Lofty Valuations Fall, But Decline Slows

Valuations for venture-backed companies fell last year, but not to the extent that they did in previous years, according to new year-end valuation data from Thomson Venture Economics (publisher of PE Week).

Medical/health and biotechnology companies continued to have the highest valuations last year, while follow-on rounds and later-stage funds maintained their dominance.

For 2003, valuations averaged $36.1 million, a decrease from $39 million in 2002 and the all-time high of $84.6 million in 2000. The rate of decrease has been slowing down since 2000. For example, the average valuation fell by 34% in 2001 and by 30% in 2002 before declining by just 8% in 2003.

How you view the valuation data depends on where you reside in the venture capital process.

For GPs who have been investing since the zenith in valuations, lower valuations produce lower internal rates of return for investors, meaning interim results may be lower than anticipated.

Limited partners for the most part have embraced lower valuations as part of a larger transparency issue, as many have felt that GPs were reluctant to reduce valuations below cost, which would lead to artificially high returns data. In addition, for those general partners currently investing, the decline in valuations from the peak in 2000 is good news in that it forms a lower cost basis on which performance will ultimately be measured.

By industry, medical/health companies had average valuations of $61.2 million in 2003, followed closely by biotechnology companies at $60.5 million. These two categories were the only industry classifications to increase in 2003 from the previous year.

In comparison, the average valuation for computer hardware companies dropped from $39.9 million in 2002 to $15.2 million in 2003. This plunge was the largest both in dollars and percentage terms.

Communications and media companies had the fourth highest average valuations, with $34.3 million. However, from 2000 to 2002, this sector ranked first, while in 1999 it had the second highest.

For 2003, the average valuation for companies receiving first-round financings was $10.3 million, down substantially from an average of $18.5 million the prior year.

The average valuation for follow-on investments was $42.1 million last year, down from an average of $45.8 million in 2002.

The gap between follow-on valuations and first-round valuations decreased each year between 1999 and 2002. But in 2003, the difference between the two valuation figures increased, so that the average valuation for follow-on financings was more than four times that of the average first-round valuation.

By vintage year, older funds investing in 2003 experienced higher valuations. For example, 1999 vintage year funds invested in companies with an average valuation of $64.1 million while the companies receiving investments in 2003 from 2002 vintage year funds had an average valuation of $43 million.

In general, the investments of older funds had higher valuations than those of more recent vintage years. This was presumably because the investments of older funds tended to be follow-on financings of companies that received financing prior to 2003.

Email Toby Walters