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Venture Industry Rally Continues: Second-Round Valuations Soar 70%

Posted September 14, 2006

— The rally of venture-backed companies after the "dot com" implosion continues, with pre-money valuation of startups reaching the highest point in five years.

The value rose to $23 million in the second quarter of this year, according to the latest statistics compiled by

Dow Jones VentureOne

. That's the best since the fourth quarter of 2000 -- at the height of the dot-com and telecommunications investment frenzy -- when the median value reached $29 million.

The $23 million median average is an increase of $7 million, or 70 percent, from the same time period in 2005. The increase in second- and later-round deals especially in healthcare and information technology is driving the increased valuations as more investors see opportunities for profitable exits increasing, according to Dow Jones VentureOne.

The valuation statistics reflect other strong areas of growth in the venture industry this year.

Venture funds raised $96.4 billion through the first six months of 2006, an increase of 43 percent over 2005, VentureOne reported recently.

Also, venture investments increased to $6.7 billion in the second quarter, up from $6 billion in the first quarter. Both quarterly totals were the highest since 2001, according to VentureOne.

Helping to drive investments were 16 initial public offerings worth $1.25 billion for venture-backed firms in the second quarter. That was the most in two years.

Mergers and acquisitions, meanwhile, generated 92 deals worth $7.14 billion in the second quarter. The number of M&As did drop by five and in value by 16 percent from the same quarter in 2005 - the only major venture-related statistic to show a sizable drop.

The National Venture Capital Association has reported similar numbers.

"The increased opportunity for successful exits is clearly playing a role in the value of these companies," said Steve Harmston, director of global research at VentureOne. "Venture capital firms tend to assign higher valuations to their portfolio companies when they see an active liquidity market, as is currently the case for acquisitions in IT and (initial public offerings) in healthcare. For example, acquisition prices for IT companies rose to a median of $60.4 million in the second quarter, which was the highest point in six years, thus driving up the value of still private companies.

"As for the higher values placed on health care companies, that may well be because this industry is still finding some success in the public market exits - they represented 10 of the second quarter's 16 venture-backed IPOs," he added.

Especially hot are healthcare firms, with the median second-round valuations more than doubling to $31.6 million from $15 million in 2005.

Medical device firms saw their median value increase to $60.7 million from $38 million.

Median second-round IT valuations nearly doubled to $22.5 million from $12.3 million.

First-round valuations remained at $6 million, according to Venture Wire.


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