Durable goods demand shows economy strengthening (Reuters)

WASHINGTON (Reuters) – The economy appears to be heading into the fourth quarter with solid momentum with demand for a range of long-lasting U.S.-made goods rising at the fastest pace in six months in September and businesses stepping up spending plans.

Other data on Wednesday also underscored the economy's improved tone, with new homes sales in September the strongest in five months and mortgage applications rising last week.

"The worries about a double-dip recession were a bit overdone, but slow growth is likely to be with us for some time to come," said Mark Vitner, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.

Orders for durable goods, excluding transportation items, rose a stronger-than-expected 1.7 percent last month after falling 0.4 percent in August, a Commerce Department report showed. The gain was the largest since March.

At the same time, non-defense capital goods orders excluding aircraft -- a closely watched proxy for business spending -- jumped 2.4 percent, which was also the biggest rise in six months.

"Most businesses feel a little bit better about the economy than consumers do right now," said Vitner. "That means investment spending and economic growth are likely to hold up reasonably well."

While shipments of non-aircraft, non-defense capital goods fell, economists said that did not materially change their expectations for a pick-up in growth in the third quarter.

The government is expected to report on Thursday that GDP grew at an annual pace of 2.5 percent in the July through September period, according to the median of a Reuters poll. That would mark a sharp acceleration from the 1.3 percent logged in the second quarter.

NEW HOME SALES RISE

In a second report, the Commerce Department said new home sales increased 5.7 percent to a seasonally adjusted 313,000-unit annual rate.

But the median price for a new home fell 3.1 percent to $204,400 last month, the lowest since October 2010, indicating the market was far from recovering. Prices were down 10.4 percent from a year earlier.

"While the housing market still has a pulse it will not be back on its feet until there is significant job growth," said Mitchell Hochberg, Principal, Madden Real Estate Ventures in New York.

Applications for U.S. home mortgages rose last week as demand for both purchases and refinancing perked up, the Mortgage Bankers Association said in separate report.

U.S. financial markets were little moved by the data ahead of a meeting of European leaders to tackle the region's debt crisis. Stocks on Wall Street were mostly up, while prices for Treasury debt fell. The dollar rose against a basket of currencies.

TRANSPORTATION FALLS

Though demand for transportation equipment fell last month, reflecting weak autos and civilian aircraft, gains in new orders for durable goods -- items meant to last three years or more -- were broad-based.

Economist said this should continue to aid manufacturing, a sector that has been the pillar of support for the recovery despite a 0.8 percent drop in overall orders.

"Demand for big-ticket items seems to be alive and well," said John Ryding, chief economist at RDQ Economics in New York.

Transportation orders fell 7.5 percent, the largest decline since April. Orders for motor vehicles and parts fell 2.7 percent, while civilian aircraft bookings tumbled 25.5 percent.

Orders for machinery, primary metals, electrical equipment and computers and electronic products all rose solidly.

(Editing by Andrea Ricci)

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Analysis: Young startups demand steeper prices from VCs (Reuters)

SAN FRANCISCO (Reuters) – A year ago, Mike Maples's investment firm, Floodgate, was investing in young companies at a pace of two or three every quarter. Now, he's backed just one startup all year and puts a big chunk of the blame on spiraling price tags.

"Relative to the risk I have to take, I can't justify paying that high price," said Maples, who invested $25,000 in microblogging service Twitter five years ago and $500,000 in textbook-rental company Chegg four years ago, each of which has since exploded in value.

Backing a company at its early stages has become a lot pricier: valuations are often a third more to double what they would have been just a year ago, venture capitalists say.

That leaves funds that back companies early on with a stark choice: pay more, or risk missing out on the next Twitter or LinkedIn. This is changing how Silicon Valley operates in subtle but important ways, venture capitalists say.

One clear sign is the shifting definition of "early stage." Traditionally, that was angel, A or B rounds, which everyone understood to mean a company was generating no revenue, or very little. Companies expected just a few hundred thousand dollars at the angel stage, $1 million to $10 million at the series A round, and $10 million to $20 million in a series B round.

But now, with technological advances and rapid-fire reputation building due to sites like Facebook, companies can within months hit revenue and customer milestones that would have taken years before. They're demanding more cash to match.

NO DISCOUNT WITH GROUPON DEAL

Online-deals service Groupon, which received $30 million in B-round funding in late 2009, was an early example. That "was a growth round," said Peter Barris, managing general partner at New Enterprise Associates (NEA), which took part in that round after making a $4.8 million A-round investment the year before. "The business model was proven, and it was a matter at that point of getting more capital to expand in more cities."

An A round can now top $15 million and B rounds $40 million. Just this year, weather-insurance company WeatherBill raised $42 million in a B round; Flipboard, which puts social-media feeds into a magazine-style format, raised $50 million.

Also this year, mobile-gaming company TinyCo won an $18 million A round, and game developer Funzio landed $20 million.

Part of the issue, seasoned players say, is the increasing numbers of investors willing to get involved at the early stages, creating outsize demand. Barris's NEA, for example, has set up a fund specifically for seed-stage investments.

And increasingly, start-ups want terms that disfavor early-stage backers, said Redpoint partner Geoff Yang, especially at seed level. For example, many seed investments take the form of bridge loans, which are riskier for investors.

Yet the boom is largely limited to specific fields such as the Internet, mobile, and cloud computing, investors say. In other fields, valuations are often down. Venture investments in cleantech, for example, totaled $1.83 billion in the second quarter, the Cleantech Group research firm said on Wednesday. That's down 10 percent from the same time last year.

BURST OF COLOR

Perhaps the best-known example of a richly valued company is photo-sharing service Color, which raised $41 million from Sequoia Capital, Bain Capital and Silicon Valley Bank in its first funding round. So far, it has a negligible number of users.

Color illustrates the clout of companies with proven teams. Color founder Bill Nguyen also founded music service Lala -- sold to Apple two years ago for $80 million.

Another group of companies that investors say expect pricey valuations: any outfit that was part of Y Combinator, a Silicon Valley boot camp for start-ups. Graduates of the three-month program include success stories such as cloud-storage company Dropbox and accommodation-network Airbnb.

"Now you have companies that have not yet achieved those results, but expect to have the valuation of a company that has," Maples said. "You say, 'OK, that company is in crazyland.'"

In addition to the high cost, Maples said, too many startups have me-too business plans, such as wanting to become a Twitter for various sub-sectors of the population.

As for his one new investment of 2011? Maples participated in a $1.7 million round for SBR Health, a video service for doctors and patients.

(Reporting by Sarah McBride; Editing by Braden Reddall and Steve Orlofsky)

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