VC Valuations Are On The Rise: Is Your Startup Worth More?

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VC Valuations Are On The Rise: Is Your Startup Worth More?

 


News was released today by VentureOne (owned by Dow Jones), which tracks venture investment data.  Venture-backed companies are now getting pre-money valuations (pre-money means the value of the company before the capital is invested) that are the highest they’ve been since the peak of the last bubble in 2000.

 

Median pre-money valuation of U.S. VC-backed companies reached $18.5 million in 2006 (vs. $15 million in 2005).  At it’s peak in 2000, the median valuation was $25.1 million.  Sounds like valuations are inching back again.  I’m not sure if this is good news or bad news.

 

Of course, for early-stage startups the information that is much more relevant is what the valuations were for first-round companies.  In this case, the pre-money valuation was $6.2 million vs. the $5.9 million in 2005.

 

“That’s all fine and dandy,” you’re thinking, “but what does that mean for me?”.  Well, that depends.

 

For most entrepreneurs, you’re probably not raising venture money – and for those that are, you’re probably not going to succeed in raising it.  Nothing against you or your company (I don’t know you, and don’t know your company), but the numbers are working against you.

 

So, the question is, if you are not raising money does it help you or hurt you that VC valuations are up?  I find this to be an interesting question.  First, I am going to guess (because it happens to be true in my case), that when VC valuations are up, the price other types of investors are willing to pay (such as angel investors) are up too.  For many of us, that’s good news.  Also, VC valuations can be seen as a proxy for the overall boisterousness (uncanny, I thought I had just made that word up, but it passed the spell-checker) of the market.  

 

Overall, for no particularly rational reason, I generally feel that the rise of VC valuations (even though I’m not raising VC money) is a good thing for startups.  There’s a small part of me that thinks that since general “market prices” are rising for startups, my startup is worth more too.  But, I could be totally delusional and uninformed.

 

What do you think?

Posted by Dharmesh Shah on Wed, Feb 21, 2007

COMMENTS

There's a great expression: "____" rolls down hill. In the startup valuation business, I'm afraid it all starts with the now frothy public ipo market for tech startups which then influences the m&a market (as an alternative) which both influence the venture valuations which ultimately influence what angels value things at. In the startup world "valuations" roll down hill.

I wonder if we should have been more aggressive with the valuation of our own angel round????? (smile)

Bh.

posted on Wednesday, February 21, 2007 at 11:39 AM by Brian P Halligan


Here's another way to think about it, Dharmesh. Overall valuations have been increasing markedly, while first institutional round valuations have increased only slightly. So that means that later round valuations have been on a steep increase (and that is supported by the data I have seen elsewhere for the years 2000 to 2005). So what conclusions to draw? If your business matures to the point where it can be attractive to a typical venture 'B' or 'C' round investor (technical risk removed, market risk removed, proven leadership, proven execution, and huge addressable market), there will be a lot of competition for the chance to invest, and that will be reflected in the price paid for your equity. What about businesses which haven't yet -- or will never -- reached that level? It's hard to draw any conclusion from this data. I can only say that the oceans of cash sloshing around the global economy these days looking for a home haven't yet found their way to the level of Series 'A' venture investors (remember that valuations have barely budged at Series 'A'). And that's unfortunate for the many great entrepreneurs out there trying to build their businesses, because it means there aren't that many Series 'A' investors competing for the chance to help make those businesses successful.

posted on Wednesday, February 21, 2007 at 12:00 PM by Geoff Mamlet


Sometimes data gets aggregated to a point where it loses most of its meaning, and that probably happened here for a few reasons: (1) Since this data aggregates across INDUSTRIES, it hides rising valuations in one industry and lower valuations in other industries (quote from Venture Wire: "in health care U.S. companies raised later-stage rounds at a median pre-money valuation of $49.5 million in 2006, up from $40 million in 2005" [this 24% growth in valuation off of a base number about 1/3 higher than the median could really skew the statistic] (2) For the same reason, it hides different valuation trends by ROUND OF FINANCING, so while the MEDIAN valuation rose, this is from higher valuations in later rounds, while angel and A rounds seem to be staying about the same (quote from VentureWire: "The median pre-money valuation for later-stage financings of U.S. technology companies rose to $33 million in 2006, up from $29 million the year before. By contrast, the median pre-money first-round valuation in 2006 nudged to $6.2 million from $5.9 million in 2005") (3) Finally, because it is an overall median, even if the valuation per round of financing stayed the same, but there were more later stage deals, then this median would rise because generally valuations increase in later rounds (since companies not doing well can't raise more rounds usually) - this may or may not be the case right now, I don't have data on this one ;) Basically, as with all these VC stats, I think you should just focus on making your company successful (or funding and building companies that will be successful) and leave the aggregate stats to Dow Jones and the Fed. If you build value in your company, it will all work out in the end, no matter what the stats say.

posted on Wednesday, February 21, 2007 at 12:33 PM by Mike Volpe


Sometimes data gets aggregated to a point where it loses most of its meaning, and that probably happened here for a few reasons

posted on Sunday, July 19, 2009 at 11:34 AM by sohbet


I wonder if we should have been more aggressive with the valuation of our own angel round?

posted on Sunday, July 19, 2009 at 11:37 AM by yonja


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