Web Startup Bubble Losing Air Fast

The Wall Street Journal reports that web startup seed stage funding is disappearing as angel investors balk at high valuations.

Amid a glut of Web start-ups, some strains are starting to show….

The average valuations of young companies have dropped recently to $3 million to $5 million, from $6 million to $8 million earlier this year, says Naval Ravikant, a Silicon Valley entrepreneur and investor who runs AngelList, a website where young companies can apply to seek “angel” or “seed” money.

The start-up financing market “is getting weaker by the week, no question,” he says. While AngelList has 50 to 100 start-ups applying for funding daily through its site, only one to two are getting financing, he estimates. “The survivor rate of these companies is way down.”

….Between Jan. 1, 2009, and late last month, U.S. venture-capital firms raised $39.2 billion, down 76% from the $162.5 billion that was raised between Jan. 1, 1998, and Dec. 21, 2000, according to VentureSource.

On Monday, the National Venture Capital Association said that venture fund raising in the third quarter fell to its lowest quarterly level in eight years.

….Aydin Senkut, a Silicon Valley angel investor, says he has cut down on the percentage of seed deals he funds as part of his portfolio because the “markups I’ve seen [on valuations of young companies] are insane.”

Instead, Mr. Senkut says, he has begun looking overseas for start-up deals that are relatively cheaper than Silicon Valley companies, and he is also looking to invest in more established companies rather than just the tiniest enterprises. Among his investments this year: Finland-based Rovio Inc., the maker of the mobile-game “Angry Birds.”

Another startup that has attracted investors from the USA and Argentina is SaferTaxi, part of the Start-Up Chile program. The investors from Argentina are the founders of MercadoLibre, the most successful startup in South America. SaferTaxi is the second Start-Up Chile participant from Argentina that has attracted investment. The other is Junar, whose CEO Diego May recently moved to the San Francisco Bay area to develop more business.

Atakama Labs, recently purchased by a Japanese game maker, also relocated from Argentina to Chile for economic and political stability. I suspect that more Argentine techies will relocate to Chile. The unemployment rate among young people in Spain is 50%, another ripe market of entrepreneurs for Chile to entice.

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