 was $6,000,000.
- Mass-syndication of funding, also known as "party rounds," has taken hold, with the median number of investor participants in debt and equity seed rounds climbing to 10 and 8, respectively, compared to 4 each in 2010.
- A preference for raising seed funding via convertible debt remains strong. During the last three years, 62 percent of companies used convertible notes for their initial financing round, while only 38 percent of the companies raised a preferred stock round.
- "Aqui-hires" or M&A transactions where the acquiror's primary motivation is to hire the core team from the target company (rather than acquire the intellectual property or customer base of the target company) are becoming a much more common occurrence.
The last three trends in particular appear to be driving investors to seek additional control when making seed investments. Investors have been taking board seats in equity rounds more often -- joining the board in 71 percent of equity seed rounds in 2010; and joining the board in 92 percent and 93 percent of equity deals in 2011 and 2012, respectively. On the debt side, investors are asking for more rights upon a sale of the company and are more frequently demanding side letters and other special rights.
"Our data shows a change in how investors are looking at seed deals," continues Gharakhanian. "The seed funding environment remains incredibly robust and founders continue to receive favorable economic terms, but market realities are leading investors to ask for slightly more control and better downside protection."
The full financing report is available at http://www.siliconlegal.com/reports/seed-financing-report-2010-2012.
About Silicon Legal Strategy
Silicon Legal Strategy is the premier boutique law firm providing targeted, bottom-line-oriented advice to technology startups, innovative entrepreneurs and seasoned investors. Trained at the top firms in Silicon Valley, our attorneys and staff are incredibly passionate about technology and have extensive experience representing early stage companies and investors. We are a known quantity in Silicon Valley, and work with or sit across the table from every major law firm in the area. Perhaps most importantly, we ourselves are entrepreneurs. We truly understand the challenges of a startup -- like building and motivating a team, creating repeatable processes to ensure continued customer satisfaction at scale and dealing with infrastructure issues. We face these challenges every day -- and as a result, are able to deliver more relevant, bottom-line-oriented advice. Put simply, we actually "get" what entrepreneurs are going through.