Funding for startups

Have Startup Valuations Stabilized?

Venture-backed startups had to wait longer for fewer investment dollars during the third quarter of 2001. But there are some signs that the valuations of startups, which went into freefall in late 2000, are beginning to stabilize.

Though no one's calling this the bottom of the economic downturn, prolonged stability in valuations is generally a sign that the worst part of a recession may have passed.

Venture-backed communications and networking companies had a median pre-money valuation of $32 million during the third quarter of 2001, according to VentureOne, a venture capital research firm. That's down 55 percent from the year-ago period, but it is also the highest valuation since the fourth quarter of 2000, when the economic bubble officially burst in most sectors. The median valuation for a communications company during the third quarter of 2000 was $72.65 million, the highest in at least six years. That plummeted to a median valuation of $25 million in the fourth quarter of 2000.

What's more, $32 million is slightly higher than the six-year median valuation for the communications sector, which is $29.5 million. These numbers appear to indicate that venture valuations are returning to a long-range norm, a sign that the climate is beginning to stabilize for VCs and startups (see VCs: Guilty or Innocent? ).

Despite the fact that valuations appear to be stabilizing, that doesn't necessarily make it any easier to find money. And because many companies raised money at the sky-high valuation levels of 2000, they risk serious dilution in taking money at the new, lower levels.

Only 9 percent of the venture-backed companies eligible for a Series B financing round during the third quarter were able to get the needed funding, according to VentureOne. During the year-ago quarter, roughly one out of every six companies got the Series B funding they needed.

The Series B market was at its frothiest during the fourth quarter of 1999, with some 22 percent of the eligible pool of companies getting Series B financing.

Companies who did get their Series B funding in the third quarter of 2001 had to wait, on average, nearly 14 months between their first and second funding rounds -- the longest average wait since at least late 1995, VentureOne says.

"I think that in general there are still great opportunities in the communications sector," says Erel N. Margalit, managing partner for Jerusalem Venture Partners. "However, specific individual companies in this sector still continue to have trouble raising money."

If the wait didn't kill companies seeking funding, the less weighty investment amounts might have. Venture-backed communications companies raised $1.58 billion in 91 funding rounds during the third quarter, compared to the astonishing $6.18 billion raised in 205 rounds during the year-ago period, according to VentureOne and PricewaterhouseCoopers. In one year, the size of the average funding round dropped to $13 million from $19.75 million.

Given the lack of liquidity opportunities, its no surprise that venture investment amounts have dropped off so significantly (see VCs Wait for Liquidity).

The companies that have found funding have needed to settle for lower valuations. Venture-backed company valuations declined across almost all industry segments during the third quarter with one noteworthy exception -- the communications industry, which includes optical networking companies.

"My recommendation to the people who have been dedicated to the communications space is to keep at it," says Margalit. "The medical field and other industries may seem hot right now, but in a time of difficulty, people should focus on things they know best."

- Phil Harvey, Senior Editor, Light Reading
Page 1 / 2   >   >>
HarveyMudd 12/4/2012 | 7:33:48 PM
re: Have Startup Valuations Stabilized? Many VCs fund the same type of companies and then attempt to sell these to larger publicly held companies. Most of these sales are based on propoganda and other corrupt means. This tends to destablize larger companies such as Lucent, Nortel, Alcatel and Siements,etc. The VC funded VC companies boast of technologies which they do not have. Most rewcently Lucent and Nortel have been victimized by many these VC funded companies.

The VC company, for example, has funded over 600 optical cvompanies? DSo we need these many optial companies? Any start-up that has the world optical appearing some where in its presentation received funding from the VCs.

There were also too many corrupt "enterpreneurs" who cheated VCs. This mostly happened in the Silicon Valley Area and it is most likely to happen in this area. People who have never received funding did receive funding, In many instaces the money was given without any restriction.

Since the VCs do not spend their own money, it is very easy to get funding by unscrupulous people.

A lasrge majority do not understand even the simple technology, yet fund companies.

VCs have no accountability in spending someone else's money.

VCs also get paid very handsomely for doing very little.

