Here’s one indicator of economic recovery that the Federal Reserve might have missed. The funding party, a ritual of tech booms past, is re-emerging across the U.S. in entrepreneurial hotbeds such as San Francisco and New York. As the venture capital market begins to emerge from deep freeze, more and more startups are finding that they can raise money, and at increasingly rich valuations. And they are celebrating by throwing parties, complete with beer and goofy costumes, for a few hundred of their closest friends.
“Raising our series B round of financing is done, and its time to celebrate!” Twilio, a very hot start up in San Francisco, announced. The company which integrates voice, short messaging and other telecom services into corporate websites, raised $12 million from Bessemer Ventures, Union Square Partners, 500 Startups and many “awesome” angels, then threw a party at its headquarters on the evening of November 12.
Another startup, a consumer tech site known as GDGT, was holding an event that night, too, in the same city. While not a funding party, it added to the increasingly busy social calendar in the startup scene.
“Drat! It’s the same time as the GDGT party in opposite directions. Congrats all the same & hope I can crash a little later in the evening,” one Twlio friend, Ken Yeung, wrote.
A San Francisco startup called Heyzap, which helps users add games to their Web sites, celebrated its funding over the summer by throwing a party. One attendee, Rayfil Wong, founder of Campusfork.com, noted that some of the partiers were dressed in “astronaut-looking foil suits.” As for Campusfork, it offers an “easy way to find and share restaurant food photos.”
The good times are a sign that money is loosening up and valuations are climbing, according to Jay Levy, co-founder of Zelkova Ventures in New York. Levy, who started his first business while in high school and helped found a successful consulting firm while in his twenties, says the good times are a sign that some of the “bad habits” of the tech boom are already returning.
Also making a return: excessive valuations. “Two and a half years ago, entrepreneurs could not raise money. Things turned too much in our favor,” Levy says. But since the middle of this year, the dynamic has shifted, and dramatically, too. “We’re getting to a point where valuations are getting too high. There is too much money chasing too few good deals, and even some mediocre companies are getting funded. It’s a very good time to be looking for money,” Levy says.
“I wish I had Twilio’s valuation,” entrepreneur and blogger, Michael Fitzpatrick wrote. While he said that valuation must have been considerable, he was more “shocked” that Groupme, which offers services such as free group texting and uses Twilio as a platform, raised $9 million on a valuation of $35 million. He noted that Groupme has been around only since April.
Back in the second quarter of 2009, when the capital markets were still reeling from the shock waves of the financial crisis, the few startups that managed to get any funding at all were pulling in about $1 million on a pre-money valuation of $1 million to $3 million, Levy said. As the markets rebounded, that moved to $1 million in venture capital on a $2 million to $4 million valuation. “Now, we are starting to hear many companies ask for $1 million on well over a $5 million pre-money valuation, which is too high.”
Levy says the high valuations aren’t good for anyone, investor or entrepreneur. Excessive valuations set everyone up for failure. “Valuation is an art not a science and getting it right is really important to everyone,” he says.
“You don’t want your company valued at $5 million if it’s not worth $5 million. That is a lot to live up to,” Levy says.
