Many venture-capital backed technology companies raise capital in multiple rounds of preferred equity financings (Series A, Series B, Series C, etc). At each round, the lead investor estimates the value of the company and submits a term sheet that sets forth the proposed size, pricing, and terms of the new series of preferred stock.

Clearly, the company’s board of directors must evaluate whether the proposed transaction provides sufficient capital to fund the company’s business plan. The board will also consider the adequacy of the proposed price and the other terms and conditions.

Typically, the new investor quotes a post-money valuation (or pre-money valuation) which assumes that every share of equity is equal in value to the proposed price of the new preferred shares. However, as I have blogged before, this “VC valuation” may be very different than the “fair market value” estimated for 409A compliance purposes (or “fair value” as that term is used by the accounting profession). In particular, the VC valuation does not reflect the impact of differences in liquidation preferences and participation rights.

As an example, assume a company’s board is evaluating two term sheets. Both term sheets propose to raise $5 million by issuing 5 million Series A preferred shares at a price of $1 per share. Both term sheets propose a total post-money value of $15 million based on 15 million fully diluted shares outstanding. The Series A shares in the first term sheet have a 1x liquidation preference and are non-participating. In contrast, the second term sheet proposes a 2x liquidation preference and full participation.

• First consider the differences in liquidation preference. The liquidation preference refers to the priority of distribution of the proceeds from an acquisition or liquidation of the company. With a 1x liquidation, each Series A share receives $1.00 (their original issue price) when the company is sold. No other class of equity receives any distribution until the Series A liquidation preference is satisfied. With a 2x liquidation, each Series A share receives $2.00 (2 times the original issue price) before any other distributions are made. Is this example, the 2x liquidation means the Series A shareholders receive a 100% return on their investment before any other shareholder receives a penny, while the shareholders with a 1x participation receive no return but their invested capital.

• Second, consider the differences in participation rights. If a preferred share has no participation rights, then the maximum amount of its distribution is its liquidation preference. The only way the preferred shareholder can receive more per share than the liquidation preference is by converting the preferred share into common stock. However, if the preferred equity is participating, then the preferred shareholder is entitled to share in the available distribution once all liquidation preferences have been satisfied.

Let’s suppose our hypothetical company is subsequently sold for $13 million, the amounts distributed to the Series A and common shareholders will be very different depending on whether the first or second terms sheet was accepted.

• Under the first term sheet, with no participation, $5 million of liquidation preference is distributed to the Series A shareholders and the remaining $8 million is distributed to the 10 million common shares.

• Under the second term sheet with full participation, $10 million of liquidation preference is distributed to the Series A shareholders, and the remaining $3 million is distributed 1/3rd to the Series A shareholders and 2/3rds to the common shareholders. The Series A shareholders receive $11 million in total distributions, while the common shareholders receive $2 million.

As you have deduced, the second term sheet is a far better deal for the Series A than the first term sheet. Of course, other factors may be considered by the board in selecting one offer over the other (for instance, the second term sheet may be from a strategic investor which offers other benefits to the company).

Bill Denebeim is a Vice President of The Brenner Group and has more than twenty years experience providing financial, regulatory and operational consulting services to executive management and investors of technology companies. Bill received his M.S. in Operations Research from Stanford University and his B.A. degree in Economics and English from the University of California at Berkeley. Bill is a holder of the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society of San Francisco.

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Ernst & Young Transaction Advisory Services (“EY-TAS”) has just released (June 23, 2010) an update on that earlier survey indicating that M&A activity for the second half of the 2010 year is even stronger than previously expected. While that is good news indeed, a couple of comments contained in the survey release have clear relevance to local companies either considering putting their money to work in select growth markets, or local companies seeing an opportunity to be acquired by those companies considering putting their money to work in select growth markets.

• According to EY-TAS, “The deal market will be defined by smaller, higher-quality deals fueled by low interest rates and corporate cash stockpiles.” The key phrase here is “higher-quality.”

• Further, according to EY-TAS, buy-side companies will be seeking “acquisitions that complement their strengths.”

Last year, we at The Brenner Group undertook a buy side advisory relationship with one of the oldest and most highly respected professional service firms in Northern California. Our counsel to this client, that was seeking to wisely and adeptly find target merger partners or acquisitions to solidify its growth prospects well into the 21st century, was to concentrate on “higher quality transactions that complement existing strengths.” That is the path we pursued on behalf of our client, and it is a strategy obviously shared by acquirers world-wide. It is a continuing focus that we continue to prescribe for both prospective buyers, and for prospective sellers needing to define who and what they are.

Of specific interest from EY-TAS’ survey update, with regard to the Technology sector, they state: “Huge cash reserves are giving leading technology companies the financial flexibility to focus on building revenues through organic growth and M&A. These companies are well-positioned to execute on attractive deals that provide entry into new markets and access to new technologies.”

With regard to the Health Care industry, the following is stated: “Consolidation is and will continue to be a means to achieving cost synergies. Relative to other industries, financing for health care deals is more available.”

As was discussed in my April pieces, there are significant opportunities for intelligent growth through mergers and acquisitions for forward looking buyers. There are also significant reward opportunities for sellers who have built well-performing and well-managed ventures that are strategically strong and well-positioned. Most recent indicators are that the remainder of this year should be a busy time for transactions.

Michael Roy is Director of Mergers & Acquisitions at The Brenner Group where he has focused primarily on middle market advisory and transaction engagements. Prior to his affiliation with The Brenner Group, Mike held posts at firms such as Pacific Marketing Partners, Corporate Finance Associates, and Lehman Brothers. Mike has authored multiple “white papers” relating to the food and beverage industries in the U. S., to commercial real estate acquisition opportunities, and to environmental technology developments. He graduated from the University of Notre Dame and received a Woodrow Wilson fellowship for post-graduate study.

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Many of our clients are venture capital backed technology companies that have been growing successfully and have commenced making acquisitions. On the one hand, they feel the ecstasy of getting their deals done. On the other hand, they must confront the agony of fair value accounting.

The Basics of Purchase Price Allocation

A company that makes an acquisition must adjust its financial statements to reflect the inclusion of the acquired assets and liabilities at their fair values. Fair value is closely related to the traditional concept of fair market value. For many items (such as cash assets, accounts receivable, and accounts payable) the determination of fair value is usually straight forward because the values recorded on the seller’s financial statements often reflect the items’ values. In the case of hard assets such as property, plant, and equipment, the market value of the assets may be different than the values carried on the seller’s books. As a result, the acquirer may have appraisals performed to determine fair value conclusions.

