Valuations fall whilst fund-raising holds firm

VentureOne, the venture capital data provider, reports on a continued downward trend in VC portfolio company valuations in the US, yet is upbeat about the fundraising environment for the year.

The overall pre-money valuations of venture-backed companies in the US have hit a two-year low of $17.7m (E19.5m) median, according to VentureOne. This compares to a peak of $29m seen in the third quarter of last year.

The report, which is based on in-depth interviews with private equity CEOs, CFOs and their investors in the US, has also seen second-round valuations decrease dramatically, falling from a median $25.7m million in the first quarter of this year to $19.2m in the second. Seed and first-round valuations also declined, although less steeply.

There was good news, however, for later-round valuations, which increased from $41.4m to $46.4m. This increase follows on from what had been the sharpest decline on record, when values more than halved, falling from $84.9m in the fourth quarter of 2000 to $41.4m last quarter.

The report indicates that M&A continues to provide a viable liquidity alternative to the still moribund IPO market, which saw only four venture-backed companies IPO this quarter. All the M&A transactions involved information technology companies, with the software sector represented most heavily.

VentureOne president and CEO Dave Witherow said. “The liquidity market has always affected private company valuations, and given the current limited IPO prospects and declining M&A values, it’s reasonable to expect a negative impact. But being prepared doesn’t make it any easier to accept. Entrepreneurs who raised money at higher valuations are facing much more difficult hurdles now.”

But it’s not all doom and gloom. Witherow observed that venture capital firms are still raising money at a “healthy pace”. “When valuations come down sufficiently, interested investors will have ample funds to back quality businesses,” he says.

In fact, venture capital firms have raised $27.8bn from their limited partners in 76 funds in the first half of this year. VentureOne concludes that fundraising for the year is likely be the second-best on record, short only of 2000’s record $72.3bn.