Down Rounds Returning To Venture Business

TechPulse 360, February 23, 2009

In the aftermath of the dot-com collapse, with the venture business in turmoil, technology startups stomached down round financings in desperate attempts to survive.

This year could bring a rebirth of the do-or-die funding environment.

Already venture capitalists say they are seeing young companies raise money at lower valuations than they had in the past. Many more deals are expected.

"I think there will be a lot of down-round activity this year," said Robert Ackerman, managing director and co-founder of Allegis Capital.

With venture investing plunging 39 percent in the fourth quarter and likely to remain weak, "the only thing companies can do, unfortunately, is drop their price," he said.

The tough deal-making environment arrived more rapidly this time than in 2001 and 2002, when it took the venture business about five quarters to reach a bottom.

"This time (the business) went right off the cliff," says Ackerman. "It was more jarring."

For venture capitalists, such as Ackerman, the suddenly deflationary market place isn't all bad news. With company values down, it is the same as finding "innovation on sale," he says.

Allegis has already agreed to finance two early-stage startups with deals that are expected to close within the next two weeks.

One company is in the computer-security business and the other is a consumer Internet venture. Both are down rounds.

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