However, accounting principles require that the fair value of intangible assets and goodwill must also be determined. Intangible assets can include technology that was developed by the seller (or was in the process of being developed), existing customer relationships, marketing intangibles (such as trade names and trademarks), non-compete agreements, and other contractual arrangements that may be expected to generate economic benefits for the buyer, as well as other items. The extent to which the price paid for a company exceeds the fair value of the identifiable acquired assets (net of the fair value of assumed liabilities) is called goodwill.

Purchase Price Allocation studies determine the fair values of the tangible and intangible assets, as well as liabilities and goodwill.

The Challenge of Fair Value Accounting Principles

The challenge for a client is that the fair value framework entails concepts and definitions which may seem very distant from the specific business strategies and objectives that led to the acquisition in the first place. The challenge exists because the information needed to make the purchase decision is very different from the information required for fair value accounting measurement. The fair value of acquired assets (and liabilities) does not measure the value an asset to the acquirer based on what the acquirer intends to do with the asset. Instead, fair value is the value to a hypothetical “market participant” that will use the asset to its highest and best use.

Take a hypothetical example where one of our clients has just acquired a smaller relatively unsuccessful company that had developed an attractive technology. The conversation concerns the value of the acquired company’s brand name:

“We didn’t buy this company to get its brand name; we bought the company to get the technology. We thought this company was unable to build an adequate marketing and sales capability. That’s why their investors decided to exit. So obviously the brand name is worth nothing.”

The difference between value of the brand name as perceived by management and value under accounting rules may be extreme. In this case, a “market participant” might choose to utilize the acquired brand name. If so, its value would need to be quantified.

Another difference can occur when the client intends to utilize a specific asset, and expects synergies from the acquisition to produce significant economic returns. In this case, the “market participant” assumption can result in a lower accounting value than the value that is perceived by management. The fair value rules spell out “… buyer specific attributes and intent should be disregarded if different than another market participant.” (ASC 820, http://asc.fasb.org). Synergistic effects would not be included in determining the value of the asset. For instance, if the sales projections included synergies that are unique to the client and not available to other market participants, then the sales projections would need to be reduced to remove the synergies.

In summary, acquisitions require accounting and financial analysis to analyze the transaction from two different perspectives. The first perspective identifies the specific costs and benefits to the buyer – including synergistic benefits that may not be available to other potential acquirers. The second perspective is to examine the acquisition from the perspective of other potential acquirers (“market participants”), and assume each identifiable asset is put to its best and highest use.

Bill Denebeim is a Vice President of The Brenner Group and has more than twenty years experience providing financial, regulatory and operational consulting services to executive management and investors of technology companies. Bill received his M.S. in Operations Research from Stanford University and his B.A. degree in Economics and English from the University of California at Berkeley. Bill is a holder of the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society of San Francisco.

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The acquisition will provide discussion fodder for months if not years to come, and we will see if HP can turn Palm into a serious competitor for the iPhones, Androids and Blackberries of the world.

In this post, I will stay clear of any strategic speculation, but rather focus on the process of the transaction.

The proxy statement recently sent out to the shareholders provides some interesting turn-by-turn insights into the transaction. A number of lessons can be learned that are equally applicable to smaller transactions.

How events unfolded

The story starts with a meeting of the Palm Board of Directors on February 17, 2010, where they reviewed operational results. Anticipated revenues for the quarter ending 2/26/2010 were 25% below plan. Anticipated revenues for the quarter ending 5/28/2010 were 63% below plan.

That has to hurt.

The Board channeled its pain into an “assessment of strategic alternatives”, also known as “raise money, license the IP, or sell the Company”. Bring in the investment bankers – in this case Goldman Sachs and Frank Quattrone’s Qatalyst Partners.

At this point, the share price hovers around $9.62 – down but not out from its recent high of $17.46 in September 2009.

On February 25 the Company officially revised its revenue guidance downwards for the current quarter and the current fiscal year. The stock closes at $6.53 the following day and erodes further in the coming weeks to $3.85 on April 6, the day before takeover rumors start.

The bankers and management draw up a list of 24 strategic partners. Between the end of February and beginning of April a total of 16 companies are contacted of which 6 sign a nondisclosure agreement to take a look under the hood. Three of them (“Company A”, “Company B”, and the ultimate acquirer, HP) are invited at the end of March to submit preliminary proposals for a transaction. Two more hover about the fringes (“Company C” and “Company D”).

HP submits its first offer at $4.75 per share on April 13, below the public market share price of $5.16.

Company A came in with a cash offer of $600 million which after preferences would have returned little or nothing to the common shareholders; Company B delivered an unspecified, drawn-out stock deal ; while Company C proposed a cash offer in the range of $6.00 – $7.00 per share with the promise of a fast close. But after taking a closer look, Company C later revised its offer down to $5.50 per share.

Bird in hand, Palm’s CEO and advisors communicate on April 24 to HP and its advisors that, “to remain in the process, HP must improve its offer significantly and immediately”, which they promptly did, increasing their offer to $5.70 per share on the same day.

In the end, Company C did not match that offer, but proposed an alternative transaction under which it would acquire certain patents and take a nonexclusive license to Palm webOS in exchange for a one-time cash payment of $800 million. The Board eventually dismissed the licensing agreement as too dilutive to the value of the overall Company.

The deal with HP at $5.70 per share was announced on April 28.  Prior to the announcement, the shares were trading at $4.63.  The $1.2B offer represents a 23% premium over the price on the previous trading day, and a premium of almost 50% over the price before any rumors of a transaction started to circle.

Unfortunately it also represents a discount of 41% from the time the M&A process was initiated and before the devastating results were announced; and a discount of 67% from the last high in September 2009.

Several lessons can be learned from the process:

1. Start your M&A process early

There are a number of reasons to start the process early, especially in a situation where the company is strategically stalled, as in Palm’s case. Usually the runway is limited, and any delay also restricts strategic options. For Palm, the option to license out webOS turned out to be an inadequate non-starter. Once the bad news is out, share prices fall quickly and any transaction is perceived as a “fire-sale”. Missing the revenue target by over 60% one quarter out qualifies as VERY bad news. So bring in the bankers before you run out of options.

