Today, BusinessWeek published my story based on an early and exclusive look at Fenwick & West’s survey of trends in venture capital financing from the fourth quarter of 2008. It’s the first survey I know of that digs into the gory details of the venture world from the end of last year when the recession gripped the economy.
Here’s the top of the story:
Venture Capital and Startups Feel More Pain, Study Says
Startup valuations are falling and venture capitalists are driving harder bargains, according to a survey by California law firm Fenwick & West
Like the rest of the economy, the world of venture capital and startups is starting to feel more pain from the deepening global financial crisis.
That’s the main takeaway from a new survey detailing trends in venture capital investments during the fourth quarter of 2008 by the California law firm Fenwick & West.
The survey, which analyzed the terms of venture deals for 128 companies headquartered in the San Francisco Bay Area, found that valuations are falling for startups and that venture capitalists are driving harder bargains. The silver lining: The fallout so far is not nearly as bad as it was during the dot-com bust, when hundreds of companies went under and stratospheric valuations came crashing down to earth.
DOWN ROUNDS ON THE RISE
Sure, there were some startups last quarter that secured a higher value on their latest investment round, such as online vacation rental site HomeAway. But, of the 128 companies that received financing, 33% of them experienced so-called down rounds, or an investment that placed a lower valuation on the company than it received in the previous round of investment. More ominous, the percentage of down rounds rose every month at year’s end, hitting 45% in December. “Each month things got worse in the fourth quarter,” says Barry Kramer, the Fenwick & West partner who runs the survey. The highest percentage of down rounds occurred in the first quarter of 2003, when 73% of the companies surveyed by Fenwick & West suffered down rounds.
With the recession worsening, most financiers and lawyers do not expect the situation to get better anytime soon. They predict valuations will continue to decline until the overall economy begins to improve. “Private values really do lag,” says Kate Mitchell, managing director with Scale Venture Partners. “More down rounds will come in 2009.”