Insider Rounds Rule As VCs Tend Portfolios

By Russell Garland

More evidence that venture capitalists were preoccupied with their portfolio companies in the first three months of 2009: The rate of insider rounds jumped to 57% in the first quarter.

That was the same period during which venture investment fell to its lowest point in 11 years, a drop of 50% from the first quarter of 2008. VCs said they were being cautious about making new investments in an uncertain economy while ensuring that companies they financed earlier had adequate capital to weather the recession.

Insider rounds - financings done entirely by prior investors - are a quick way to shore up a start-up. Such deals also avoid having a new investor come in and question whether the company's valuation is too high. In good times, venture-backed companies like to bring aboard new investors to set the valuation, provide fresh capital and, perhaps, add expertise on the board of directors.

Insider rounds climbed in the fourth quarter of 2008 as the financial crisis worsened, involving 54% of all deals versus 41% in the third period, according to industry tracker VentureSource, which is owned by Dow Jones & Co., publisher of this blog. By way of comparison, the frequency of insider rounds for the boom year of 2000 was 23%.

The rate of insider rounds in the first quarter 2009 was 58% for both health care and information technology, the mainstays of the venture industry. Second rounds, which can be tough for a company missing its milestones, had an insider-round rate of 54%. Interestingly, later-stage rounds, which included many companies that would be eyeing the public markets in better times, had insiders doing the whole deal 60% of the time.