Follow-on venture rounds harder to realize

Only 9% of all venture-backed companies eligible for a Series B round were able to land investor money in the third quarter, according to a study released by VentureOne. Furthermore, the start-ups that did receive funding had to give up a larger stake of their company for less money.

The chances of receiving Series B financing dropped from 16.8% in the year-ago quarter to 9%, because the venture industry has an “excess inventory” of start-up companies to work through that received initial investments in 1999 and 2000, said Dave Witherow, president of VentureOne. At the height of the venture boom in the fourth quarter of 1999, about 22% of eligible companies received Series B investments. Historical norms are in the 12% to 16% range, according to VentureOne.

Companies lucky enough to land second-round funds in the third quarter had to give up something—namely, a larger stake in their company. The median pre-money valuation for all-venture backed companies fell to $15.2 million in the third quarter, down almost 25% from $19.5 million in the second quarter. In the third quarter of 2000, the median pre-money valuation was $29.0 million.

Pre-money valuations in later rounds also fell during the quarter, to $29.4 million compared with $44.4 million in the second quarter.

Pre-money valuations in the communications and networking segment remained relatively steady during the third quarter at $32.0 million and have been on a slight uptick since bottoming the fourth quarter of 2000. One year ago, pre-money valuations of communications and networking startup hit their peak at $72.65 million.