Is the Venture Capital Market Getting Its Mojo Back?

The venture capital market appears to be bottoming out after a long decline, according to a Fenwick & West survey of the venture capital market for the third quarter of 2009.

There are two significant data points worth pulling out. First, the number of investment rounds for higher valuations (i.e. “up rounds”) exceeded the number of investment rounds for lower valuations (i.e “down rounds”) for the first time this year. Up rounds exceeded down rounds 41% to 36%, according to the survey. In the second quarter, down rounds exceeded up rounds 46% to 32%.

This the equivalent of a rising valuations in the stock market, suggesting that VCs are getting more optimistic about the value of venture-backed startups.

The second related point is that the average price of venture deals increased 11%, the first increase this year. That compares to a 6% decline in the second quarter, and a 3% decline in the first quarter.

Another positive data point, which I highlighted in my lead story for the new special report on the “The World’s Most Intriguing New Companies,” is that angel investment numbers have started to rise. During the first half of this year, angel investors financed 24,500 new ventures, 6% more than during the same period last year, according to the Center for Venture Research. The overall amount of money going into startups has declined, but the figures suggest that this year will see the birth of roughly 50,000 companies with enough promise that someone is betting money on them.

Before calling an absolute bottom, we need to see VC investment numbers starting to rise. And that seems at least a quarter or two away. The good news is that the rate of decline of investments has been dropping, from 57% year-over-year decline in the first quarter, to a 45% decline in the second quarter, to a 32% drop in the most recent quarter.

Like much of the financial system, the VC market is establishing a new normal. My hunch is that the market stabilizes and starts growing in the first quarter of 2010. It almost has to because the comparable figures for the first quarter of 2009 were horrific, reflecting the height of the financial panic.

- Spencer Ante also publishes the Creative Capital blog. Click here to see more.

Fenwick & West Q309 VC Terms Survey Report

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