Tag Archives: venture capital

Update on Angel Investors

Angel investors are often one of the first things an entrepreneur thinks about when beginning their search for money to start their business.

Unfortunately, this can be a daunting task.

Today, Angel investors can be divided into two general groups:

  1. The first group of Angels makes larger investments, primarily in high-tech enterprises nationwide. These are often referred to as “Super Angels.”
  2. The second group of Angels makes smaller (and earlier) investments in local startups. They are likely to be successful business people living in your hometown.

For the first group of Angel investors, the Angel Resource Institute recently released its annual “Halo Report,” which is a survey of Angel investments over the past year—2012.

The “Halo Report” presents the results of a survey of 738 deals totaling $1.1 Billion during 2012. Following are the highlights of this survey data:

  • Internet, Healthcare, Mobile & Telecom, and Electronics made up 70% of the deals.
  • Most common investment size in 2012 was $600,000 ($690,000 ave. for 4th quarter).
  • 63% of recipients were already producing revenue.
  • Co-investment (multiple Angels investing in same deal) deals were most prevalent in this first group of Angels with 70% of all deals being made by multiple investors.
  • Median investment with multiple investors was $1.5 Million.
  • Over the past two years, the value of companies receiving investments from this first group of Angel investors has averaged $2.5 Million.

Obviously, this first group of Angels is only interested in the high-tech, high potential profit companies that are already established and either already producing revenue, or are about to.

Most of the vast majority of the 6+ million new business startups this year do not fall into this high-return-on-investment requirement and must look elsewhere for their startup money.

There are a variety of alternative sources of startup financing available, but if you are interested primarily in Angel Investors, you will need to look much closer to home … for Angels in the second group of investors.

I would suggest that you do this search for your investors through your Advisor Group, banker, attorney, accountant, or business network.

There are many qualified Angel Investors in every city and town around the country—all you have to do is find out who they are … and then make your very best presentation to anyone you contact.

Just keep in mind that if all the investments by Angel Investors and Venture Capitalists were added together each year … the total would barely make a dent in the total startup money required by the 6+ million new full-time businesses that start up each year.

There are many ways to finance a new small business besides Angel Investors and VCs … it just takes a little digging to find them. You can get some help here.

How many of you have used either Angel Investors, or some alternative form of investment (equity) capital to start your business?

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What Venture Capitalists are Looking For

A recent study put out by the combined efforts of the University of St. Gallen in Switzerland, and the University of Utah concludes that Venture Capitalists around the world rely on social connections to introduce them to business deals, but they base their decisions on more important factors.

I have no idea how much money the above study cost (in time and/or money), but when throwing around terms like Bayesian Methodology, Hierarchical Bayes Procedure, Monte Carlo Markov Chain (MCMC) methods, and Metropolis-Hasting algorithm, you have to assume that a great deal of time was spent arriving at the same conclusions that entrepreneurs have known for quite some time.

Anyway, here are the two main conclusions that can be taken from the study:

First—You need to have an intermediary (can be an “event”) to either refer you and your Business Plan to a Venture Capitalist, or to introduce you directly to an influential member of a VC firm. A-list Venture Capitalists don’t pay much attention to unsolicited Business Plans that come in “over the transom”—there’s just way too many of them to ever get serious attention.

Second—Your Business Plan needs to specifically address the three main interests of Venture Capitalists:

  1. Potential Return. This is the number one interest of all A-list Venture Capitalists. If your Business Plan doesn’t provide a realistic 10 to 20 times the VC’s investment within 5 to 7 years, you likely don’t have a shot at venture capital.
  2. Founder’s Experience. If the founders of the business don’t have a track record, or an accomplished “platform” to dazzle the VCs, you also are far behind in the running for VC money.
  3. Market Readiness. You should have a “proven” product or service ready to hit the marketplace full force as soon as you receive VC money. Venture Capitalists don’t invest in “ideas” alone.

If either one of the above two major findings of the study are weak—the other one needs to be extremely strong. There are very few venture capital deals made each year (around 4,000/yr. in the U.S.), and they are only made to the businesses with the most convincing proposals.

Of course the above study only confirms what entrepreneurs have always known, but it is always good when academia catches up to the real world once in a while.

The take-away on all this is two-fold:

  1. Don’t bother shot-gunning your Business Plan to lists of Venture Capitalists—they won’t bother reading it. Get a personal introduction, or at least a referral. Otherwise you’re just wasting your time and the cost of postage.
  2. Make sure your Business Plan (it is really an “investment proposal,” but the SEC won’t allow you to call it that) measures up to the big three of VC interests: (1) Potential Return, (2) Founder’s Experience, and (3) Market Readiness.

If you can’t meet the above requirements—you’re not yet ready for venture capital, and you may need to seek alternative methods for financing your startup.

Are any of you looking for startup financing? If so, keep checking back as I’ll have more information on various ways to finance your small startup business.

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Funding For Startups

When talking about funding for startups, I continually find it interesting (and disheartening) that the business community so closely (exclusively?) associates “startups” with Venture Capital. In fact, a young entrepreneur recently told me that a business should not be called a “startup” until they begin searching for venture capital.

The Reality

That was a very naïve comment, and here’s why: According to the Kauffman Foundation, there were over 6.5 new businesses started in the U.S. during 2010. Also, according to PriceWaterhouseCoopers reports, there were 3,277 venture capital deals made during 2010.  Not very good odds.

So, where did the funding for startups come from to start the remainder of the 6.5 million new businesses?