2. The more the merrier

Not all bidders may be the ideal candidate, and any auction in such an environment will inevitably attract bottom-feeders. But a healthy number of participants will keep the auction competitive, make the ideal candidate pay up, and generally force a transaction in a timely manner on the best available terms.

3. Keep key employees motivated

Once a company is on the auction block, employees will consider their options too. It is important to retain  key employees to effectuate a transaction as well as maintain the value of the company. This is especially true for technology companies, where most of the value is intellectual property that is embedded in the workforce. Palm’s Board recognized this early on and approved a Retention Bonus Plan for certain employees on April 1.

4. Cash is king

Somewhat obvious, but in a situation such as Palm’s it is hard for any Board to accept and consider the complexity and value of a stock deal. Not surprisingly, Company B’s proposal was not pursued further, in part because of the ambiguity and uncertainty of a stock deal.

5. Keep the options open

A straight sale is not always the best option, and Palm’s Board considered a range of different strategic options. Although the ultimate transaction was a sale of the whole Company, this open option approach helped to attract more and diverse potential interested parties. In this case, a straight sale was the easiest to evaluate for the seller, and – as indicated above – as the game moved to later innings, the less viable options were retired.

6. Elephants can dance

This one is probably less obvious. The deal was pulled off on a very abbreviated time line. This is exceptional from the seller’s perspective, but even more from the buyer’s. Palm certainly was motivated by a dwindling cash balance, deteriorating fundamentals, and the inability to double-down on its webOS roll-out in light of the weak initial market success. HP had its strategic reasons to buy into the deal, but the speed of execution was forced by the competitive nature of the auction that did not leave much room for delay.

Now, if only HP and Palm do their post-merger integration at the same speed as they did the transaction, we should see some new and exciting products in the marketplace fairly soon.

Gunther Hofmann is a Vice President of The Brenner Group and has done extensive work in valuations, M&A, venture capital, and corporate finance with significant international experience in small firms as well as global corporations. Gunther earned a Masters Degree in Electrical Engineering and Business Administration from Darmstadt University of Technology in Germany, and was a Visiting Scholar at UC Berkeley. He is a holder of the Chartered Financial Analyst designation, and is an Accredited Valuation Analyst (NACVA). Gunther is Treasurer and a Member of the Board of Directors of the the German American Business Association (GABA)

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This is true in general, but can become a prerequisite in connection with securities laws[i].

Many of our clients are venture-backed technology companies. Most of the capital that they raise comes from accredited investors, if not institutional venture capital funds. Some of their money may come from unaccredited investors, and virtually all venture-backed companies issue stock options to employees that are sooner or later exercised. Most of the employees of course are not accredited investors. An annual income of at least $200 thousand or net worth of at least $1.0 million renders you an accredited investor[ii] .

As IPOs continue to be the exception, the exit route of choice for most companies is a sale to another company in an M&A transaction.

And as cash comes at a premium these days, the acquiring company often pays with its own stock – and that’s where some sophistication goes a long way.

Exempt Transactions

Most often, the stock of the acquiring company is not registered with the SEC, either because the acquirer is a public company that uses newly issued shares that are pending registration, or because the acquirer itself is a private company with restricted stock. Thus, such a stock offering would need to use one of the exemptions provided under Regulation D of the 1933 Securities Act – known as “Reg D Offerings [iii].

Usually, the issuance is exempt under Rule 506 of Regulation D, which allows for unlimited amounts of capital raised (Rule 504 limits the sale of securities to $1 million within a 12-month period; Rule 505 limits the raise to $5 million, also within a 12-month period).

Rule 506 also allows the sale to a maximum of 35 non-accredited investors; however, these investors need to be “sophisticated”.

What is “sophisticated”?

In the eyes of the Security Act, “sophisticated” means someone who has “either alone or with his purchaser representative(s) such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment.”

So you can get some help on the way to “sophistication” by retaining a purchaser representative.

What now is a “purchaser representative”?

The purchaser representative is defined in Rule 501 of the Securities Act.

Apart from not being an affiliate of the issuer and being acknowledged by the purchaser, the purchaser representative “has such knowledge and experience in financial and business matters that he is capable of evaluating, alone, or together with other purchaser representatives of the purchaser, or together with the purchaser, the merits and risks of the prospective investment”.

In other words, the purchaser representative is a shortcut to “sophistication” and the path around unaccredited status.

The Brenner Group regularly acts as purchaser representative, enjoying the opportunity to spread “sophistication” and help unaccredited investors to navigate and understand sometimes complex transactions with hundreds of pages of agreements in a multitude of disclosure documents that today’s mergers produce in the interest of compliance …….. and informing investors.

[i] This blog post does not constitute legal or investment advice.

[ii] California provides for some similar provisions regarding a “qualified purchaser”.

[iii] For very small transactions including only buyers (and seller) in the same states, companies may be able to take advantage of some of the state exemptions, such as California Corporations Code Section 25012.

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M&A on the rise

For those business owners who have built and operate a business that is financially, operationally, strategically, and intellectually strong and well positioned for future growth, significant sale opportunities are returning. A continuing need for operating efficiency is driving a new surge in industry consolidation—the big guy wants to get bigger. Buying market share, assets, and resources is still considered an efficient and effective means to an end. Additionally, as a wet and cold winter finally turns into the promise of spring and the warmth of summer, buyers’ bank accounts that were frozen for the past 18 months are opening and significantly higher equity values are giving some an alternative currency to exchange. Related, a plethora of private equity funds of all kinds and sizes are returning to the marketplace and are particularly interested in bringing fresh opportunities into their portfolios. Both corporate and private equity buyers are also benefiting from an increasing availability of debt financing in the marketplace.

In a survey report issued in mid-April, the international corporate communications firm Brunswick Group revealed that more than two thirds of top bankers and lawyers who orchestrate mergers and acquisitions believe that deal-making activity will rise again. That’s a big change from survey results of one year earlier when only 29 percent of respondents forecast signs of recovery within 18 months. According to Steven Lipin, a Brunswick Group senior partner, “This year’s results reveal a substantial change in sentiment in the M&A world and advisers appear to be quite optimistic that the deal activity we’ve seen in the first quarter of 2010 will continue and potentially accelerate during the remainder of 2010.” Further according to a recent article in the Dealbook section of The New York Times, merger volumes for the first quarter of 2010 alone were up more than 18 percent from last year.

