TechWag

Image via WikipediaSeattle VC’s and Angels are talking about the valuations of the companies that they are funding, and one of the more interesting comments to come out of the conversation is “when valuations go up, the market is overheating”. I have heard more than one Seattle Angel and VC say that same comment, and it seems like companies are either not paying attention to the economy today, or the valuations of companies really are overheating, and that is another sign of the Web 2.0 Bubble.

The National Venture Capital Association has an excellent press release that discusses the valuation structures for companies going back years that anyone in Seattle (or anywhere) should be reading. When the economy tanks, that great idea that might have gotten millions last year, might not even be funded this year. This is why we keep on advocating getting money early in the startup process. The minute you have an alpha product, or are deep in beta testing, this is the time to go and start talking to the backer that you need.

Venture Beat also reports that:

Now lets take a look at some recent valuations at one of the most aggressive venture capital firms in Silicon Valley: New Enterprise Associates. That firm has demonstrated how it has offered very rosy terms to entrepreneurs in recent years, bidding up value levels of companies like SolFocus and SugarCRM by offering large amounts of cash for relatively small ownership stakes. It did so because it believed: 1) the deals were competitive and NEA wanted to participate, and so outbid other venture firms to do so, and 2) because it has more money than other venture firms, and so was mandated to put its money to work. Source: Venture Beat

The party does not have to be over, but the party is going to be scaled back over the next year or two. That is reality, and that is the reality that companies need to start addressing as they get their systems and products going. This does not mean that there will not be some mega deals down the road, those deals will be few and far between, with many smaller deals based on a decreased valuation of the startup. Add to that the shock that the Entellium debacle over the week and you know that Angels and VC’s are going to be much more hesitant to loan money to anyone for any reason. Tough economic times mean that businesses have a harder time.

The outcome of the presidential election will influence some of this, but that is months off until the new president takes office. The financial bailout will also take months to trickle into the financial systems, with no guarantee that they will help unfreeze the credit markets that angels and VC’s tap at times. When money is tight, that influences all businesses, not just yours. A realistic valuation of what your company is actually worth today will help you get the money to survive into the good times and the party that will return once we get over this massive hang over.

Tags: vc, angel, valuation, Entellium, money, tight, financial crisis, president, venture beat, advice

Tags: web 2.0, funding, technology, Participation, business //