Dorsey & Whitney Survey Shows Robust Startup Funding Climate; Pendulum Swings Back To Institutional VCs, Who Make Strong Comeback

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Andreessen Horowitz, Sequoia, Kleiner Perkins, and Google Ventures Top-of-Mind with Startup CEOs

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the emergence of angels, accelerators/incubators and super-angels in metropolitan areas as an escalator to institutional VCs and larger funding rounds is an early positive sign for this new era of startup investing.

The Palo Alto office of international law firm Dorsey & Whitney LLP today released findings from its second survey of startup company CEOs regarding fundraising. The “Calling all CEOs: 2011/2012 Fundraising Survey” received a total of 336 respondents over a 3-month period. The survey explores what matters most to entrepreneurs in their selection of investors, and it highlights changes that have taken place since Dorsey conducted its first survey in 2010. The survey also sheds light on the direction that startup CEOs are headed when they raise their first or second round of funding. The survey results identify respondents in two primary categories: startups located within the San Francisco Bay Area/Silicon Valley and other specified major metro areas (“Metros”), and startups located in other US locations or abroad (“Non-Metros”). All survey respondents were either CEOs or founders/co-founders.

The survey findings have been published in a report titled, “The Pendulum Swings in Funding: New Generation of VCs Leads Startup CEOs Back to the Fold.” A link to the survey report is available for viewing, reprint, and redistribution at:

“The data from this survey present a snapshot of the startup funding environment immediately prior to the JOBS Act, which authorizes crowdfunding and removes the general solicitation prohibition for accredited investor financing rounds — the biggest regulatory changes affecting startup companies since the adoption of the Securities Act,” noted Ted Hollifield, Corporate Partner in Dorsey & Whitney’s venture capital practice. “Survey data suggesting the emergence of angels, accelerators/incubators and super-angels in metropolitan areas as an escalator to institutional VCs and larger funding rounds is an early positive sign for this new era of startup investing.”

Entrepreneurs Return to Traditional VCs
Survey data indicates the renewed prominence in metro tech hubs of traditional VC firms, whose influence had declined in the last few years due in part to the rise of incubators, angels, and super angels. Findings supporting the renewed prominence of traditional VC firms include:

  •     The percentage of Metros that previously secured funding from traditional VC firms increased sharply to 27.5% from 17.1% in 2010.
  •     Forty-two percent of Metros expect to raise a future round from traditional VC firms, a huge increase over the 22.1% in 2010.

Survey results indicate, however, that Non-Metros are not tapping traditional VC firms at the same rates as their Metro counterparts. The percentage of Non-Metros who secured funding in the last 12 months from traditional VC firms dropped from 17.1% in 2010 to only 7.5%. Likewise only 18.5% of Non-Metros expect to raise a future round of funding from traditional VC firms, down from 22.1% in 2010.

This latest survey also asked CEOs to write in their top three investor choices. Although startup CEOs could have selected any type of investor, they conclusively identified traditional VC firms as their funding preference, with Andreessen Horowitz coming in first place for the metro group, Sequoia Capital voted second place, and Kleiner Perkins Caufield Byers ranking third. For the Non-Metros, Sequoia Capital received the most write-ins for first place, with Andreessen Horowitz ranking second, and Google Ventures placing third.

More Capital Available to Startups
The survey data suggests that funds are more available to Metro startups now than in 2010. For example, 36.3% of the Metros and 33.9% of the Non-Metros completed a round of funding in the past 12 months as compared to 28.8% in 2010.

Additionally, the data reflects a trend since 2010 towards fewer small rounds and the increased prevalence of large rounds:

  •     The percentage of CEOs who raised less than $500,000 in total funding dropped to 62.8% overall from 75.8% in 2010.
  •     CEOs expecting to raise $150,000 - $250,000 in their next round dropped from 12.5% in 2010 to 2.9% for the Metros and 10.2% for the Non-Metros.
  •     CEOs who raised between $1-5M in total funding rose from 10.2% in 2010 to 15.8% overall.
  •     Startups expecting to raise future rounds between $1-5M increased from 23.2% in 2010 to approximately 30% for both Metros and Non-Metros.
  •     In 2010, only 1% of startups reported raising $15 million or more in the prior 12 months, whereas 7.5% of today’s Metros and 2.5% of Non-Metros completed a round in this larger range.

