Startup valuations have risen sharply in the last few months. While there are some acquisition rumors that could help support these valuations, confirmed liquidity events do not seem to justify the increase.
Clarence Wooten, an entrepreneur and venture capitalist, has a theory as to why this is happening. While companies today need far less capital to launch than they did a few years ago, venture capitalists are for the most part still stuck with huge funds and need to invest $3-5 million to justify the time commitments and opportunity costs associated with an investment. While angel investors are taking a more prominent role in funding some startups, Clarence thinks that VC’s are simply raising valuations so that they can invest the required $3-5m, while still taking just 20-25% of the equity in an A round.
I think he may be right.
Of course, competition for deals from Google and other public companies with super-valuable stock are also pushing prices up.
Michael,
Do you think this is a general trend that will last next year, or is it largely cause by the “hangover”, uninvested 2000 funds that have to be returned if not invested this year?
ohh Web 2.0 how I love you. This is a very good post. Many forget the relationship between the venture firm and their investors, and how it impacts the VC firm’s investments into startups.
-Jason L. Baptiste
Mike,
Good post, and I couldn’t agree more. Matt Marshall at SiliconBeat had some similar thoughts a few days ago and I also posted a similar thought on my blog the other day in case you’re interested.
J
http://woodrow.typepad.com/the_ponderings_of_woodrow/2005/11/theres_excess_c.html
OK, I think this is an interesting point, but I think you are not right. The reality is that VC’s are now very careful, where they invest. They do not just put their money the way they used to in the 90′s. They are looking for stabile startups, with a better biz models, with revenues, with a good management team and clients. When a startup, has all of this, they would require higher investment and evaluation at a lower pie cut. Startups, as you pint out are at a much better position to get off the ground now a days with much less startup costs. Technology is cheap, outsourcing is even cheaper and many entrepreneurs have cash to bootstrap. There are a few possible scenarios there now. A startup can go to an angel for up to a 1 mil. They could than go directly for an M&A w/o the VC’s. They could also try to get in the corp M&A directly w/o the angel or the VC steps at all.
We are doing this exact thing right now. I am just now starting to look around for money, as we are about to get a few clients in first and revenue on the books. This way I can ask for higher evaluation and give out a much smaller chunk of Blogtronix.
Cheers,
Vassil