There are now over 70 Storage start-ups. Perhaps only 4-10 of these companies would succeed, but they have received huge sums of money from the VCs.

It used to be that the valuation of the company depended on sales that the company generated, But VCs throgh their propoganda machnery started to sell the start-ups even before it sold its product.

More needs to be said about the corrupt VCs and serial starters of start-ups.
msoptics 12/4/2012 | 7:33:46 PM
re: Have Startup Valuations Stabilized? You have just described the beauty of Capitalism.

The concept is simple:
1) Large investments creates competition (vaper ware or not)
2) Competition creates change
3) Change forces large companies to focus, small companies to walk their talk
4) In the end you have a streamlined well defined industry set to provide end users real value.

I would say we are somewhere in step 3.

It's important to note however, this cycle begins with investors who simply want to make money (just like you or I).

let-there-be-light 12/4/2012 | 7:33:45 PM
re: Have Startup Valuations Stabilized? Yes, the "beauty of capitalism". I think most of us know how it's supposed to work (and does work). On the other hand, I have to agree to some extent with Harvey, in the sense that we (society as a whole) have been extremely wasteful with resources, have allowed GREED to drive our behavior, and somewhere along the line, we seem to have lost the ability to be honest with each other.

I remember reading a post recently from someone who had got into the optical industry not too long ago and he was commenting that the level of dishonesty in our industry was very high relative to what he had been used to. I can believe that. I remember the good old days when optical was a field for boring engineers and our idea of marketing hype was a nice, shiny color brochure (as opposed to a black and white photocopy). When we started building million-dollar booths just to show off at some event (you know what I mean), I knew that something was going horribly wrong.

Sure, in the end, the strong will survive, and the end user will get real value, as you say, msoptics, but there are a whole lot of wrecks (human, financial, emotional,....) along the way. Did we really have to pay that price? I guess that's the dark side of the "beautiful capitalism"

In the meantime the hype wagon has rolled on to other pastures (watch out, still-innocent biotech engineers!!)
netskeptic 12/4/2012 | 7:33:42 PM
re: Have Startup Valuations Stabilized? ??? Greed, what greed ???

Considering amount of money thrown by VC towards people who had no hope to repay it, I would not be surprised that some VCs would change their status to non-profit philantropic organizations before the tax year ends.

Most of us were on the receiving end of the one bigest philantropic efforts known to the humanity, I do not think there is prudent to speak about VC's greed in this context.




trends 12/4/2012 | 7:33:42 PM
re: Have Startup Valuations Stabilized? Yes, we live in a market driven, capitalistic society. Yes, VCs "sell" their funded companies and technologies. Should we expect less from them? The problem is not the environment, nor the way VCs pedal companies. The problem is the lack of investigation and over-reaching by the likes of Lucent and Nortel and Alcatel.

Use to be that in heady days, large companies would sell their over-priced stock on the open market, using the cash for internal expansion or just sock-it-away. In drier times, such as now, they would use reserve cash to carry the company or to buy back depressed shares.

Now adays, it seems more important to expand through acquisition. "What is the most direct path to convince investors that we are a progressive company that can bring new technologies to the market?" That seems to be the question that is asked, for the sole purpose of proping-up near-term share prices.

So, if you are looking to place blame for the situations Lucent or Nortel or Alcatel now find themselves, look right at the managers at the top. These market cycles are not a new phenomenon. The new thing is managers seeking short-term gains at the expence of long-term stability. In essence, they are taking on the risks that VCs have historically taken. I wonder how many people would have invested in those "larger more stable" companies if they had understood the the real risks?

The best player in this game seems to be Cisco. They didn't really reach for technology at any price. (Well, maybe Monterey.) Their bottom line and cash reserves show it.

Kindest regards.
skeptic 12/4/2012 | 7:33:41 PM
re: Have Startup Valuations Stabilized? Many VCs fund the same type of companies and then attempt to sell these to larger publicly held companies. Most of these sales are based on propoganda and other corrupt means. This tends to destablize larger companies such as Lucent, Nortel, Alcatel and Siements,etc. The VC funded VC companies boast of technologies which they do not have. Most rewcently Lucent and Nortel have been victimized by many these VC funded companies.