Through just the early part of 2010, a wide range of buyers have been closing corporate acquisitions. Closest to home, major technology players GOOGLE, INTEL, ORACLE, CISCO, IBM, SYMANTEC, and SYBASE have been leaders in acquiring much smaller strategic targets at significant premiums. In particular, industry buyers are aggressively pursuing targets that represent new and better ways to meet their respective markets. Typical buyer intent is not just to increase revenues or reduce expenses, but to expand and enhance product offerings to an existing customer base. This represents a great current reward and future growth opportunity for smaller to mid-sized companies that are unique and opportunistic.

Prepare your business for an M&A event

If it is time for you to seek a buyer or a merger partner for your business and the business is strong, growing, and financially stable, it is likely a window of opportunity is currently opening. Of equal relevance, if your business or your industry is struggling, there are important things that you can and should do. We’ve listed below a few areas where business owners and managers of under-performing companies should focus:

• Building management depth and strength;

• Improving financial and IT systems and capabilities;

• Developing sales and marketing muscle;

• Diversifying the customer base;

• Implementing organic growth initiatives;

• Rationalizing operations; and

• Addressing contingent liabilities.

While many business owners have developed a clear and appropriate internal succession plan to assure that a business “remains in the family,” many business owners and investors do expect to participate in an exit strategy that sees their business either acquired from outside or merged into another existing operation. If you and your business are ready for the prospect of a formal merger or acquisition, all indications are that deal making is returning to an active mode. If you and your business are not yet ready for such a prospect, now is the time to bring all elements of the business up to full snuff and be ready when opportunity does knock.

Michael Roy is Director of Mergers & Acquisitions at The Brenner Group where he has focused primarily on middle market advisory and transaction engagements. Prior to his affiliation with The Brenner Group, Mike held posts at firms such as Pacific Marketing Partners, Corporate Finance Associates, and Lehman Brothers. Mike has authored multiple “white papers” relating to the food and beverage industries in the U. S., to commercial real estate acquisition opportunities, and to environmental technology developments. He graduated from the University of Notre Dame and received a Woodrow Wilson fellowship for post-graduate study.

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Supporting the Capital Confidence Barometer results, another recent survey conducted by corporate communications firm Brunswick Group revealed that top bankers and lawyers (typically the grease that facilitates mergers and acquisitions) were even more optimistic, with 67% saying they thought the deal-making business was clearly on the increase.

Not surprisingly, increased availability of debt financing in the marketplace is a significant factor in prospective acquirers returning to the deal-making table.

For prospective buyers, there are significant strategic growth and development opportunities out there. We are now well into the 21st century and doing business is faster, more aggressive, and often profoundly international. Business success, even locally, requires keeping up. As many industries continue to consolidate, serious consideration should be given continually to what are the best strategies for staying ahead of the competition. Sometimes, refining a unique niche makes a lot of sense. Sometimes, recognizing the importance of being bigger and stronger is the obvious choice.

Identify the right target

Experts in the conduct of corporate merger and acquisition transactions generally agree that for a prospective buyer, there are key pre-requisites that need to be identified in a prospective target:

• Strong management—there really is a formula whereby 1+1 can equal 3, but it requires the courage and forethought to bring aboard leadership that is tested and proven.

• Market leadership—I recently heard a terrific metaphor (pardon the politically incorrect connotation)—“strapping two one-legged persons together doesn’t create an Olympic runner.” The key to strategic success is identifying and bringing in market strength, not weakness.

• Sustainable competitive advantages—a little like a good NFL draft where position needs are successfully filled.

• Financial stability—a successful combination hits the ground running—it makes little sense trying to dig out of someone else’s financial difficulties.

• Excellent growth potential—the intent is to grow and prosper.

• Potential business synergies—an obvious pre-requisite, but often overlooked. And not only must there be clear business synergies, there must also be clear cultural and “personality” synergies between the target and the pursuer.

As anyone who has participated in an acquisition or merger transaction will attest, the process of M&A is just as much an “art” as it is a “science.” Not only is it necessary to understand the operations, the accounting, the legal details, and the financial formulations, but it is critical to understand the nuance between pursuer and pursued relative to style, culture, personality, and all the other unique elements that differentiate one organization from another.

Michael Roy is Director of Mergers & Acquisitions at The Brenner Group where he has focused primarily on middle market advisory and transaction engagements. Prior to his affiliation with The Brenner Group, Mike held posts at firms such as Pacific Marketing Partners, Corporate Finance Associates, and Lehman Brothers. Mike has authored multiple “white papers” relating to the food and beverage industries in the U. S., to commercial real estate acquisition opportunities, and to environmental technology developments. He graduated from the University of Notre Dame and received a Woodrow Wilson fellowship for post-graduate study.

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My favorite quote: “But in a bust, having a lot of cash can be a huge competitive advantage because you can use that cash to put enormous pressure on your underfunded competitors.” Amen to that.

Fred Wilson from Union Square Ventures picked up the gauntlet and countered with The Case For The Lean Startup: “I have never, not once, been successful with an investment in a company that raised a boatload of money before it found traction and product–market-fit with its primary product.”

Which prompted The Revenge of the Fat Guy with some more clarification on why big is beautiful, and some cleaning up of common myths about that elusive product-market-fit.

The dogfight has elicited a slew of reactions throughout the blogosphere, my preferred one is making the not-so-obvious connection to Dr. Seuss’Lorax.

With so much body weight being tossed around, the questions remain: (1) who’s right and (2) what does that mean for your startup?

Who’s right?

Both, of course.

Ben Horowitz walked the walk and spent his way to success with Opsware. Arguably, this was before Opsware had found its sweet spot and dominance in the data center automation segment. Now one successful fat start-up does not a prescription for success make, and for every successful fat start-up there are plenty of failures (remember WebVan?). But the same can be said for the lean start-up. The lack of money does not predict success. Arguably, there are more dead lean start-ups than fat ones; although not necessarily by choice.

Fred Wilson has invested in about 100 web companies, and has yet to see success in doling out too much money too early.

What does it prove? If somebody gives you a boatload of money, and you spend it wisely, you can be successful; conversely, if they don’t give you so much money, but you spend it wisely, you may still be successful. Chances are, however, that you’ll build it and they won’t come.

What does that mean for your startup?

I surmise to say “it doesn’t matter”. Investors just aren’t giving out those boatloads of money anymore, so you might as well get used to the low-carb diet.

