But inevitably, with the good comes the bad. In this case, as the market for venture financing heats up to pre-recessionary levels, a few troubling investing trends have emerged that are impacting both entrepreneurs and investors -- some for the worse.
First, let's set the stage. Around 67% of start-ups in the first quarter of 2011 raised money at a higher valuation than their previous funding round, according to a new study from Silicon Valley law firm Fenwick & West, which surveyed 122 companies. And only 16% of these companies raised financing at a lower valuation than their last funding -- the largest gap between so-called "up" rounds than "down" rounds since 2008.
In terms of the recent growth of early-stage investing, last year funding rose 15% to $5.2 billion, while the number of deals leapt 25% to 1,147, according to the National Venture Capital Association.Much of this deal making focuses on the tech sector, where early-stage investors hungry for a piece of the next Facebook, LinkedIn (LNKD) or Twitter have created a gold rush-like scenario for social media-related firms. The problem: the funding mania sees some investors pouring money into start-ups with products that may not be ready for primetime. "You're got a fair amount of companies who would normally test something at an angel stage who are now going to bigger rounds when they haven't necessarily proven their product," said Charlie O'Donnell, a principal at First Round Capital in New York, who has noticed the average seed round increase from $500,000 to $1 million as investors have become more aggressive. "Sometimes a company
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