Interview with Matthew Quilter Partner at Fenwick and West LLP

VC Staff


Yesterday's Buzz article featured the results of the survey by Fenwick & West entitled "Trends in Terms of Venture Financings In Silicon Valley (Second Quarter 2009)". Today we are pleased to be joined by Matthew Quilter, Partner at Fenwick & West. Mr. Quilter has a general corporate practice, with an emphasis on working with entrepreneurs in the high technology market and represents them in structuring and negotiating their venture capital financings. He also represents venture capital firms in their investments in portfolio companies.

To view the entire Fenwick & West survey, or to sign up to receive the survey on a quarterly basis when published, please go to

Sound off on this week's buzz in the Comments Section.

Matthew, once again your recently released venture financings survey results offer both good news and bad news for the venture capital industry. Will you share with us your reaction to the survey results?

I am guardedly optimistic. The increase in funding during the quarter provides some reason for optimism, amidst the caution in the funding environment that the results otherwise reflect. Otherwise, many of the trends we saw in the first quarter--more down valuations than up valuations; overall lower valuation levels--continued through the second quarter as well.

Your survey results earlier this year confirmed that first quarter of 2009 was one of the worst quarters for the venture capital environment in many years. Overall, how do you feel the second quarter results compare?

The second quarter shows some improvement over the first quarter, which is consistent with national trends. But at all levels of the venture cycle, from LP investment in VC funds, through first and subsequent rounds of funding in portfolio companies, through liquidity event, greater caution continues to be in place. I do think that improvements in the broader economic outlook, as well as in the NASDAQ, do portend improvement in the venture capital funding environment over the next several quarters as well as in the environment for liquidity events.

The Silicon Valley Venture Capitalists Confidence Index reports the confidence level of Silicon Valley VCs at 3.37 on a 5 point scale, which is the second consecutive quarterly increase in the index. How much should we read into this?

Improvements in the confidence index most likely reflect an assessment that the worst of the broader financial and economic challenges are behind us, even though improvement is likely to be slower than any of us would like.

Declining valuations continue to be a concern and your survey results only validate those concerns with down rounds exceeding up rounds 46% to 32% with 22% flat and an average price decrease of 6% for companies receiving venture capital in 2Q09 compared to such companies' prior financing round. How much hope does the NASDAQ market rally offer to private company valuations?

NASDAQ rally will help. It will lead to more acquisitions, more acquisitions involving use of at least some stock, and more and higher comparables that can be used when a sale price is being negotiated. (Some of these dynamics are already at work in the public to public company M&A environment in the second quarter. Increased private company M&A generally trails public to public activity. As a result, I find the overall results of Q2 M&A activity to provide a basis for optimism for the balance of the year, and not alarming.). Further, as the valuations of leading public companies improve with the increase in the NASDAQ, the realistically achievable enterprise value that VCs can forecast for successful private companies should increase as well, bringing with it an increase in private company valuations.

As we learned in your survey results, the health care industry received 42% of 2Q09 investment while information technology attracted 37%. How much impact do you believe the government's recent emphasis on the healthcare industry has had on investments in this segment of our economy?

Longer term that may be the case. This year, however, the impact is probably modest given the substantial length of time VCs generally spend on a deal before funding, and the lower number of highly competitive deals where normal timing is often accelerated. What's more likely to be at work this year is that health care is a segment of the economy that experiences less of the economic slowdown than other venture-backed segments, and the number of life science investments and portfolio companies were not affected by the economic slowdown to anywhere near the extent other technology investments were.

What factors do you believe contributed to fundraising by U.S. venture capitalists in the second quarter of 2009 being at its lowest level since the first quarter of 2003?

Limited liquidity opportunities for portfolio companies (which severely restricts the virtuous cycle of funds flow-- from fund LPs to VC funds, to portfolio companies, through liquidity event, and then return provided to LP which can be available for additional investment in VC funds), lesser number of new VC funds being raised, and caution from LPs who do not want to exceed historical norms for amount of their overall investments allocated to venture capital.

As we have noted in the past, the downturn in the economy has shaped venture financing terms as it has become more common to see downside protection for the investor. Can you share with us what trends you are seeing in this area and how it is affecting VCs as well as founders and management?

More use of drag-along type voting agreements so that future financings and liquidity events are less likely to be blocked; and a greater emphasis by investors on how potential "blocking" rights are allocated amongst the investor syndicate. The bigger developments in the protective environment, however, have been the traditional ones--in earlier stage companies, it is smaller rounds, to fund a longer period of operations, done at lower valuations. In later stage companies, recapitalizations, pay to play financings, and management carve-outs are all getting more attention.

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