Overall financing activity in the second quarter of 2016 slowed noticeably from prior quarters. In Q2 2016, Cooley handled 154 disclosable deals, representing more than $1.8 billion of invested capital. Invested capital decreased by 57% from the prior quarter, mainly due to fewer large, later stage transactions. We have found aggregate dollars raised to be highly dependent on a handful of the largest deals of the quarter, and so we would not necessarily expect that the decline in aggregate dollars raised is an indicator of a comparable decline in the overall market. Of particular note was the increase in down rounds during the quarter. In Q2 2016, 21% of all transactions were down rounds, almost a 3x increase from prior quarters and a level not seen since 2011. It will be of particular interest to see if this becomes a trend in future quarters. Median pre-money valuations declined in both Series A and Series D+ transactions, with a significant decrease seen in later stage deals. This points to a more challenging investment environment for many "unicorn" companies.
Deal terms during the quarter mirrored the cooling financing trends. The utilization of drag-along provisions increased to 96% of all Q2 transactions, a level not seen since 2008. Additionally, the data pointed to an increase in transactions with liquidation preferences of greater than 1x, compared to prior quarters. This is another signal of growing investor caution in the current environment.
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Q&A with Aydin Senkut
Aydin Senkut, founder and managing director of Felicis Ventures, sat down with us to discuss Cooley's Q2 Venture Financing Report and his view on the state of VC investing.
On down rounds
: "The best way to counter [down rounds] is for companies to be a lot more hawkish on cash management."
On deal terms
: "The most dangerous takeaway is for every founder to think that they are one of those few companies that can dictate terms even under these circumstances and this market."
: "The IPO market is going to be better than what people think right now."
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Q&A with Aydin Senkut
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