The 2008 Economy and Startup Investing

I got an interesting email from an entrepreneur this morning asking my thoughts on the funding outlook for start-up companies this year and whether investors mood over the stock market and economy affect the number of dollars invested.

I thought a while about my answer. I didn’t want to sound flip or dismissive and I don’t have a crystal ball to peer into. Also, I have experienced a little pull back from some Angels on prospective investments.

I have attended a few pitch sessions this year and the investors, mostly Angels, have been enthusiastic about looking at companies. I haven’t seen a drop in attendance by investors. I won’t really know unless I see a drop in the number of fundings and it is a little too early in 2008 to for that data.

The last data I saw showed that Angels invested in 51,000 early stage companies in 2006. The Center for Venture Research at the University of New Hampshire reported that 24,000 early stage companies received Angel investments in the first half of 2007, which was down about 2%. So it seems that if the number of investments go down in single digits, there will still be plenty of deals being funded by Angels.

I haven’t heard about VC’s deciding on closing down funds based on the economy. On the other hand, the Price Waterhouse Money Tree report shows that there were more seed/early stage investments in 2007 than in 2006 both in terms of deals and total dollars invested ($6.3B vs. $5.3B).

 So, I would be less concerned about whether investments dollars will be available and more concerned about making sure that I am able to describe a great opportunity that clearly separates me from the myriad of companies competing for these dollars.

Remember somebody is out there with the next YouTube, Facebook, Digg or other potential high flier. So you really need to:

• take the time to create your story,
• see if it meets the expectations of your prospective investors,
• make sure that all your documentation is squeaky clean,
• lead with your elevator pitch, and,
• most importantly, look for that person who can make a warm introduction for you.