The chart below shows the recent decline in valuations of late stage venture backed companies as reported by the Wall Street Journal.
It’s a decline that hurts everybody, with cash starved companies taking whatever they can get, which is often a far cry from what was promised and according to the WSJ, existing investors are increasingly resorting to propping up valuations, something that is clearly only sustainable in the short term.
In the first quarter, 57% of all venture rounds in the U.S. were done by insiders only, according to VentureSource. The prevalence of such financings has raised concerns that venture firms are propping up valuations to avoid write downs that would affect fund performance. A new investor is more likely to question whether a company is over-valued.
No doubt everyone is hoping that a recovery will take place ans valuations will soar once again, but if we are in for a longer slump it;s a dangerous game to play and we will see more VCs becoming over exposed and undercapitalised.