Onset Ventures Khanna on early-stage valuations

Last October, Raman Khanna and David Lane of DiamondHead Ventures merged their firm with Onset Ventures, one of the oldest VC firms that specialize in the seed and Series A round of a company. 

In mid-April, I went down to the VC capital of Menlo Park for a wide-ranging conversation with Khanna about the move, as well as trends in venture capital and different markets.

He says that despite some of the huge valuations now being bestowed on late-stage private companies like Facebook, Ning and Bebo, early-stage valuations remain at "traditional levels."

For example, the 20 or so investments he and Lane made at Diamond Head all had pre-money valuations of less than $5 million, Khanna says.

Few venture capitalists are interested in taking the risk of funding an idea and a small team. Until entrepreneurs prove their business model and show revenue, few VCs want to invest.

Most prefer helping a company go from $20 million in revenue to $40 million, Khanna says. It's about supply and demand, he says. As late-stage funds raise more capital, they are forced to put more to work. That's resulting in more term-sheet offers for late-stage companies and driving up their valuations.

Making early-stage investments is the toughest way to make money as a VC, Khanna says.

He thinks that the broad trend of pervasive computing will create opportunities that may spawn new mega-successes like "a Cisco or an Oracle."

Two of his favorite portfolio companies are Obopay, a mobile payments startup, and Sentilla, a pervasive computing platform that was spun out of technology developed at UC Berkeley.