Summarizing the current state of early stage venture and angel investing, the picture in Q4/2011 looks like this:
The U.S. and world economy does make investors nervous. That said, they must deploy their Funds to create a return on investment. So they are investing, but they are cautious about the criteria of the start up and the terms of the deal.
- The ability for entrepreneurs to build a Minimum Viable Product (MVP) from their own seed or sweat equity has created lots of new ventures and increased the competition for investment from angels and venture capitalists.
- Valuations are down (except for games, which are exempt from these considerations and work under a different business model).
- Despite the hype, venture capitalists are making fewer early stage investments (the angels are driving that momentum now).
- VCs are spreading the risk through syndication with other venture investors, and moving early for seats on (and if necessary, control of) the Board of Directors.
- There are more smart Angel investors than ever before, investing in the earliest stages of startups. They sometimes want 10-20% of your company for up to $250K in seed capital. Many new Angel investors are over-investing and not supporting their portfolio companies (so the new ventures suffer, and the Angel pulls back from investing, particularly in the next round). Entrepreneurs should screen their investors.
- There is a gap between each round of funding, beginning at seed capital, and no investor (angel or VC) will commit to the next round in advance. This demands careful capital strategy from entrepreneurs.
- Hot investment sectors include: online media, games, social media, and any new idea that can monetize quickly and then scale.
Key advice to entrepreneurs:
- Take capital as late as possible to drive the highest valuation and to retain control of your company. Find strategic revenue or capital rather than equity capital, if possible.
- Your management team needs a history of prior start up success (find a partner who has this).
- Ask for enough capital to get safely to the next level of funding.
- Have some kind of defensibility for your idea in the marketplace. Don’t prove the market only to let the Big Dogs take it away from you.
These are exciting times, and risky times. Good luck!