VCs Are Getting More For Their Money

The IT rebound that's helping propel the U.S. economy has yet to be reflected in the valuation of IT firms getting funds from venture capitalists. The median valuation of an IT firm before receiving VC money fell to $8 million in the second quarter, down from $9 million in the first quarter, according to a study released Thursday by investment information provider VentureOne. In the second quarter of 2002, VentureOne pegged the median valuation of an IT firm before receiving VC money at $11.1 million. Except for an occasional quarterly blip, IT firms' valuations have been steadily declining since peaking at $30.2 million in the first quarter of 2000.

The median pre-money valuation of newbie hardware makers peaked in 2000 at $32.7 million; last quarter, their valuation was a lowly $5.5 million. Likewise, software firms reached a median valuation of $24.1 million before getting the VC cash and have since declined to $6.3 million in the second quarter.

Owners seem more willing to agree to a lower valuation in order to attract venture capital, meaning the investors receive a larger proportion of a company's ownership for the same number of dollars invested. "The VCs are in the driver's seat," says Amity Wall, VentureOne's research operations manager, "because they can be more selective and command terms they want."

Still, VCs shouldn't be too greedy. Says Wall: "VCs should leave management with a good-sized portion of the company to maintain their incentive to drive the company to its ultimate success."