The other aspect that’s not so clear in either post is what’s good for the company and positioning the product may not be good for the founders or investors.

Boatloads of money usually come with boatloads of dilution; unless a company can prove quickly significant traction in its market. Dilution for the founders and dilution for the investors. Now it is true that 1% of McDonalds’ pie is worth more than 100% of the burger joint next door, but things are not so rosy after the second re-structuring, wash-out, and reverse split.

Boatloads of money also significantly increase the benchmark for success. Once a company burns through $30+ million, it’s hard to make everybody happy with an exit of less than $100 million. These days, most exits aren’t above $100 million, so most investors aren’t happy. What happens often enough is that with new funding, a viable strategy to get the company to an exit of $50 million is ditched in favor of a high risk, “swing-for-the-fences” strategy to get the company to the magic $1 billion exit. But this evolves from a structural issue within the venture capital industry at large, covered in two earlier posts (Bigger isn’t better Part 1 and Part 2).

Like Black Jack, doubling-down doesn’t always double your payout, but often enough leaves you with the loosing hand. Unless of course, you count the cards very, very carefully – as Ben did at Opsware.

Gunther Hofmann is a Vice President of The Brenner Group and has done extensive work in valuations, M&A, venture capital, and corporate finance with significant international experience in small firms as well as global corporations. Gunther earned a Masters Degree in Electrical Engineering and Business Administration from Darmstadt University of Technology in Germany, and was a Visiting Scholar at UC Berkeley. He is a holder of the Chartered Financial Analyst designation, and a member of the National Association of Certified Valuation Analysts. Gunther is Chairman of the Software/IT Industry Group of the German American Business Association (GABA).

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Strategic buyers’ interest

Strategic buyers are usually mostly interested in the product and the market. In the sense that patents support a competitive advantage, and this is reflected in premium margins, they add considerable value. In some industries, such as life-sciences, patents are indispensable. In other industries, patents only play a supporting role. Some strategic buyers will be interested in patents for defensive purposes: either they have a product or they intend to develop a product that may infringe on the intellectual property of the seller.

Strategies of non-operating entities

Most of the non-operating entities will eventually try to find targets that license the technologies (or collect damage awards through litigation). Some will act for operating companies as a direct or indirect front to take intellectual property off the market and prevent others from enforcing the rights aggressively.

How does all of this affect start-ups?

1. Broad Strategy

From the outset, the patent strategy should be as broad as practically possible. This means being cognizant of other applications for the technologies, even if there are no current plans to pursue them. These areas can lead to additional license revenue and make the intellectual property more attractive to a wider range of potential buyers and licensees (strategic and non-operating alike).

2. More isn’t always better

Many companies are trying to amass as many patents as possible in support of a very specific product concept. It might be more cost effective to have fewer, but stronger/blocking patents, that also extend into adjacent application areas.

3. Who’s infringing. Today and tomorrow

It pays off to be aware of anybody currently infringing or on the trajectory to infringing on the company’s intellectual property. Any such instance – even if small and in different markets, will help to make the patents more marketable and may lead to higher income now or later.

4. Enforce the patent rights yourself, or have a “friend” enforce

Which leads to the question what to do if there actually is somebody infringing upon the patents. If the perpetrator is a direct competitor, it certainly makes sense to enforce the patent rights oneself. If the infringement happens at the margins of ones application, or is not worth the effort, or if the necessary funds aren’t there for a drawn-out legal battle, then there are plenty of non-operating entities that may take on such a case without the company itself acting as the bull in the China shop. Usual arrangements involve a sell-and-license-back agreement with the acquiring entity.

5. Geographies matter

Sometimes it pays to patent one’s intellectual property not only in the more obvious jurisdictions where the company intends to do business, but also in others, where potential acquirers reside. Some international non-operating entities will not be interested in US-only patents, but rather look for international scope.

This gives just an overview of some of the considerations for technology start-ups and their patent strategy. Beauty is in the eye of the beholder, and often start-ups are too narrow in the pursuit of patent protection and miss some of the beauty that others may see.

Gunther Hofmann is a Vice President of The Brenner Group and has done extensive work in valuations, M&A, venture capital, and corporate finance with significant international experience in small firms as well as global corporations. Gunther earned a Masters Degree in Electrical Engineering and Business Administration from Darmstadt University of Technology in Germany, and was a Visiting Scholar at UC Berkeley. He is a holder of the Chartered Financial Analyst (CFA) designation and an Accredited Valuation Analyst (AVA/NACVA). Gunther is a Member of the Board of the German American Business Association (GABA).

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The project reminded me of how much the landscape of acquirers of IP has changed in recent years as the market for buying, selling, and licensing IP becomes more mature. There are a host of different players with very distinct interests and operating models.

In this first of two blogs, I will describe some of the main types of participants in more detail. In a second post, I will touch on the implications for the patent strategies of high-tech start ups.

Who’s out there?

In a broad sense, potential buyers of IP assets can be divided into operating and non-operating entities. Operating companies intend to use the patents to support (or defend) their operating business; non-operating entities are companies with no substantial operations other than enforcing intellectual property claims. They acquire patents for offensive (trying to license the IP or receive damage awards from infringers) or defensive purposes (trying to prevent others from seeking damage awards).

In the last decade, there has been a lot of development in the area of non-operating entities. The category may have started out as the derogatory “patent trolls”, but at this point has matured into an industry with a number of players with distinctly different strategies:

- Enforcing Entities: these companies seek to offensively enforce their patent rights vis-à-vis current or potential users that may have an interest in licensing the IP or are suspected of infringing upon the rights. These entities can be structured in a range of ways: some are structured as a fund; some were formerly operating entities that sold off the operating business to focus on patent right enforcement; and others started out as individual inventors with a successful track record of enforcing their prior inventions.

- Defensive Trusts: these entities are a relatively recent development. Large, operating companies band together to form trusts that acquire patent rights for defensive purposes. The rights will be licensed to some or all of the member companies as a “protective shield”. Depending on the trust, the patents may be sold after the initial round of internal member licensing to provide cash flow back to the trust as well as to keep the threat of litigation alive with non-members.

- Aggregators: whereas Enforcing Entities usually aim for an immediate and targeted activity, aggregators take a broader and more patient approach: Their aim is to amass a large patent portfolio in certain areas that will represent a critical mass for later enforcement.

