Jonathan O'Connell’s Post

Data and observations on recent trends in VC deal terms. Along with more "structure" (participating preferred, multiples on liquidation preference, and cumulative dividends), pre-money valuations have dropped significantly more and not recovered in later stage deals but early stage deals are much closer to 2022 pre-money values & raise sizes. https://lnkd.in/g2kcxznr

Over the past two years, the leverage in VC funding negotiations has tilted in favor of investors. There are exceptions to this new rule, to be sure. The buzziest AI startups, for instance, are still juggling multiple highly attractive offers, and in many cases are able to dictate terms. But for many startups, raising capital has grown more difficult—and more likely to involve deal terms that offer protection to their investors. Frances C. Mosley has worked on a number of venture fundraisings over the past several months in her role as a counsel at WilmerHale. She's seen signs of the shift. “I’m seeing a lot more investor-favorable types of terms, as well as investor-favorable valuations,” Mosley told me. So too has Jonathan O'Connell, a partner at Crowell & Moring who's also been deep in the weeds on VC dealmaking in 2024. “I’m definitely seeing more participating preferred, usually with a cap from 1.5x to 3x,” O’Connell told me. “I’m seeing different types of more investor-friendly anti-dilution protection, like full ratchet. And I’m occasionally seeing some redemption rights.”  What else have Mosley and O'Connell been seeing in the market so far this year? And what does Carta data have to say on the state of liquidation preferences, cumulative dividends, and other investor-friendly deal terms? My latest story dives into it all—check the comments for a link. And a big thanks to Frances and Jonathan for sharing their insights!

The times are a changing ... and so are the deal terms; read more below.

Are #VC associates just junior players or secret weapons for startup founders? While they may not have the final say in investment decisions, they offer invaluable insights and support, bridging the gap between founders and higher-ranking partners. Read Allie Garfinkle’s article for Fortune to learn more about the value of VC associates: https://lnkd.in/dWdmtWgv #startupnews

We welcome Wes Lyons and Eagle Venture Fund to the Localvest community! Eagle Venture Fund invests in early-stage, values-based B2B SaaS, FinTech, Tech-Enabled Services, and Healthcare companies. They typically invest in companies led by founders who are at least 2nd-time entrepreneurs, who have proven traction with a couple hundred thousand in revenue, a repeatable and scalable business model, channel partners, or a clear path to scale, large opportunities in their sales pipeline, and deep spiritual integration. They often take a board seat but look more for coachable entrepreneurs in the due diligence process who listen to their advice. Eagle has a deeply Experienced Team – over 44 years of VC experience, dozens of companies founded, more than 100 acquisitions, and they seek to bring value, especially in those moments when their experience in significant strategy shifts, accepting strategic investments, selling companies, and major challenges are most helpful to entrepreneurs. To learn more visit: https://hubs.li/Q024P_f90 #NewOpportunity #StartInvesting

A glimpse of our recently published guide on 'Cap table Management' (link in the description): Your cap table is critical in deciding who your investors will be, how much money they will put in, and at what terms. So it's essential to get it right! Chris Harvey, a venture capital lawyer, while advising a client on their Series A round, came across a super complicated cap table. It had convertible debt, warrants, participation rights, and liquidation preferences greater than 1x. Upon some digging, they found out that this was the founder’s third startup. One of his investors is an early supporter and former landlord who has been with the founder since his first startup, which had a big exit. Afterward, the founder bought her property, and she invested in his second startup, which didn’t succeed. The founder didn't want to let down his early supporters, so he found a way to give them upside in his third venture. While some VCs may be fine with founders carrying 'old baggage,' others might proceed cautiously. Either way, the deal terms will change a lot because the new investor would want to protect their investment. Swipe to know cap table management do’s and don’ts ➡️

