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Behind the VC numbers: Higher prices, less control

October 17, 2013: 2:20 PM ET

Five unexpected venture capital deal trends.

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FORTUNE -- Venture capitalists invested $8.1 billion into 981 U.S.-based companies last quarter, according to PitchBook Data. That's basically flat from the prior quarter, and suggests that year-end 2013 totals will be a bit lower than the 2012 tally.

So that's the top-line. What lies beneath, however, is much more interesting.

Fortune has gotten a sneak peak at PitchBook's new VC Valuations and Trends Report, which has financing terms on more than 11,000 deals (including 2,900 that have closed since 2012). Here are five notable data points:

1. VCs are taking smaller stakes

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Venture capitalists are acquiring smaller and smaller stakes of portfolio companies upon investment, particularly on Series A deals. Back in 2004, VCs acquired 40% of a company on Series A rounds and 24% of a company on Series D rounds. For the first three quarters of 2013, those figures have fallen to 29% and 13%, respectively.

2. Fewer VC protections

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Not all investment returns are created equal. Venture capitalists have historically stacked the deck in their favor, by structuring deals with liquidation preferences (i.e., VCs get paid back before common shareholders). They've also been known to insert "liquidation participation" language, which basically helps them get additional priority after the aforementioned preferences are completed.

But PitchBook reports that the number of VC deals that include participation (both capped and uncapped) has fallen from 71% in 2008 to less than 35% over the first three quarters of 2013. Moreover, the percentage for flat or down rounds -- where liquidation participation is most important to VCs -- is now below 50%.

3. IPOs aren't always the richest exit

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There have been more VC-backed IPOs in 2013 than in any other year since 2000, which also has contributed to a boom in late-stage, "pre-IPO" valuations. For example, median pre-money valuations for rounds Series D or later hit a record $114 million in Q3. But PitchBook finds that the difference between final round and exit valuations is actually greater from acquisitions than from the time of IPOs. That's been true since 2011, but the gap has grown substantially so far this year.

It's worth noting that such data is not necessarily reflective of ultimate VC returns, given that firms typically hold onto shares beyond the IPO (and, this year, that's generally been a smart move). But it also shows that, to achieve IPO upside, VCs often have to begin from a lower starting point.

4. Series A crunch is real

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Recently I wrote about how startups can screw themselves by taking high seed-stage valuations, only to find out that no one will give them an up-round for Series A. The above chart illustrates the problem. Median pre-money seed valuations have climbed by 112% since the beginning of 2010, while Series A valuations have only increased by 26%. Moreover, the median size of seed rounds has climbed from $1 million to $1.5 million. Yes, there is still typically some room for companies to get upside, but that window has narrowed significantly (and, in some cases, completely).

5. Most VC funds are small

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Two years ago, the majority of VC funds raised were at least $100 million in size, with nearly one-third coming in at $250 million or more. Today that figure has fallen to just around 40%, with nearly half of all VC funds actually below $50 million. To be sure, there is a growing concentration of capital within fewer hands -- just a small handful of VC firms control the vast majority of all dry powder -- but the typical new VC fund is more likely to be of the "micro" variety than it is to be a more conventional early-stage model.

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About This Author
Dan Primack
Dan Primack
Senior Editor, Fortune

Dan Primack joined Fortune.com in September 2010 to cover deals and dealmakers, from Wall Street to Sand Hill Road. Previously, Dan was an editor-at-large with Thomson Reuters, where he launched both peHUB.com and the peHUB Wire email service. In a past journalistic life, Dan ran a community paper in Roxbury, Massachusetts. He currently lives just outside of Boston.

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