Valuations of private companies robust

Private companies are being valued almost twice as high as they were a year ago, a sign that the fund-raising environment for entrepreneurs remains excellent.

When venture capitalists invest in a company, they negotiate with entrepreneurs to set the company’s value. The higher the value they agree upon, the more the venture capitalist has to pay to invest in the company in exchange for his ownership stake.

The median value agreed to during venture rounds in the third quarter was $20.4 million, up from $11.8 million in the third quarter of 2005, according to the latest quarterly valuation report from Dow Jones VentureOne. These are the so-called “pre-money” values, corresponding to values agreed upon before money is invested.

The value levels represented a slight decline from the second quarter of 2006 ($21 million), which which was the highest quarterly valuation since 2000. The median is being pushed upward by higher valuations placed on information technology companies, which hit a median $22 million in the third quarter, up from $11.7 million a year ago, the report found. Within IT, software companies saw median valuations of $22 million, which was the highest on record for that sub-sector since 2000.

This is a good time to review arguments about when’s the right time to sell your company (See column).

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