- IP Development Companies: as public and private research organizations have become more skilled in their efforts to monetize their inventions, they have also become more active in seeking to round out their own IP portfolio through acquisitions. Some will have their own enforcement activities, while others may license a more complete set of IP to third parties.

- Buy-side, sell-side brokers: as the players in the intellectual property get more specialized and mature, so do the related intermediaries. A lot of operating companies and several non-operating companies do not want to openly engage in IP transactions, but rather do so indirectly through third parties. This preserves confidentiality for competitive and pricing considerations. By keeping the “need” for certain IP confidential, the buyer also does not provide any clues about their strategy, or legal Achilles’ heel.

Each of these entities may have its own focus on certain industries and may have its own process with its own timeline. For example, defensive trusts will necessarily focus on the industries of their member firms, and will likely only bid on a patent portfolio once they receive interest from their member firms. This may take a while and they may not be as responsive as other entities capable of making faster decisions.

Knowledge of the different strategies is essential in executing a successful IP sale. However, an awareness of the different strategies of these companies may also lead to a re-thinking of the IP strategy of start-up companies that intend to maximize the value of their intellectual property either in an ultimate sale, or in additional revenue from licensing agreements along the way.

Gunther Hofmann is a Vice President of The Brenner Group and has done extensive work in valuations, M&A, venture capital, and corporate finance with significant international experience in small firms as well as global corporations. Gunther earned a Masters Degree in Electrical Engineering and Business Administration from Darmstadt University of Technology in Germany, and was a Visiting Scholar at UC Berkeley. He is a holder of the Chartered Financial Analyst (CFA) designation and an Accredited Valuation Analyst (AVA/NACVA). Gunther is a Member of the Board of the German American Business Association (GABA).

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The terms and conditions on preferred equity frequently issued to venture capitalists may seem arcane, but the impact on the value of common stock (and stock options) is significant! These impacts are important for tax and accounting compliance. But more importantly, they determine the amount of money shareholders will receive when the long hoped-for “exit” is finally realized.

This is the second in a series of posts meant to help explain many of the typical terms for preferred equity we see in our daily valuation work. Hopefully, this analysis will provide some guidance on the impact to the holders of common shares. (There can be legal issues which also come into play, especially in contested matters. However, this blog is not legal advice, and the specific facts and circumstances for any particular case will differ from the examples described herein).

Seniority: Preferred Equity Is In-Between Debt and Common Stock at M&A Exit

The preferred stockholder’s liquidation preference (together with the degree of participation) is a key factor is determining how much, if anything, common stockholders receive in an M&A exit. Participation will be the subject of subsequent blogs.

Most of the companies we see are early stage venture capital backed technology companies. They typically have a capital structure comprised of common stock, preferred stock, and occasionally debt. The exit for an investor is sometimes an IPO, but more frequently, it is a “liquidating event”, which can mean either the company is sold in an M&A exit or the company is shut down. In the case of a liquidating event, the seniority of each component of the capital structure becomes key to whether and how much of the liquidation value is received by each class of shareholder. Take, for example, a company that was funded by $20 million in preferred stock and $5 million in debt. The debt is considered to have first priority on the proceeds available for distribution from the liquidating event, typically the preferred equity has second priority on the proceeds (due to its liquidation preferences), and the common equity has whatever is left over (in this case, it stands third in line). If the company is sold for less than $25 million dollars, the debt holders would get paid off first, the preferred equity holders would get the rest (but not their entire preference amount), and the common stock holders would get nothing. The common stockholders would only receive a distribution if the company is sold for more than $25 million.

Liquidation Preference Multiple (1x vs. 2x) and Similar Provisions

In many cases, the liquidation preference is “1x”, which means the preferred equity gets one times the amount they invested. In the example above, the preferred equity put in $20 million, so the amount of their liquidation preference is $20 million.

However, a liquidation preference can be “2x” (or “3x” or some other multiple), meaning the preferred equity gets back twice the amount invested before any proceeds are distributed to common stockholders. In the example above, the preferred equity would get back $40 million.

In some cases, there may be a mandatory dividend on the preferred, or the liquidation preference is structured so that the amount of the liquidation preference grows at a specified rate (e.g., 8% per year non-compounding) until the exit event. In the above case, assuming a three-year term to exit, the liquidation preference for the preferred equity would be $24.8 million. The key point is that liquidation preferences greater than 1x mean that the common stock holder receives nothing until and unless the preferred equity holder receives a return of capital plus a specified amount of profit.

Conclusion

Liquidation preferences provide preferred shareholders with downside protection on their investment. In some cases, liquidation preferences also provide for a profit. Of course, the assurance is not absolute. At an exit, legally enforceable obligations (such as debts, lease commitments, legal judgments, etc.) must be satisfied first. However, once these first priority claims are satisfied, then the preferred stockholder is second in line and ahead of the common stockholder.

The preferences of preferred stockholders do not end with just the liquidation preference. In the next blog, I will describe what happens after the preferred stockholders receive the liquidation preference in an M&A exit through their participation rights.

Other Posts in this Series
Preferred Equity Basics Pt 1: VC Differences
Preferred Equity Basics Pt 3: Participation Rights

Bill Denebeim is a Vice President of The Brenner Group and has more than twenty years experience providing financial, regulatory and operational consulting services to executive management and investors of technology companies. Bill received his M.S. in Operations Research from Stanford University and his B.A. degree in Economics and English from the University of California at Berkeley. Bill is a holder of the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society of San Francisco.

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The terms and conditions on preferred equity frequently issued to venture capitalists may seem arcane, but the impact on the value of common stock (and stock options) is significant! These impacts are important for 409A compliance. But more importantly, they determine the amount of money employees may receive when the long hoped-for “exit” is finally realized.

This is the first in a series of posts meant to help explain many of the typical forms of preferred equity we see. We will provide guidance on the impact to the holders of common shares.

Preferred equity is extremely malleable, the specific terms and conditions are tailored to the facts and circumstances of each unique case. So there can be additional differences between the cases discussed here and the specific equity structure of any particular company.

Overview of Preferred Equity

Preferred equity is sometimes described as a hybrid security that combines elements of a debt security and an equity security. To the extent that the preferred equity provides for the return of principal and commits to the payment of dividends (in effect the dividend acts like an interest payment), it is similar to debt. To the extent that there may be no specific time-frame for when the original amount invested must be repaid and it participates in the growth of the company, it is similar to equity.

