I wrote this post earlier today and put it up on Startup Coast but thought I would re-blog it here.
This is one question that I have gotten quite a bit by entrepreneurs who are currently pitching or thinking about pitching their companies. There is a lot of rhetoric out there, so I decided to see if I could find some information on my own.
I went over to SoCalTech, where Ben Kuo’s team has been tracking investments in SoCal companies for many years, and here’s what I found out. 47 investing groups have invested in 105 early stage deals in the first half of 2009. The highest was Tech Coast Angels with five Seed and one 2nd round fundings. Now I am pretty sure that these numbers are down versus previous years, but not exactly zero.
Next, I thought I would see what the national numbers looked like. The Angel Capital numbers for 2009 are not out yet, but Price Waterhouse’s Money Tree Report is available for 1Q09. This shows that there were 549 deals representing $3.0B of investment. Of this, 47 were startup/seed investments worth $169M and 157 were early stage worth $683M.
Again not record breaking, but having $852M of VC funding going into early stage companies is no small amount. So, what exactly is the problem and why am I being asked this so often?
I think that one answer is that, overall, early stage investments are down while the number of people who think that a down economy is the perfect time to start a business. Result, is a bigger group of people going after a smaller amount of money. So the bar gets raised and entrepreneurs need to up their game to get noticed. You need a great story, documentation, with significant investor potential.
I also think that entrepreneurs are running in to investors who just don’t have available cash. The Exit landscape hasn’t been too rosy over the last 18 months. So, you have a lot of investors, especially in the Angel space, without cash. I think that a lot of them would rather tell you to get more traction, or fix some other problem with your opportunity rather than admit they are out of cash. Maybe if you work on your business a while, they will have money by the time you are done and come back to them.
The bottom line is that early stage companies will continue to be funded, but those that do will stand out head and shoulders above the rest. They will have compelling stories offering great returns for the investors, solve big problems that people are willing to pay for, and they will have squeaky clean documentation that meets investor expectations. What meets an investor’s expectation? Try asking before you decide to pitch!