Angel Investors

Certainly some financing came from Angel Investors, but their requirements are not that much different from the VCs. Angels usually precede VCs and get a company started before the VC becomes involved.

The data is elusive, but It appears that (certified) Angel investors may not have made substantially more deals than the VCs did. Even if they made 10 times as many deals as the VCs, that would only account for about one-half of one percent of the total startups for 2010.

Angel investors are actively coming together as “groups” that act on new venture deals as investing partners, just like the Venture Capitalists. The lone wolf angel investor is a dying breed.

Banks

Of course, no bank is going to provide funding for startups (other than, perhaps, a personal loan to the entrepreneur…if they have substantial collateral). There is also no indication that banks will begin more aggressive lending to businesses, especially small businesses, anytime in the foreseeable future.

Banks certainly are not the answer now, or any time soon.

SBA Loans

We need to remember that SBA loans are made by banks, not the government. SBA loans are only partially guaranteed by the government, and I have been told by many bankers that their SBA loans must meet the same borrower requirements as a non-SBA loan. Therefore, in reality, the SBA is not the answer either.

Grants

There is no such thing as a U.S. government grant available for the purpose of starting a for-profit company. There can be local “incentives” like tax postponement, subsidized property or facilities, etc., but finding grant money to start a for-profit business in the U.S. is like finding the Holy Grail.

While many of the economically emerging countries are offering strong incentives to entice American entrepreneurs to start businesses in their country, the U.S. seems paralyzed about doing anything to keep those businesses here, let alone expand our own business community.

Who’s Left?

Well, that still leaves something over 6 million new startup businesses without any realistic form of  outside funding. That means the primary sources of funding for startups available in the U.S. are: (1) the entrepreneur’s personal borrowing capacity, (2) family, and (3) friends.

Unfortunately, for nearly all of the over 6.5 million new U.S. businesses that will start up during 2011, the only investor decision that can be made is which family member or friend to approach first. Very sad.

How did you fund your startup business?

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Women in High-Tech

I recently read an article in the New York Times about women in the high-tech industry, particularly Silicon Valley. It was quite discouraging information, but it does give some insight into why the U.S. is falling so far behind the rest of the world in innovation and information sciences.

Here are some highlights from the article:

  • Women own 40 percent of private businesses in the U.S., but create only 8 percent of venture-backed tech startups.
  • Just 14 percent of Venture Capitalists are women.
  • Women outnumber men at elite colleges, law schools, medical schools, and the overall workforce, but are noticeably scarce in the high-tech world.
  • Only 18 percent of college students graduating with computer science degrees in 2008 were women—down from 37 percent in 1985.
  • Only 1 percent of girls taking the SAT in 2009 said they wanted to major in computer or information sciences.
  • Mixed-gender teams have produced technology patents that are cited 26 percent to 42 percent more often than the norm.
  • Women have few role models in high-tech.

These are just a few of the key points presented in this illuminating article. I highly recommend the article, because it speaks directly to our country’s decline in innovation and loss of high-tech leadership.

The title of the article is Out of the Loop in Silicon Valley, by Claire Cain Miller. I included a link here.

Venture Capital in Mid-America

Venture Capitalists tend to cluster in Boston and the Bay area of California. Many of them also like to be close to the companies they invest in. Consequently, many startups and growing small businesses located in the mid-America regions find it difficult to interest VCs.

No longer. There is a source of VC funding for small businesses in areas the U.S. Census Bureau defines as rural. These VCs are called Community Development Venture Capitalists (CDVC) and most of them are looking for a “double bottom line”–financial and social returns. Many of the CDVCs also provide money for operations assistance and to guarantee debt.

Although the concept of investing in “rural” companies began in the late 90’s, it has only become popular more recently. There are now about 80 CDVCs actively investing. There is a large untapped pool of talented entrepreneurs in small-town America, and even the traditional VCs are starting to realize that becoming successful does not require a big-city address. Ideas hatched in a small town diner are just as viable as those hatched in fancy high-rise buildings.

At the same time, don’t forget that these are still Venture Capitalists, and they don’t just hand out money without expecting a high rate of return. You still have to do your homework, and present a “knock their socks off” business plan–that is believable. There are thousands of people constantly seeking VC money across the country, and very few of them get funded. You must have a great concept, great team, and a great presentation, or your idea will never even get looked at. Do your homework…get help if you need it.

If you are starting a business in “rural” America, or trying to expand your existing business, you may be interested in what CDVCs have to offer. For more specific information on CDVCs, check them out at the Association of CDVCS.

Open Source Funding

I know there are many newly started, or about-to-start businesses out there just waiting for an investor to jump in and help them. Well, now’s your chance. Hi-tech entrepreneur, Mark Cuban, has developed his own private stimulus plan for small business, and is willing to consider funding existing, or start up businesses. If you are looking for “jump start” money, this program may be for you.

Here is what Mark said initially on his blog:

Rather than trying to be a Venture Capitalist, I was looking for an idea that hopefully could inspire people to create businesses that could quickly become self funding. Businesses that just needed a jump start to get the ball rolling and create jobs. Im a big believer that entrepreneurs will lead us out of this mess. I just needed a way to help.

So here it is. Some people will love it, some will hate it. It is what it is.

Some of Marks rules for funding may be outside the box, but he moves fast, and if your business qualifies, you may be funded very quickly.

This is certainly not the only way to fund your business, but it is an interesting concept, and well worth taking a look at.

For more information and all the details on applying for funding, go to Marks blog.

Good luck!