Venture Capital Preferred Equity is Different

In venture capital financings, the debt-like characteristics of preferred equity are changed and significantly expanded. While often there is no mandatory dividend, there are hosts of additional rights, protections, and privileges. Preferred equity issued to a venture capital firm is a highly customized security that provides the preferred investor a set of provisions (“preferences”) that are tailored to each company’s unique requirements and circumstances. Preferred stock rights often grant the preferred stockholder advantages relative to the common stockholder. The preferred equityholders may have some or all of the following rights:

o To earn a return on their investment that is disproportionate to the percentage of shares owned relative to the common,

o Downside protection, and

o To have disproportionate influence or control over the company.

Economic Rights and Control Rights

Using the terminology of the AICPA, certain provisions give the preferred equityholder economic rights and control rights: “…preferred stock has characteristics that allow preferred stockholders to exercise various economic and control rights”.[1]

Economic Rights

o Preferred Dividends – As discussed above, mandatory dividends are infrequent in the venture capital transactions we have observed. However, specific dividend rights may be granted.

o Liquidation Distributions – These rights are critical to understanding the value of common shares. These rights refer to the specific rules by which the proceeds from a sale of the company are distributed among each class of shareholders.

o Mandatory Redemption Rights – These rights give a class of preferred equity the ability to require the company to buy back the preferred shares (exit the investment) before the ultimate liquidity event.

o Conversion Rights – These rights give a class of preferred equity the ability to convert their shares into common stock at a specified conversion rate. While most conversion rates are 1:1 (one share of preferred stock is exchangeable into one share of common), we sometimes see different conversions rates such as 1:2 (one share of preferred stock is exchangeable into two shares of common). Frequently, preferred shares are subject to mandatory conversion (they must be exchanged for common shares) if the company proceeds with an IPO.

o Anti-dilution Rights – These rights give a class of preferred equity the ability to adjust liquidation and conversion rights so that dilution is either reduced or avoided due to the issuance of new shares.

o Registration Rights – These rights give a class of preferred equity the ability to compel the company to use its best efforts to proceed with an IPO (or secondary offering).

Control Rights

o Voting Rights, Drag-Along Rights, Protective Provisions, and Veto Rights. These rights give a class of preferred equity disproportionate voting or veto power over the company, or the right to compel other equity classes to vote a particular way.

o Board Composition Rights. These rights give a class of preferred equity disproportionate power to designate specific board members, or to control the board.

o Management and Information Rights. These rights give a class of preferred equity access to pre-specified information such as financial reports, company plans, and the right to attend and observe board meetings.

o Participation Rights (Future Financings). These rights give a class of preferred equity the right to purchase a portion of any future equity financing so that the original ownership percentage is maintained.

Conclusion

In subsequent blogs, I will describe how these provisions typically play out as a venture-capital backed company proceeds with its “exit” either through an Initial Public Offering (IPO) or a sale or wind-up the business. These provisions have a big impact on all classes of equity at exit, in that they determine how much of the value of the company is paid out to each shareholder.

Other Posts in this Series
Preferred Equity Basics Pt 2: Seniority & Liquidation Preferences
Preferred Equity Basics Pt 3: Participation Rights

________________________________

[1] This quote and the ensuing discussion are adapted from the AICPA’s Valuation of Privately-Held-Company Equity Securities Issued as Compensation, Appendix H.

Bill Denebeim is a Vice President of The Brenner Group and has more than twenty years experience providing financial, regulatory and operational consulting services to executive management and investors of technology companies. Bill received his M.S. in Operations Research from Stanford University and his B.A. degree in Economics and English from the University of California at Berkeley. Bill is a holder of the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society of San Francisco.

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A recent Grant Thornton study digs a little deeper and identifies 1997 as the peak year for the total number of public companies in the US. Since then and through 2008 the number of listings has declined by almost 40%. This is especially remarkable as listings on other global stock exchanges have increased: the number of listed companies in Hong Kong has almost doubled.

Grant Thornton traces this development back to the advent of online brokerages in 1996 and introduction of new order handling rules in 1997. The decline in listings was already in full swing when the dot-com bubble peaked. The rate of decline has slowed somewhat since Sarbanes-Oxley (between 2004 and 2007: coinciding with the economic recovery), but accelerated again towards 2008.

Grant Thornton argues that the root cause of this depression in listings is not Sarbanes-Oxley, but an array of regulatory changes that were meant to advance low-cost trading (such as decimalizing spreads), but have had the unintended consequence of stripping economic support for the value components (quality sell-side research, capital commitment, and sales) that are needed to support markets, especially for smaller capitalization companies.

There likely is more to it:

The pace of smaller IPOs after the dot.com crash may have been much higher without Sarbanes-Oxley, or with a reasonable exception for small-cap companies. This has combined with decreased investor appetite for “public venture capital” in the US vis-à-vis emerging markets.

Is any of this likely to change?

Grant Thornton makes several recommendations to bridge to more traditional IPOs, such as the establishment of an alternative public market segment that supports a higher fee structure for market makers, as well as private markets with limited access, such as solely to qualified investors. IPOs might pick up in a recovery, but they are unlikely to reach the 360 new issues per year that are calculated as the equilibrium number to avert further erosion of total listings.

Given investor interest in overseas markets compounded by an increase in domestic M&A activity and bankruptcies, a further decline in listings in the US is much more likely until a new equilibrium is found.

Gunther Hofmann is a Vice President of The Brenner Group and has done extensive work in valuations, M&A, venture capital, and corporate finance with significant international experience in small firms as well as global corporations. Gunther earned a Masters Degree in Electrical Engineering and Business Administration from Darmstadt University of Technology in Germany, and was a Visiting Scholar at UC Berkeley. He is a holder of the Chartered Financial Analyst designation, and a member of the National Association of Certified Valuation Analysts. Gunther is Chairman of the Software/IT Industry Group of the German American Business Association (GABA).

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Whereas the timing of a transaction (up-market, down-market, hot technology space, etc.) is certainly of importance to the general consideration of whether or when to sell, the execution time from when the decision to sell has been made until the transaction closes is relevant in any market.

Obviously, there is a time value of money, and one dollar in a couple of weeks is worth more than one dollar in six or nine months. The simple compounding effect gets amplified for companies with a high cost of capital – such as venture capital.