Non-Metros again yielded somewhat different survey results than Metros. Whereas the trend towards fewer small rounds and more large rounds was generally the case for Non-Metros expecting to raise a future round, there were exceptions. For example, the percentage expecting to raise less than $150,000 increased to 15.7% from 11.3% in 2010. In addition, it was difficult to identify any clear-cut trends in funding amounts for Non-Metros who had raised a previous round.

Regional Differences Reflect Mixed Outlook Among Incubators, Angels and Super Angels
Along with the increased clout of traditional VC firms, the data shows a mixed picture on a regional basis for incubators, angels and super angels. Metros tend to access incubators for early rounds, but not subsequent ones, while the opposite is true of Non-Metros. For example, the use of incubators in previous rounds rose to 15% in Metros and dropped to 5% in Non-Metros, compared to 8.6% in 2010. However, of CEOs seeking a future round, the expected use of incubators decreased to 7.8% in the Metros from 11.6% in 2010 yet spiked for the Non-Metros (24.1%).

The use of angels and super angels was also mixed. Fewer startups across the board (52.5%) received prior funding from angels compared to 2010 (59%), and angel funding anticipated for a future round also dropped overall. In turn, super angel funding appears less prevalent for the Non-Metros. Whereas metro CEOs receiving super angel funding for a prior round stayed the same as 2010 levels (approximately 12%), it dropped to 7.5% for Non-Metros. Super angel funding expected for a future round increased to 41.2% for Metros, up from 37.4% in 2010, but fell to 30.6% for the Non-Metros.

Entrepreneurs Still Weigh Other Criteria
As in 2010, the overwhelming majority of respondents consider valuation, dilution, liquidation preferences, and Board control to be important in completing a deal. The speed at which the deal can get done is also extremely important. In addition, the percentage of CEOs rating an investor’s industry focus/expertise as important increased overall since 2010, possibly signifying that easier access to capital leads CEOs to also seek greater non-monetary value from investors.

On the other hand, the following factors were found to be relatively unimportant:

  •     Approximately 88% of startup CEOs felt that selecting an investor based on having raised funds with them before was “somewhat important” to “not important”.
  •     The importance of existing relationships with investors decreased overall since 2010 as a factor in selecting an investor. Approximately 81% of today’s Metros ranked an existing relationship as “somewhat important” to “not important” compared to 75.4% of 2010 respondents. One possible explanation is that relationships become less important in a stronger investment climate where investors more actively court startups.

The survey also solicited open-ended feedback from CEOs. Anecdotal responses indicate the importance of investors who have the patience and mindset to grow the company over time. Many respondents also cite the importance of strong personal rapport between the startup team and investor. Lastly, CEOs seem to value investors who can provide assistance but still let the core team “drive the bus.”

CEO Survey Profile
Of survey respondents who disclosed their location, 27.3% were based in the San Francisco Bay Area/Silicon Valley region and 21.8% in other major metro areas, with 18.3% distributed throughout other parts of the U.S., and the remaining 32.6% located abroad. The Metro survey results aggregated responses from the San Francisco Bay Area/Silicon Valley, New York, Boston, Los Angeles, Seattle, Chicago, and San Diego. All other responses were aggregated in the Non-Metro results. All respondents were planning to raise funds within the next 12 months or had completed a funding round in the past 12 months.

The 336 survey respondents were either CEOs or founders from a range of technology sectors, spanning IT infrastructure, software, gaming, life sciences/biotech, and green tech/energy. However the majority of startups participating in the survey were in the consumer Internet space, mobile or cloud computing/SaaS, 30.8%, 18.6% and 16%, respectively. While the number of mobile startups increased overall from 12.9% in the 2010 survey, this increase was especially striking in the Metro group, where 22.1% had mobile startups. The number of consumer Internet companies fell from 34.1% in 2010 to 25% for Non-Metros while increasing to 37.2% for Metros.

About Dorsey & Whitney LLP
Clients have relied on Dorsey since 1912 as a valued business partner. With more than 550 lawyers in 19 locations in the United States, Canada, Europe and the Asia-Pacific region, Dorsey provides an integrated, proactive approach to its clients' legal and business needs. Dorsey represents a number of the world's most successful companies from a wide range of industries, including leaders in the technology, life sciences, financial services, and energy sectors, as well as major non-profit and government entities. Its Palo Alto office has a strong focus on technology-based startups and venture capital, and Dorsey is one of only seven law firms with a Silicon Valley office to be designated a Featured Provider on the National Venture Capital Association’s list of Recommended Law Firms. Interested parties may obtain more
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