Frazier Technology Ventures' Len Jordan doesn't mince words when discussing the tough climate for venture capital deals right now. "Valuations are brutal," said Jordan, one of a several venture capitalists speaking today at The Seminar Group's 10th annual venture capital financing conference in Seattle.
The biggest problem spot are those startup companies that have built a product and generated some revenue, but are now looking to supercharge the efforts with outside financing. Many of those mid-stage companies are finding it extremely tough to raise money, and when they do valuations are awful.
In fact, Madrona's Greg Gottesman said that companies sometimes are better off not having any revenue since investors don't have actual figures to investigate or criticize. "Nothing ruins a good story like data," he quipped.
That view was backed up by Voyager Capital's Geoff Entress, an angel investor who has backed some 27 startup companies in the Pacific Northwest.
You'll do a series A first round of funding for a startup company at a $5 million valuation today, then turn around and do a series B deal for another company for the same amount, he said. Jordan agreed, calling series B rounds "highly variable."
Those companies sitting between zero and $50 million in revenue are stuck in a "no man's land," he said. And they need to be "ultra careful" about considering their next round.
"if you are a company that has a trickle of revenue, but not very much, I don't think you are not getting much credit," he said. "If you are not in the revenue class yet, you are probably not going to get punished as severely in valuation."
Gottesman describes this as an "inverse yield curve," a situation that also occurred during the last meltdown.
"It is almost easier not to have the revenue in order to get funding," he said.
Jordan said early-stage deals also have taken a big hit in recent months. Between 2005 and October 2008 -- an era Jordan described as a "mini bubble" -- pre-money valuations for series A deals stood at $10 million to $15 million. Now, he said those early-stage deals are being valued close to $3 million to $5 million.
"What's tricky when markets shift is that it takes about six months to figure out what the new valuation range is," he said. "It takes a little while to settle into a range, but I think it is starting to settle into that range now."
However, Jordan said it can be increasingly difficult for venture capitalists to try to set a valuation on their own portfolio companies, especially when it is a flat or down round.
"All of your kids are the most beautiful children, and all the others are just OK," he said. In order to avoid that situation, Jordan said he will sometimes call an attorney or another venture capitalist to get an idea of an appropriate valuation.
Despite the rough times, Jordan said he remains optimistic given that some very large tech companies (H-P, Intel, Microsoft, etc.) were started during weak economic periods.
"It is going to be a longer, harder slog," he said.
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