Bells & whistles

". . . never send to know for whom the bell tolls; it tolls for thee." - John Donne, Meditation XVII

It was as predictable as the sun rising in the east that the excesses of 2000 would lead to lowered valuations for private equity deals once the stock market bubble burst. Down rounds come with a price. This can range from the ultimate penalty - the total inability to get new money - to painful dilution that is likely to hit management particularly hard.

Because inflated valuations always will regress to a mean driven by fundamentals, the current situation should be a reminder to young companies that they should never assume that the rules for valuation have been rewritten permanently, never get too greedy, or fail to live up to their promises. And they should always be nice to their investors, who will have the power to either punish them or keep them whole when it comes time to do a down round.

Metrics

This is not to say that all financings now are down rounds. In fact, some companies are getting step-ups. This may depend on a number of factors, including the valuation of the last round and whether management has met its milestones.

"A 50% haircut is not uncommon, but it's all over the map," said Mike Powell of Sofinnova. "I'm finding a complete dichotomy in deals getting done. Some are at the money people want and are so over-subscribed, while some aren't happening at all."

According to Powell, "investors are getting more selective in going after good management teams instead of going after the latest '-ics' plays, as in genomics or proteomics."

Companies that are not having problems raising venture money right now are those that have promising Phase II data, experienced management teams, a reasonable amount of cash, and bankers courting them to go public.

One recent example is Achillion Pharmaceuticals Inc. (New Haven, Conn.), which raised $41 million in January. The company's ACH-126,443 oral nucleoside analog is in

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