PEHub and Pre-Money Valuation Inflation




Dan Primack of Private Equity Week recently launched an interesting new VC bloggers hub at PEHub.  It is similar in concept to the Venture Capital Feedburner Network, but it is visually distinguished through the caricatures that link the roster for each blogger who is part of PEHub–  I think that is a nice  touch.

I was drawn into the lively debate surrounding Bart Shachter’s two initial posts with his rendition of the "VC Model is Broken" story.  While Bart’s "maiden voyage" into the blogosphere generated a number of comments, which is good, most of the comments objected to the tone of his post, which is not so good.

As someone who posts extensively on religious issues and current events in Israel and the the Middle East, I am very sensitive to the propensity for blog posts to be hurtful to others. I don’t recommend Islamic fundamentalist analogies when one is trying to make an otherwise important and valid point about valuations in the venture capital business. 

Putting the "delivery vehicle" aside,   Bart does make an important point about the current M&A environment.  I have written about this topic in this blog on October 30: Yes, Too Much Money Is Chasing Too Few Deals in VC.

Bart accurately suggests that, to be successful as a VC today, you need to re-calibrate your investment parameters to fit the current investing environment.

It’s been clear for some time that we live in a world of $50 million to $150 million acquisition exits for many VC-backed companies.  This is particularly tough if you have $35 million – $50 million invested in a company with a post-money well north of $50 million and get caught at the low end of that exit range. My partner, Keith Benjamin, has written extensively on his blog, www.sfventure.com, about the trend of "take-unders" as opposed to take-overs that has characterized VC for several years.

The most recent VC industry data (see below) reports inflation in pre-money valuations for second rounds over the past two quarters.  This is troubling because, in my view, it is unsustainable and unjustified by the reality of the capital markets.

I’ve noted in other posts that VC’s need to be students of the capital markets as well as students of technology.  Merely finding and investing in a great company isn’t good enough if the capital structure is a mess–  unfortunately it’s the LP’s who end up paying the highest price for lack of investment discipline by VC’s. 

The results of outlier investments such as YouTube and Google should not be relied upon to benchmark investing valuation parameters.  Two data points do not define a sustainable trend.Picture1

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