SiliconBeat links to a report from VentureOne:

"The recent rise in valuations is due in part to the rise in prices in liquidity for venture-backed companies, particularly for M&A transactions," said Josh Grove, research analyst at VentureOne. In the third quarter of this year, the median amount paid for a venture-backed information technology company in a merger or acquisition was $59.5 million, the highest it has been since 2000, and about $25 million more than companies were paying a year ago.

While the current median valuation figure still sits well below the mark at the peak of the high-tech bubble - $29.8 million in the first quarter of 2000 - it reflects a significant increase from $9.1 million in the second quarter of 2003 during the downturn.

The difference between the valuations of 2005 and those of five years ago, Grove said, is that later-stage investments, rather than deals with young start-ups, are fueling the increase."

If you want to hear my prediction - valuations will go up even further. Very simple reasoning:

A) Assume that the number of VC firms and partners stayed pretty stable through the last 2-3 years
B) Assume that the number of deals per partner is fixed and can't be increased as easily as due diligence and supervision would lack
C) Assume that it is a long term thing to bring in new partners and even worse change the coporate structure and attitude to change a VC firm into a corporation (which VC firm has a CFO?)

Now assume my assumptions are right - VC funds investinging in Series A, B, C have been oversubscribed and have raised more money as expected.

What do you think happens? All this money goes into the same number of companies (see B) - so valuations go up until a point is reached where this high valuations are not justified even more and ROI goes south. Only then we'll see valuations sink (often drastically).

Agree?