I Disagree w/ Paul Kedrosky on VC Bubble Data

Paul Kedrosky wrote a post earlier today disputing VentureOne's claim that the latest funding stats indicate a bubble in venture funding. VentureOne reported that median pre-money valuations rising from $15m in 2005 to $20M in 2006, brought valuations back to bubble levels of 2000. Mr. Kedrosky digs deeper to dispute the implication of a bubble by breaking the numbers down by round. As it turns out first round funding valuations stayed flat at $6M and Mr. Kedrosky writes:

"First-round valuations, the place where bubbles are born, were flat in the quarter. Nothing changed. It is later rounds where valuations are going up, which can be read as a positive sign: Business are delivering results, and investors are paying up for those results. I'm hard-pressed to see why that's a bad thing."

The problem that I have with this is that second round funding valuations jumped from $12.5M to $20M. Not only is that a big jump, but very few startups that raise a first round are unable to raise a second round because the signs of success are rarely clear at this stage. The bar is much higher for raising a series A round than a series B. Few startups look like run away successes or total failures at this juncture so it generally makes sense to invest more capital at this stage to see how things play out.

A 60% jump in second round valuations could mean that the signs of first round startup success appear to be so clear that the perceived reduction in risk has pushed prices upward. However, it seems more likely to me that larger funds are simply bloating second round valuations.