Buzz: The Sound of an Inflating Market

Entrepreneurs, dust off those business plans. The gang in the valley is eager to get capital out of their newly raised funds. Inspired by a couple of big exits, VC’s are starting to increase their bets out in the market. The industry moves in tandem. When things feel safe and it looks like the markets (acquisition or IPO) are starting to open up, VC’s start bidding up prices with the assumption that they can be taken out by higher market multiples. I am starting to see a variety of irrational behaviors. Some firms are reloading on sizeable capital raises after having blown through significant capital (and restructuring) during the first bubble. Discipline has not nearly deteriorated as badly as during the 1999-2000 period. My advice to entrepreneurs is to get your warchest now while it is more affordable, but continue your spending discipline honed during the past 5 years. It is very hard to do so with $20 million staring at you. Below is the excerpt from the recent Venture Reporter email:

Mirroring the health of publicly listed information technology and health care companies, median pre-money valuations for venture-backed start-ups in the U.S. hit $18.4 million in the first quarter of 2006, the highest quarterly level since it reached $23 million in the fourth quarter of 2000.

Median pre-money valuations climbed by $3.1 million in the first quarter from the same time a year ago, according to a study released today from VentureOne, which is owned by Dow Jones & Co., the publisher of this newsletter.

Health care companies led the way with valuations in the sector jumping to $29 million from $19.2 million. Within health care, medical device companies continued to have the highest valuations at $34.4 million, while health care devices followed with $22.8 million and biopharmaceuticals at $15 million.

IT deal valuations rose to $18 million from $17 million, boosted by electronics and computer hardware, an area that saw valuations skyrocket to $65.1 million from $25.3 million in the first quarter of 2005. Valuations of communications and networking companies rose to $23.5 million from $15 million, while software saw a similar increase to $17.5 million from $12.3 million. On the other hand, information services dropped to $5.5 million from $17.2 million and semiconductor valuations fell to $18.7 million from $31.8 million. Meanwhile, valuations in business, consumer and retail start-ups increased to $16.9 million from $12 million.

The explosion of consumer Internet companies last year gave tech stocks a shot of adrenaline with high-climbing stocks like Google Co. and strong exits like MySpace’s acquisition by News Corp., pushing private tech company valuations up along the way.