As far as my understanding goes, this is the normal process for funding a startup:
- Seed Capital: funding to get the initial concept off of the ground
- Bank Loan: debt funding to get prove the business model works on a small scale
- Angel Investor or Venture Capital: equity funding to take a proven business model to the next level and achieve dramatic growth and become profitable
- Merger, Acquisition or Public Listing: Exit strategy that would include one of the following; at this point the founder could continue to lead the company or cash out.
The distance between these steps is widening, and step 3 in particular is beginning to favor Angels over VC for less established businesses.
As times change, so too does capital availability. VC is closing their doors to new investments and focusing on developing their current portfolios. This is making Angel Investors a more viable alternative, however, they are also becoming increasingly more picky. A few things that I have gathered is that they are preferring the following:
- Shorter Sales Cycles in the business model
- Experienced Management over a brilliant newcomers
- Intellectual Property that can guarantee a competitive advantage
- A business model that will not require repeated cash infusions over the next several years
An example:
Meet the new breed of angel-backed entrepreneur. Donna Myers, president of software provider TowerCare Technologies, is in the process of securing $2 million in angel funding. But she’s no newbie: Her 22-person Wexford (Pa.) company has 160 customers and last year generated $500,000 in sales.
In years past, a firm of Myers’ size might have sought venture capital. But as venture capital funds have moved upstream, doing larger deals, angel investors are being pitched by much more established companies. Now it’s not just first-time entrepreneurs or those whose companies are in their infancy who are winning cash from angels, although those entrepreneurs are still pitching. Increasingly, successful candidates, like Myers, boast impressive experience and a significant customer base.
Click below for the slideshow on angel investors:
———————
Sources:
http://images.businessweek.com/ss/08/10/1017_sb_angel_investors/index.htm
http://www.businessweek.com/smallbiz/content/oct2008/sb20081016_778120.htm?link_position=link1
IdeaFLITE 
VC Continues to fade away
Posted in Economic Commentary, Financing, Inspiration, tagged capitalism, venture capital on November 13, 2008| Leave a Comment »
Interesting article yesterday on venturebeat.com about why the VC market is broken. The circumstances surrounding the economic climate and end of the “let’s create a cash burning internet startup and hope it gets bought out” mentality will cause an estimated 50% of VC firms to go under. This consolidation of VC is probably needed as the easy-money VC-fund my friend’s startup fad is finally recognized as an ill founded business model. A few interesting points made in the article:
At present moment, VCs are not a creator of value, but a diminisher of value!
Where I do agree with Ressi is in the ugly economics overall. Most daunting is that there’s more money being invested into venture firms than those same VC firms are generating from their investments in start-ups — in other words, Ressi argues, they’re now having a net negative affect on the economy. You’d expect this lopsided dynamic to exist temporarily in a downturn. But the worrying thing is that this state of affairs may last for quite some time.
I’m not sure how long this negative balance will last, but for now it certainly contradicts the message traditionally propagated by the VC industry — that it, that VC is a net creator of value, namely of stock market growth and job creation. That positive impact was indisputable — until now.
In order for the VC market to stabilize, the underperfoming firms will need to be weeded out.
However, a lot of VCs are likely to go under this time. This asset class significantly underperformed other asset classes between 1998 and 2006. A handful of firms — Sequoia, Kleiner, Benchmark, Accel and a handful of others — have pulled up the average performance somewhat, because they’ve produced an inordinate amount of the successes (a small group of homeruns, the eBays and the Googles, account for 25 percent of total VC returns over the past 20 years; see Ressi’s slides). But if you invest in the average firm, you’re doing very poorly. So limited partners will probably shift from endowments and foundations increasingly to fund-of-funds and sovereign wealth funds.
So, yes, the VC model is badly broken. This time, Bob Kagle’s statement about half of all VCs going out of business is more likely to be true.
The way I see it, the doors will be opening for those willing to create a solid business model to flourish. Instead of spending time worrying about how to impress and sell whatever company we start to a VC firm, we will focus on building and evovling our business itself. It seems that CollarFree has a pretty firm grasp on this concept, and we can learn a lot from them.
————————-
Sources:
http://venturebeat.com/2008/11/12/the-vc-model-is-broken/
Read Full Post »