The rate of companies in the first rounds rose to about 38% of recruitments in 2019 * when market research becomes archeology

This is according to an annual survey on the legal terms of venture capital transactions for 2019 conducted by the law firm Sheblat & Co. *

The rate of companies in the first rounds rose to about 38% of the rounds, the highest rate since 2015. This is according to an annual survey regarding legal terms of venture capital transactions for 2019 conducted by the law firm Shablat & Co. in collaboration with the law firm Silicon Valley Fenwick & West LLP.

Lior Aviram, senior partner at Sheblat & Co.: “Reality sometimes surpasses all imagination, so our survey this time has historical and research significance, more than practical and points to current market conditions: the survey covers 2019, a year crowned in the press and all polls as the peak year Exits in Israeli high-tech and characterized by large recruitments.
And unsurprisingly, our survey also indicates a year of high tide that is inherent in favorable conditions in recruitment. ”

This rate of investments in the first round is even higher than that surveyed in Silicon Valley (“only” 33%). And the various preference conditions of preference shares over the share rights allotted in previous rounds – have moderated dramatically. The rate of use of the right of priority in the division compared to the preference shares of the previous round (“senior liquidation preference”), which fell as early as 2018, continued to fall to the lowest rate we ever surveyed – 51%, compared to 70% or more in previous years. The rate of use of the right of way in distributions was nevertheless high (80%), which can be seen as an expression of fear of declining valuations of companies that have sometimes raised very high values.It should be noted that in Israel fewer recruitments were observed at such stages compared to Silicon Valley. % In Silicon Valley, which again demonstrates the tendency of Israeli companies to end their independent path earlier, and the support for a longer independent life span in Silicon Valley.

The dramatic change was observed in the rate of use of the “right to participate in the distribution” of the preference shares (“participation rights”), which dropped to only 16% (!); This is a dramatic decrease compared to the usage rate of quite a few years in a high majority of the rounds, which moderated in 2017 and 2018 to a third of the rounds, and now constitutes a minority. In this sense, the industry has taken a big step towards the conditions prevailing in Silicon Valley, where the rate of use is one-tenth of the rounds. ” Aviram explains. Another dramatic and surprising change was observed in the decrease in the rate of use of interest accrued on the amount of investment that will be distributed as a priority to investors. From high rates of most rounds, in 2019 it dropped to just 13%! This is still 3 times the use rate of Silicon Valley which stands at only 4%.
It is clear that this optimistic report will be published during a global crisis, which will also give its signals on the high-tech industry. “

In order to still benefit from the data, the survey authors compare the industry’s recovery from previous crises (the bursting of the dot-com bubble and the subprime crisis), ”
We have learned that the main effect is a reflection of a reduction in the “money” available for investment as follows:

• The proportion of new companies in which funds invested after the crises was low – 22% in the second half of 2003 and 16% in 2009. In 2009 almost half of the rounds (46%) were of later rounds of D and above, reflecting the expected conduct of fund support in existing portfolio companies and the reduction of new investments.
• An increase in the rate of decreasing value rounds and a decrease in the rate of increasing value rounds, however, while in the period after the bubble burst the rate of decreasing value was 62% in the second half of 2003, and the rate of increasing value was only 10% for this period, after the subprime crisis. At the rate of increasing value rounds, but they still constituted the majority – 53% in 2009 and 54% in 2010 compared to rates of 85% in the second half of 2007 and 82% in the first half of 2008.
• An increase in the use of multiples over money has been observed in the case of multiples (which is a type of appendix element for determining the value of the company, and in this sense is a wheel for a decrease in the observed value rounds).
• There has been an increase in the rate of use of the pay to play conditions, which means that anyone who does not continue to support the company in the following rounds will be harmed by his rights. This is also a clear expression of an environment in which there is financial distress.
  Naturally, there was also an increase in the rate of rounds in which the company’s shares were reorganized, we had to reorganize their capital due to extreme declines in value. It is interesting to note that according to our survey data and other published surveys (fundraising, capital raising for companies, exits) After each of the crises (the bursting of the dot-com bubble and the subprime crisis) it started after a good few quarters – between two and three years later.
  Finally, an optimistic tone – in light of the analysis of the effects of past crises, it is to be hoped that the dramatic improvements in the preferential rights of preference shares, first observed in this survey, will be maintained and continued in investments made in 2020.