Inflated valuations by themselves are not an indication of a bubble brewing. Still, they make you think twice about what M&A and IPO outcomes are likely to be several years ahead.

Pre-money valuations are not the best measure of whether VCs and entrepreneurs are getting good/bad deals. Some cool Web 2.0 companies notwithstanding, on average, companies these days are consuming more capital (due to more aggressive execution and more competition, amongst other reasons) than pre-bubble companies. Therefore, you’d expect pre-money valuations to drift up as well to account for the dilution that comes with financings.

A better measure I like to use is the ratio of pre-money to the raise amount. This morning I analyzed Series A data for some of the sectors I’m interested in using self-reported company data. The histogram below was generated by Excel’s Data Analysis pack using automatic binning. For the period 2005-6, the predominant value is around 1.5x. That’s a noticeable increase from 2-3 years ago. Good news for entrepreneurs who are suffering less dilution.

I haven’t had the chance to compare to pre- and during- Bubble 1.0 data.