Megan Muir

Although the dollar amounts may be relatively small, there is increasing competition for early stage startup investments that is driving up valuations.  Paul Graham talked about this phenomenon at Y Combinator’s annual Startup School (see here for Graham’s presentation).  VCs are making some small seed investments in dollar amounts you’d typically see from angels, creating pressure on other investors to get in a deal quickly and allowing founders to push valuations higher.  Dow Jones VentureWire reporter Tomio Geron has a good summary here.

The speed with which deals are getting done allows the founders to get back to work building their company and less time fundraising, which may be one of the best things about the trend.  A number of these startups are structuring their fund raising as promissory notes that will convert to stock later, saving time in papering the deal at the front end, and avoiding negotiating the company’s valuation until the later equity round.  It will be interesting to see if the high valuations Graham and Geron mention will apply for some of those companies when they go to price a round at some point down the road.  If they’ve put the bridge money to good use, a higher valuation later may not seem so high.