Start-up Seed Financing in 2011: Analyzing the Trends

Start-up Seed Financing in 2011: Analyzing the Trends

Fenwick & West LLP, a law firm that represents emerging growth companies, has published a survey of seed financing transactions, comparing the terms of such deals in 2011 to 2010. The survey was based on 56 transactions closed in 2011 and 52 - in 2010, mostly on the West Coast.

The survey highlighted several trends that I would like to bring to your attention:

1. Venture capital investment into seed rounds increased by 52% from 2010 to 2011 (three most active investors were 500 Startups, SV Angel and First Round Capital).

2. Investing by angels has been on the rise since 2009.

3. There has been a mushrooming of accelerators/incubators for start-ups (and not just on the West Coast).

4. The deals tend to be more founder- friendly, as preferred stock valuations, convertible note usage and convertible note cap amount are increasing.

5. The seed funded companies have hard time receiving subsequent venture funding. In fact, less than half of the companies with seed funding received venture funding within 18 months.

6. The use of convertible notes increased by 10% in 2011 as opposed to 2010; their median size increased from $662,500 to $1 million; and the median valuation cap increased from $4.0 million to $7.5 million. Note that only in 4% of the convertible note deals in 2011 investors received a board seat, as opposed to in 8.3% of such deals in 2010.

7. The pre-money valuation in preferred stock offerings increased from $3.4 million to $4.0 million for internet/digital media deals.

Overall, the survey shows that the changes in the seed funding have been founder-friendly, which is an encouraging sign for the start-ups.

This post is a summary of the 2011 Seed Financing Survey. For any questions about it, please refer to the survey and contact its authors.

Read more commentary from Arina Shulga on the legal aspects of operating new and growing businesses at Business Law Post.

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