Plain talk about valuations

These days, to keep the average venture investor in the average private company happy, the average pre-money valuation of a company's IPO has to be $200 million. On average, that has been the case in this window, where the average pre-money valuation is $209.5 million.

But appearances can be deceiving. Indeed, there is downward pressure on venture rounds in response to this window, and the reason is that averages don't tell all.

The key is that a few high IPO valuations have pushed the average up. In reality, 20 of the IPOs in this window have gone public well below the $200 million pre-money threshold, while only 16 have been close to or above that figure.

The numbers also have gotten worse as the window has matured. Excluding the $157 million IPO from Eyetech Pharmaceuticals Inc. (EYET, New York, N.Y.), which had a pre-money valuation of $674.6 million and a post-money valuation of $831.6 million, the average pre-money valuation of companies that went public in the first half of the window (October 2003 to April 2004) was $194.7 million. The average post-money valuation in this period was $257.7 million.

Abingworth's Jonathan MacQuitty noted that the first batch of IPOs in the window had high enough valuations that "everybody along the line could get paid off."

The second half of the window looks different. MacQuitty attributed the valuation compression to "a very small number of players that want to buy IPOs. They have a foot on the IPO valuation hose, which forces compression down the line - it backs up everything."

Excluding the three companies with high valuations - Idenix Pharmaceuticals Inc.

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