"C" is for communications, California, cash

Communications and California-based companies raked in the highest median valuations before their most recent funding rounds, according to new figures from VentureOne.

Dawn Kawamoto Former Staff writer, CNET News
Dawn Kawamoto covered enterprise security and financial news relating to technology for CNET News.
Dawn Kawamoto
2 min read
Call it the "C" factor when seeking a high valuation.

Communications companies, as well as California-based companies, raked in the highest median valuations before their most recent funding rounds, according to new figures released Wednesday by VentureOne, a venture capital research firm.

That's quite an enviable position to be in these days, as an increasing number of companies are seeing their valuations drop in successive rounds--or not get funded at all.

Communications companies commanded higher valuations in all stages of venture funding from the first round up, but the gap was particularly wide for later-stage communications companies.

Late-stage communications companies received a median valuation of $250 million last year, up from $100 million the previous year. Information technology companies, meanwhile, received substantially less with valuations of $125 million last year--slightly up from around $75 million the previous year.

The sector last year reaped the benefits of Wall Street's love affair with fiber optics and wireless companies, venture capitalists said.

In addition to the communications sector, California-based companies from the Internet infrastructure to semiconductor industries also received higher valuations than did companies from other parts of the nation.

California companies seeking a third or later rounds of financing averaged a median valuation of $120 million last year, compared with other regions that received valuations of slightly more than $80 million, according to VentureOne.

And they're worth it, said one venture capitalist sitting on a panel at VentureOne's Best of Breed in Venture Capital Summit in San Francisco.

California companies tend to get a higher valuation because of the large concentration of venture capitalists based in Silicon Valley, who are sitting on tens of billions of dollars to invest, said Arthur Patterson, general partner with Accel Partners.

And California companies have an edge in building their businesses faster and building management teams because of the large number of tech companies in Silicon Valley that can aid a start-up, Patterson said.

Though the average median valuation before funding reached $29.9 million last year from $22.5 million during the go-go market days of 1999, it did drop sequentially in the fourth quarter last year. And venture capitalists and industry watchers expect it to fall further in the first quarter of this year.

The median pre-money valuation was $27 million in the fourth quarter, down from $30 million in the previous quarter, according to VentureOne.

"I think valuations could fall 20 percent for initial and second rounds, and even further for later-stage rounds," said Jean Yaremchuk, chief operating officer for VentureOne.

Steve Baloff, general partner with Advanced Technology Ventures, expects more companies to experience flat to declining valuations for those seeking later-stage venture rounds.

"Anyone who did a (second or third) round last year will likely get a flat or down round the next time," Baloff predicted.

And that translates into less money for entrepreneurs, as well as potentially lower profits for investors who put money into companies in previous rounds.

One entrepreneur attending the conference said, "I'd hate to be a VC right now."