Lucent, Nortel and Alcatel were victimized by
their own management. Not by VCs or startups.
If the leaders of one of these companies decides
to make a disasterous acquisition, refuses
all recomendations against the deal, and the
board of directors or senior management will
not step in, there is no way to stop the deals.

Look at Hewlett-Packard/Compaq. Nobody outside
of HP's senior management likes the deal. But
the CEO (from Lucent by the way)
will not back down and seemingly nothing short
of a proxy fight among the shareholders can
stop the deal.

When CEO's can act without any sort of
accountability or restraint, bad things are going
to happen regardless of VCs or startups.

In the case of some of these companies the
only pressure on the CEOs was to increase earnings
regardless of how that was done. Nobody cared
what they did as long as the earnings were
right. Even it was suicidal ideas like loaning
unproven customers money to buy products were
ignored because the earnings were good.

rjmcmahon 12/4/2012 | 7:33:40 PM
re: Have Startup Valuations Stabilized? The VC model seems to be replacing internal research groups, research groups which used to be part of the large corporations or funded by govt defense contracts.

Does anyone know of a better way to fund innovation?


BlueWater66 12/4/2012 | 7:33:37 PM
re: Have Startup Valuations Stabilized? I think the VC model actually works well. Internal research at large companies is good, but the "stakes" are much lower. A start-up is required to develop a ground-breaking technology, commercialize it and maintain a small cash burn. They are usually required to make all this happen in under four years. That involves much more than someone at IBM-Research developing a new transistor that won't see commercial applications for 15 years.

Also, there was an earlier message that implied entrepreneurs "cheat" venture capitalists and acquiring companies. Get real! The VCs are an extremely sophisticated group. They can also be ruthless. Acquiring companies can always choose to stay competitive by funding internal research and adequately compensating their employees. Acquiring companies are also G«£expertsG«• in their industries and should have a good grasp of a start-ups value. It is a simple G«£return on investmentG«• and G«£legal contractG«• discussion. An acquiring company negotiates performance based payout, calculates accretive financial impact, employee vesting, non-compete agreements etc. There is a massive legal framework defining an acquisition. There is also a personal relationship element that needs to be evaluated. If a VC or large acquiring corporation doesnG«÷t know what they are doing, then G«£competency issuesG«• should be the focus of this discussion.

Obviously, a gold rush mentality is bad. We saw this in 2000. But the basic model has created MOST of our high technology success stories (Intel, Microsoft, Apple, OracleG«™)
lightmaster 12/4/2012 | 7:33:37 PM
re: Have Startup Valuations Stabilized? The VC funding of startups which are sold to larger companies is in and of itself a neutral process (well, sort of). It has generated successes, such as Ciscos entire LAN switching business (bought 3-4 startups), the Ciena CoreDirector (bought from Lightera), and the Cisco 454 (Cerent). It has also produced some dismal failures (Just about everything that Cascade bought, everything that Cisco bought in optical other than Cerent).

IMO, the aquiring company is ultimately responsible. They are responsible for due dilligence to make sure they are not buying crap. They are responsible to make sure that the aquired company will be a good fit technically and culturally, which can be a problem even if it is a good company. AND they are responsible for succesfully integrating the new business without killing it in the process.

We can blame all of the failures on VCs selling garbage and companies being too dumb to know it, and there are certainly good examples of this. However, there are just as many examples of large companies buying the wrong "good" company, or failing to integrate it properly. This is NOT easy.
lucender 12/4/2012 | 7:33:31 PM
re: Have Startup Valuations Stabilized? > Considering amount of money thrown by VC towards people who had no hope to repay it, I would not be surprised that some VCs would change their status to non-profit philantropic organizations before the tax year ends.

I remember a joke from the late 80's about how if a VC-funded company folds but other people are able to somehow benefit from the technology that was developed, then the VC's can be re-labeled "Venture Socialists."

The big companies like Lucent, Cisco and Nortel were all worried that there was a big party going on and they weren't going to get any of the booze. In some cases, the purchases looked like panic (like LU paying $24B for ASND!).
Page 1 / 2   >   >>
Sign In