Getting stale

But more than that, once deals are marketed they tend to have a limited shelf-life before they become stale. Interest in the company may be waning, and the economic situation of the company as well as the larger economy can change negatively as time drags on. Any potential acquirer will do a “make or buy” analysis. The assessment can change over time as the deal lingers on.

It is a crucial condition to a successful transaction that a sense of urgency among the buyers be constantly stoked. This holds true for a sale in an auction as well as for negotiated sales.

Confidentiality is another consideration: the longer the deal process lingers, the higher the likelihood that word gets out. This may be an advantage if the company is selling its assets and wants to target the largest possible universe of buyers, but it can be detrimental if it keeps customers from buying its products pending a transaction, or employees start to become nervous over the outcome of the transaction, or competitors start taking dead aim in the marketplace.

Auction 90TM

The Brenner Group has developed a formulated process for the sale of a company: Auction 90™ . As the name implies, in its purest form it takes 90 days from the start of the engagement until a buyer is contracted.

The process has been designed in an auction setting and can be executed as an open auction (where the goal is to maximize exposure) or a limited auction (where a limited number of bidders are corralled along a pre-defined process to expedite the transaction.

Timing

There are several factors that influence the execution time:

1. Asset sale versus stock sale

As the name implies, a company sells only its assets (or a sub-set of its assets) in a piecemeal manner. Any proceeds to the company will then be distributed to debt- and equity holders. In a stock sale, the owners of the company sell their stock to the acquirer, thereby disposing of the company in a single transaction. The assets (and liabilities) will continue to be owned by the company. Usually, asset sales can be executed faster than stock sales, in part because stock sales require more analysis and due diligence by the buyer.

2. Complex due diligence

Obviously, the more there is to a company, the more due diligence there is to do, and the longer it takes for a transaction to close. Complex technology, employees, overseas offices, and contractual relationships all take time to analyze. The further a company is along in terms of customer buy-in, product development, and actual sales, the easier it is for an acquirer to do due diligence.

3. Economic and industry environment

Obviously, deals will take longer in times when everybody is hunkering down and trying to cut costs. There are exceptions to the rule – if companies provide technology or products deemed “mission critical”, deals will still be done expeditiously. For example, Electronic Arts acquired online game company Playfish for $375 million at the same time EA announced layoffs of about 1,500 employees from its core staff.

4. Cash deal, share deal, merger

If the acquirer pays in cash, there is little to analyze. A transaction where the acquirer pays with shares needs additional scrutiny: are the shares registered, or restricted, or readily marketable, what is the trading volume, etc. The more weight on deferred payment, the higher the risk for the seller; especially as the seller has little control over the acquiring company’s operations going forward.

5. Auction, negotiated deal, limited exposure auction

Usually, an auction will lead to a speedier close, as it keeps all participants focused on a deadline. While a negotiated sale for a highly sought-after company can proceed swiftly, undue urgency may not leave the seller the necessary time to investigate other strategic options that could result in a higher price. Read more about auctions in my previous post Going…going…GONE!

Ideally, technology companies are bought, not sold. Employing the right sale strategy ensures an optimum transaction value.

Gunther Hofmann is a Vice President of The Brenner Group and has done extensive work in valuations, M&A, venture capital, and corporate finance with significant international experience in small firms as well as global corporations. Gunther earned a Masters Degree in Electrical Engineering and Business Administration from Darmstadt University of Technology in Germany, and was a Visiting Scholar at UC Berkeley. He is a holder of the Chartered Financial Analyst designation, and a member of the National Association of Certified Valuation Analysts. Gunther is Chairman of the Software/IT Industry Group of the German American Business Association (GABA).

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It is based on an exhaustive survey of commercial bankers, asset-based lenders, mezzanine capital investors, private equity sponsors and venture capitalists. It provides insights into everything from the critical ratios commercial banks expect when extending credit to the average closing fees charged by mezzanine investors.

Rates of Return – what VCs want

What caught my attention and gave this post its title is the calculation of implied expected rates of return of venture investments.

Investors were asked about their expected sales multiple (target sales prices to total venture investment ratio). As can be expected, the average ratio decreases from 8.2x for a “Stage 1” company (Two guys in a garage, or more formally according to AICPA: “No product revenue, limited expense history, incomplete management team with an idea, plan, and possibly some initial product development”) to 3.9x for a “Stage 6” company (“Established financial history of profitable operations or generation of positive cash flows”).

So far so good.

Respondents were then asked about their anticipated time to a liquidity event. Again, as expected, the timeline shortens from an average of 6.2 years for a Stage 1 company to 3.8 years for a Stage 6 company.

With both numbers in hand, the authors then calculated the implied rate of return.

The average implied expected rate of return actually increases from 40.5% for a Stage 1 company to 43.3% for a Stage 6 company.

In other words, this would mean that VCs require a higher rate of return from an investment in a company with lower risk. This does not quite conform to financial theory.

How come?

1. Black Swan Hunting

First, VCs aren’t really going for an average return, but they are looking for the outlier that will carry the return for the portfolio. In essence, they’re “black swan hunting”. The 6.2 year estimate for the time to exit of a Stage 1 company may be a realistic average. But the 8.2x exit multiple might be better understood as a hurdle ratio for a base case: An Early Stage VC investor is unlikely to invest in any company (or at a valuation) that does not have the potential to return such a multiple. In the end, of course, most investments don’t pan out that way. But hopefully, a select few in the portfolio will outpace that number by far.

2. No incentive to invest in early stage deals

Secondly, and questioning the viability of Early Stage Venture Capital investing on a more fundamental level: If above estimates are correct in reflecting the current reality that the expected returns from Early Stage investments aren’t significantly higher than Late Stage investments, who would want to invest in Early Stage deals? And indeed, for the second quarter 2009, an analysis of 89 financings conducted by law firm Fenwick and West pegs the percentage of Series A and Series B rounds at 35% of all financings, down from more than 50% in the third quarter of 2007.

And finally – coming back to the title of this post – I believe that respondents are underestimating the detrimental effect that compounding has on their rate of return: The additional time to exit chips away from a healthy return. I would yet want to meet the Early Stage VC who invests with an expected IRR as low as 40% on an individual investment.

The authors of the Private Capital Markets Report are planning to include actual return estimates for the different stages of investment in future editions of the survey. At that point we will be able to quantify exactly how bad VCs are at their math.

In the meantime, I encourage any investor to participate in the survey.

Read more about Silicon Valley news, trends, and commentary in The Brenner Banner

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