According to Cooley LLP, "the percentage of down and flat rounds remained relatively high during Q4 2023, with down rounds representing 25% of deals for the quarter." "Relatively high"? Uh... well, to put that into historical context, down rounds have never exceeded 25% in Cooley's data coverage of the venture capital market. Ever. Translation: There is blood on the streets and that blood belongs to startup founders. What we are witnessing is VC financial sorcery in real time. The only way for the Power Law Cartel to continue propping up the crumbling Unicorn investing thesis is to egregiously separate founders from their equity. Down rounds are one the easiest ways to exploit bear market conditions. I wrote about how and why this happens recently. Click the link to learn more. #venturecapital #bearmarket #startupfunding #founders https://lnkd.in/eHDK9d7X

Months before Scott Shleifer stepped down as head of Tiger Global Management’s private investments, Chase Coleman had already begun to reclaim control of the firm’s $34bn venture-capital arm, Bloomberg reported. The founder sought more communication from Shleifer and his team and held meetings to discuss how to proceed after they plowed billions of dollars of client cash into hundreds of startups — just ahead of an industrywide slump. Coleman also spent this year engaging more with clients and founders of the firm’s portfolio companies. Now, he’s taking over the unit that accounts for about two-thirds of the firm’s assets and has made Tiger a dominant force in startup investing. The move comes after some investors asked Coleman and other partners to get more involved in the wake of steep markdowns and has given many comfort that the firm is seeking to correct the biggest misstep in its history. The rush to deploy almost $20bn that Tiger raised near the height of the venture capital boom led to a 33% writedown of its private portfolio last year and an additional 6% this year, prompting questions about whether Coleman had let the firm spin out of his control. Tiger announced last month that Shleifer, the driving force behind the VC expansion, will transition into a senior adviser role — the most significant management shakeup since the firm’s founding in 2001. #MergersAcquisitionsDivestitures #Investments #PrivateEquity

VCs are including more portfolio sales clauses for later stage funding as a way to access liquidity and keep investors happy. This is a last resort option for investments which may have been going stale for a while📉. VCs are always looking to create new revenue stream to keep their portfolio growing and importantly, exiting too, but instead they should be concentrating on the eggs they do have in their baskets. A real time due diligence platform like Portend allows VS to monitor their portfolio live, alerting them to any financial risk which might hurt their bottom line 🚨. It’s backwards to focus more on portfolio sales clauses to access liquidity for new investments, when you aren’t giving your investments the attention they deserve in the first place! 🚀 💪 https://lnkd.in/eNMb9p2E Sifted Anne Sraders #vcfunding #duediligence #startups #founders

This year's Upfront Summit in LA was even more impressive than in prior years. Critical insights and high-quality connections with entrepreneurs, fellow GPs, and LPs reaffirmed my intense passion for this industry and the entrepreneurial journey. Congratulations to Mark Suster and the Upfront Ventures team for organizing such a successful event, and special thanks to Seksom Suriyapa for his partnership and expertise in his discussions. I came away with several impactful insights relevant to us at Roble Ventures and to any early-stage VC manager: 🌳 We are back to doing VC "correctly", where 80% of the venture business is about adding value back to our portfolio companies; VC is a client services business. Founders, this means you should be going into investor meetings asking what your investors can do for you. At the end of the day, the story of any fund is best told by our customers, our founders. 🌳 For emerging managers looking to raise a new fund in '24, the consensus is DO NOT — unless you have four critical proof points: 1. early validation of portfolio success 2. a differentiated playbook that digs deep into what you do and how you do it so well 3. an eye-grabbing story, and 4. a thoughtful, consistent and disciplined portfolio construction & returns strategy. Until you have these ducks in a row, delay a raise. 🌳 For those who go on to raise, the capital available in '24/'25 will come from markedly different sources than in '20/'21. Follow the money; it is sloshing around in the right pockets. Get on our mailing list (link in the comments) for next week's monthly newsletter to learn more about my thoughts on this. 🌳 Study your LPs — they have their own strategy, and you need to put on your Wall Street/asset allocator hat to understand how you (and the venture asset class more broadly) fit into your prospective LP’s master plan. This is a challenging correction, but an essential part of the entrepreneurial journey. I am grateful for the honesty and clarity brought to us by the Upfront ecosystem.