21.2: Venture Capital Survey - Silicon Valley First Quarter 2003

Background -- Fenwick & West analyzed the terms of venture financings for 84 technology companies headquartered in the San Francisco Bay Area that reported raising money in the first quarter of 2003. This compares to 81 deals analyzed in the fourth quarter of 2002. This slight increase is based on improvements in our information gathering rather than any increase in the volume of financings. In fact, various industry publications report a material decline in the volume of venture financings and dollars invested from the fourth quarter of 2002 to the first quarter of 2003.

Financing Round

The financings broke down according to the following rounds:

Series	Q1 '03	Q4 '02	Q3 '02	Q2 '02	Q1 '02
A	15%	13%	15%	11%	7%
B	28%	20%	19%	32%	36%
C	26%	30%	31%	27%	18%
D	13%	22%	24%	15%	29%
E and higher	18%	15%	11%	15%	10%

Price Change

The direction of price changes for companies receiving financing this quarter, compared to their previous round, were as follows:

Price Change	Q1 '03	Q4 '02	Q3 '02	Q2 '02	Q1 '02
Down	73%	68%	67%	52%	57%
Flat	7%	6%	8%	10%	10%
Up	20%	26%	25%	38%	33%

The percentage of down rounds by series were as follows:

Series	Q1 '03	Q4 '02	Q3 '02	Q2 '02	Q1 '02
B	56%	50%	33%	20%	25%
C	68%	67%	71%	60%	62%
D	100%	78%	77%	73%	84%
E and higher	87%	83%	90%	82%	75%

The percentage of new financings that were down rounds continued to increase in Q1 '03. Perhaps most notable is the percentage of Series B financings that were down rounds in the last two quarters.

Liquidation Preference

Senior liquidation preferences were used in the following percentages of financings:

Q1 '03	Q4 '02	Q3 '02	Q2 '02	Q1 '02
68%	64%	60%	56%	62%

The percentage of senior liquidation preference by series was as follows:

Series	Q1 '03	Q4 '02	Q3 '02	Q2 '02	Q1 '02
B	65%	51%	33%	38%	44%
C	73%	67%	55%	55%	62%
D	73%	78%	83%	69%	69%
E and higher	60%	66%	70%	91%	100%

Multiple Liquidation Preferences

The percentage of senior liquidation preferences that were multiple preferences were as follows:

Q1 '03	Q4 '02	Q3 '02	Q2 '02	Q1 '02
40%	37%	32%	41%	58%

Of the senior liquidation preferences, the ranges of the multiples broke down as follows:

Range of multiples	Q1 '03	Q4 '02	Q3 '02	Q2 '02	Q1 '02
>1x- 2x	74%	79%	80%	87%	66%
>2x - 3x	16%	14%	13%	13%	27%
> 3x	10%	7%	7%	0%	7%

Participation in Liquidation

The percentages of financings that provided for participation were as follows:

Q1 '03	Q4 '02	Q3 '02	Q2 '02	Q1 '02
77%	74%	73%	67%	56%

Of the financings that had participation, the percentages that were not capped were as follows:

Q1 '03	Q4 '02	Q3 '02	Q2 '02	Q1 '02
63%	50%	51%	56%	32%

Cumulative Dividends

Cumulative dividends were provided for in the following percentages of financings:

Q1 '03	Q4 '02	Q3 '02
8%	9%	13%

(There are no figures for Q2 or Q1 of 2002 as we initiated our analysis of these numbers beginning in Q3 of 2002.)

Antidilution Provisions

The uses of antidilution provisions in the financings were as follows:

Type of Provision	Q1 '03	Q4 '02	Q3 '02	Q2 '02	Q1 '02
Ratchet	16%	18%	15%	20%	29%
Weighted Average	83%	77%	80%	78%	69%
None	1%	5%	5%	2%	2%

Pay-to-Play Provisions

The use of pay-to-play provisions in the financings was as follows:

Percentages of financings having pay-to-play provisions.

Q1 '03	Q4 '02	Q3 '02	Q2 '02	Q1 '02
14%	25%	18%	18%	20%

The pay-to-play provisions provided for conversion of non-participating investors' preferred stock into common stock or shadow preferred stock, in the percentages set forth below:

Common stock

Q1 '03	Q4 '02	Q3 '02	Q2 '02	Q1 '02
50%	75%	71%	50%	56%

Shadow preferred stock

Q1 '03	Q4 '02	Q3 '02	Q2 '02	Q1 '02
50%	25%	29%	33%	22%

Redemption

The percentages of financings providing for mandatory redemption or redemption at the option of the venture capitalist were as follows:

Q1 '03	Q4 '02	Q3 '02	Q2 '02	Q1 '02
32%	33%	37%	44%	36%

Corporate Reorganizations

The percentages of post-Series A financings involving a corporate reorganization were as follows:

Q1 '03	Q4 '02	Q3 '02	Q2 '02	Q1 '02
19%	21%	19%	11%	20%

Percentages of these corporate reorganizations involving a:

Reverse split of outstanding stock

Q1 '03	Q4 '02	Q3 '02	Q2 '02	Q1 '02
50%	55%	67%	70%	100%

Conversion of senior securities into more junior securities

Q1 '03	Q4 '02	Q3 '02	Q2 '02	Q1 '02
53%	59%	47%	30%	67%

Conclusion

The terms of venture financings were a bit tougher overall in Q1 '03 compared to the already tough terms of Q4 '02. However, with the Nasdaq increasing 16.5% from March 1 through May 13, and with the Iraqi situation hopefully stabilizing, there are reasons for the venture capital financing environment to improve.

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For additional information about this report please contact Barry Kramer at 650-335-7278; bkramer@fenwick.com or Michael Patrick at 650-335-7273; mpatrick@fenwick.com at Fenwick & West. To be placed on an email list for future editions of this survey please go to www.fenwick.com/vctrends.htm.