Valuations Not at Bottom Yet"
August 29, 2002
By Matt Marshall
It's hard to believe there's still air left in the Internet bubble,
but that's what the latest venture capital data suggests. If so,
things could get worse for high-tech entrepreneurs before they get
Sure, a lot of air has been let out already. The valuations on
start-ups -- which are the values that entrepreneurs negotiate with
venture capitalists -- are declining. That means VCs are paying
entrepreneurs less money for an ownership stake.
Median valuations for venture-backed start-ups fell to $10.6 million
in the first half of 2002, which is about where they were in 1996,
according to VentureOne, a venture capital research firm. That's
much lower than the peak of $29.9 million in the first quarter of
But there's still room to head lower, says John Gabbert, director
of research for VentureOne. ``Is the bubble gone?'' he asks. ``That
would mean we've hit a bottom. I don't think we have.''
The fall in 2002 valuations comes mostly in later stage financing
rounds, or for Internet-era companies that are still trying to raise
money even though they're troubled.
But if you look at start-ups funded after the crash, the median
``seed-round'' deal was $3.2 million. That's much lower than the
peak of $5 million in 2000, but still higher than 1995's median
of $1.8 million. So we're not rock bottom yet.
Some VCs, like Vince Occhipinti, partner of the Woodside Fund,
say they're happy with valuations even if they're not as low as
they could be. The quality of the deals are better, he says: Management
teams are sharper and more experienced, business plans are more
focused, and target markets are bigger and real.
But other VCs are insisting on tough terms to make up for valuations
that they say are still too high, according to Nancy Schoendorf,
of Mohr, Davidow Ventures.
That air suggests that VCs still have too much too spend. That
might be what's keeping up valuations: ``There's too much money
given today's pace of investing,'' says Gabbert. He says there's
enough money to fund start-ups for three years.
In the seed stage, the federal Small Business Administration is
helping generate more than $1 billion a year for VC firms to invest
small amounts -- $500,000 to $2.5 million -- in Silicon Valley start-ups.
The SBA argues that this is the ``weak spot'' in the market that
is ignored by bigger venture firms.
But the bigger firms are now returning to their roots, and investing
smaller amounts too. Charles River Ventures' Ted Dintersmith says
his firm made six investments of about $250,000 over the past year.
Vinod Khosla, of Kleiner Perkins Caufield & Byers, says his
investments are averaging about $1 million.
True, many ``angel'' investors -- who specialized in giving budding
entrepreneurs $1 million or less -- have fled the scene. Ron Conway,
who invested piles of cash into Internet-era companies like Productopia,
Livemind and Octopus, still has a headache. He's spending all of
his time trying to save existing companies: ``My fund is not investing,''
But other angels are still anointing start-ups at the same old
rate: Ram Shriram, who runs Saratoga angel group Sherpalo, helped
seed Internet search engine Google in 1998. He's made two new investments
this year, or around the same pace he has in the past.
If there are indeed too many players and too much money, then there's
still more consolidation to come in the VC world -- which means
Postcript: TermSheet reported earlier that Los Altos' Aspen
Ventures acquired funds from Saratoga's Redleaf Group, as a way
to leverage them with SBA matching funds. The name of the merged
firm is Aspen-Redleaf Fund. Aspen-Redleaf will keep two Redleaf
partners on board.
Contact Matt Marshall at email@example.com