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US valuations down 50 per cent since peak

Venture-backed companies in the US are having to dig extremely deep to secure funding, says study.

Just how hostile an environment US entrepreneurs are trying to build businesses in is evidenced by new data published this week by VentureOne, the venture capital data provider owned by Wickes Business Information.

Accoding to the research, the third quarter of 2001 took another turn for the worse as median pre-money valuations of venture-backed companies fell from $20m in Q2 to $15.4m. Valuations are now down almost 50 per cent on the $30.1m peak reached in Q1 2000.

During the third quarter of 2001, a mere 9 per cent of companies eligible for a second round of funding were able to complete such a round, said VentureOne. Classified as ‘eligible’ for B financing were 2,050 companies, double the number of relevant businesses five years ago.

At the peak of the venture capital boom in the fourth quarter of 1999, 22 per cent of eligible companies received second round financing. Between 1996 and 1998, 16 to 18 per cent of relevant companies received backing.

The data confirms fears that a fast-growing number of young businesses are on the verge of financial oblivion as venture firms are unwilling – or unable – to invest. “The venture industry appears to have ‘excess inventory’ in terms of venture-backed companies, which will need to be worked through”, said David Witherow, president of VentureOne. “This will be a painful period for many entrepreneurs, since it means that numerous companies will not be able to withstand the downturn.”