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Improve Funding Odds by Going With the Trend

Improve Funding Odds by Going With the Trend

Startups and entrepreneurs need to be realists. You need to accept the fact that the down economy over the last couple of years has changed the way in which venture capitalists see the world, so you should adjust your strategy and expectations in dealing with them.

While the amounts were down, the number of startups that took slices of the pie went up by 9 percent (780 total), perhaps signaling that investors are trying to be more economical with their funds. Despite the third-quarter funding drop, though, funding for the full year still looks to be higher than it was in 2009.

So the venture process isn’t dead yet, despite all the rumors. But the amount invested did decline 7 percent to $4.8 billion in the July-September period, compared with $5.2 billion invested during the same three-month period in 2009, according to the National Venture Capital Association (NVCA).

There is no doubt that many VCs are still holding onto their cash while they wait for conditions to improve — a lemming-like mindset of cash conservation that won’t help pull us out of the downturn. Many of the large endowments that invest in the venture industry have seen their net worth plummet. The market is coming back, but it is still well under water.

So what can you do to optimize your chances of getting a chunk of the money? Here are some recommendations I have heard from the experts:

  • Move your company to Silicon Valley or Boston. VCs have pulled closer to home and hunkered down. Like angels, they like to touch and feel their investments. About half of the VC dollars and deals come from these two corridors, so it helps to be there.
  • Move your company to China, India, or Israel. Amazingly, it you can’t be where VCs live, the next best thing is to be way out in the new frontiers of investment. Overall, venture capital investment fell in the United States last year but rose elsewhere. This is called overseas speculation in big growth opportunities.
  • Get in a recession-proof sector. Many sectors where VCs have traditionally made the biggest home runs have faded or matured. These include chips, computers, software, telecom, and the Internet. Last quarter winners were clean tech, biotech, and medical.
  • Personal networking is key. Unless you know a VC personally, the chance of getting them on the phone and pitching them, before they have had a chance to look over some kind of summary, is zero. An entrepreneur should use advisors to find someone “on the inside” who can make personal introductions to investors.
  • Hone your executive summary. Once introduced, your best entre is hitting the VC with a well-honed executive summary. Here are the “big four” that must be in the summary – what you do and what space you are in, how you make money, your competitive advantage and your funding plans.

Make no mistake, the first priority for VCs this year will be to provide more monetary support towards existing investments and companies. As a result, young, innovative companies are being hit hard. Many believe that investing in new technologies and paradigm shift products is too risky a move in today’s down economy.

The upside of the down economy is that it opens prospects to obtain great deals. Luckily, some VCs feel that the best time to invest is during a struggling market, when both valuations and competition are at an all time low.

I believe that startups and venture capital firms that struggle but survive in 2010 will emerge stronger in 2011, making that a year of recovery and renewal in the investment world. Be there.

Marty Zwilling

Marty is Cayenne's Chief Knowledge Officer and the Founder & CEO of Startup Professionals. His passion is nurturing the development of entrepreneurs by providing first-hand mentoring, funding assistance, and business plan development. He has over 30 years of experience in big businesses, as well as startups. View details.

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    1. About 6 million businesses are started each year in the U.S., according to the Kauffman Foundation. VCs invested in 3,277 deals in 2010, according to PriceWaterhouseCoopers. If you do the math, you’ll see that the percentage is tiny. [See notes below for a few caveats and disclaimers.]

      Having said that, I imagine that 100% of the deals that VCs believe have great potential succeed in getting funded if they go about it the right way. Great potential means that they have all the right ingredients: proven product, strong management, large market, good competitive position, good customer traction, clean balance sheet and legal entity structure, etc.

      [Note 1] VCs typically don’t invest in “startups” but rather in businesses that have been developed with personal funds, friends & family funds, angel investments, and customer revenues over a period of several years. In addition, venture capital isn’t an appropriate source of capital for the vast majority of startups. Venture capital is appropriate only for specific types of high-growth (and often high-leverage) businesses. Thus, it’s not really meaningful to divide the # of VC investments by 6 million.

      [Note 2] The PWC number might include multiple investments in the same company and might include some non-U.S. companies (it’s been a while since I’ve dug into the details), so the actual percentage is probably even smaller.

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