The majority of second-round-and-later venture funding deals during the first quarter of 2009 showed a decrease in valuation. Fifty-one percent of the financing during the period were so-called down rounds, which means the price per share of a new security is less than the price of the security issued in the previous round, according to data from Wilson Sonsini Goodrich & Rosati, a tech law firm. Essentially, the business is worth less to investors. Check out the chart from the WSG&R Summer 2009 newsletter:
The data points to what we already know — the irrational exuberance appears to be leaking out of the venture industry as exits stay scarce and returns stagnate. Basically, a whole lot of startups had to go back to their venture backers and see the value of their businesses fall. Everything about the startup may be the same, but the economy is different. I wonder if those entrepreneurs and their venture backers wake up after these deals feeling like a female movie star the day after her 40th birthday. Everything about her is the same, only now her age is different.
Down rounds aren’t fun, although the WSGR newsletter notes that other financing provisions such as liquidation preferences (who gets to take out money first) and pay-to-play clauses (previous investors need to keep investing in subsequent rounds) haven’t become too onerous.