FALLING START-UP COMPANY VALUATIONS

Silicon Valley law firm Fenwick & West publishes a quarterly survey of venture financing, and not surprisingly the first half of 2009 was not pretty.  They report that for the last two quarters "down rounds" have outnumbered "up rounds" in venture financing of start-up companies - meaning the valuation of the start-up companies they are funding is falling.  In a down round, new stock is issued to investors at a lower valuation than previously issued stock.  This hurts previous investors as the value of their earlier investment falls.  Down rounds in the second quarter outnumbered up rounds by 46% to 32%.

From the NYTimes article about the study...

For context: in the salad days of 2007’s third quarter, there were some 79 percent up rounds and only 14 percent down rounds.

“These two previous quarters were by far the worst quarters for valuations in a good number of years, going back to the dot-com bubble bursting,” said Barry Kramer, a partner at Fenwick & West. “For the venture capital environment to work, you are supposed to have nontrivially more up-rounds than down-rounds. This is depressing to venture capitalists.”

The law firm, which surveyed 89 deals, or around half of the financings in the Valley last quarter, also found that the average valuation for companies receiving venture capital during the quarter decreased by 6 percent from the companies’ prior financing round. That’s slightly more of a drop than the 3 percent decrease the survey reported in the first quarter. These are the only two negative quarters since the law firm began reporting these statistics in 2004.