Funding for startups

Valuation Deflation in Startup Land

Private optical networking companies have seen their valuations plummet between 50 percent and 90 percent in the past year and are struggling to find financing in a tight venture market, according to a report published this month by Light Reading's subscription research service, Optical Oracle.

The report, compiled after detailed conversations with more than 20 venture capitalists and an equal number of startup executives, shows a growing rift between investors and the entrepreneurs they once funded. Many startups, faced with high costs and a sleepy telecom market, must raise new funding to survive the slowdown. Investors, on the other hand, are reluctant to pump more money into crowded markets and are requiring substantially larger pieces of companies in exchange for capital.

For example, startups such as Équipe Communications Corp. and Appian Communications, two companies funded at valuations close to $400 million in 2000, have likely fallen to half that value in the current market, according to those interviewed.

The fall in valuations follows a precipitous drop in the world financial markets in conjunction with the substantial decline in the market for telecommunications equipment.

In many cases, the drop in valuations has caused extreme dilution for the shareholders of startups seeking additional funding. To cite one instance: BrightLink Networks Inc., which had a post-money valuation (the value assigned after a company has received funds) approaching $500 million during a funding round last year, was forced to go back to the market this year and accept a pre-money valuation (value before investment) of $60 million in the next round of investment, according to those familiar with the deal.

Many experts see the current climate as causing friction between investors and entrepreneurs -- and predict that many companies that don't raise adequate funding will go out of business.

“Anybody that raised money last year at an inflated price is probably going to hit the wall this year,” says Tim Kraskey, a partner at YankeeTek Ventures.

The report, which includes estimated valuations and investment histories of 57 private companies, in addition to a prognosis for the future of optical capital, is available to subscribers of Optical Oracle. — R. Scott Raynovich, Executive Editor, Light Reading

Editor's Note: Light Reading is not affiliated with Oracle Corporation.

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