Goldilocks and The Three Funders

-By Stephen Fiedler

In this world, there are the thinkers and there are doers. If you just so happen to be an entrepreneur, you are both.

Life for a go-getting entrepreneur is a dichotomous, focusing on both product development and capital accumulation. Depending upon the stage of your startup/company’s development, there are certain types of funding that green entrepreneurs should turn to in hopes of meeting success in this chaotic and ever-evolving environment. Here are the three main forms of funding for startups and small businesses, including Angels, Angel Funds and Venture Capital. See which one fix you and your company’s needs the most:

Angels:

Angel investments are what most entrepreneurs think of when they first seek outside funding for their business. Angel funding is the smallest form funding and usually comes from  an individual who has significant funds or earning potential (other successful entrepreneurs, doctors, lawyers, etc…) but who is seeking out potential high return investments. Because successful startups produce a much larger return than most stock market ventures, Angels are the risk takers, who either see something as the “next big thing” or want to get on the ground floor of something huge (ideally).

As a result, Angels will often invest between $10,000 to in excess of a $100,000 in a business, often seeking an equity stake in return for their investment. Angels can often be friends, family or close acquaintances that often have more faith in you, the entrepreneur, than the company, because little has been produced yet. They work as catalysts. They get the ball rolling and say to a would be entrepreneur with a great idea: “go for it”.

Angel Funds:

Angel Funds, in contrast to Angles, are a blend between individual angel investors and the more traditional VC investors.  An Angel Fund is usually comprised of a group of individual investors (mostly Angels) who pool their money to make a number of individual investments. Angel funds are an intermediary step towards long-term funding, but they pack a punch if you can get enough investors on board.

An example of a Angel Fund might be 50 individual angels each contributing $100,000 to make an overall fund of $5,000,000.  This overall fund will then make a number of individual investments, allowing the individual angels to diversify their risk.  A typical angel fund will have a submission process, often via the internet, where you can submit your business plan or overview documents.  If selected for the next step, you would present your overall business plan to the members of the fund, where afterwards they will vote to proceed or not.  If the fund has enough votes to proceed, they will often select a small group of members to negotiate the details with the entrepreneur (think board members).

Angel funds will typically invest between $100,000 and $1,000,000 in a company (often in multiple tracks), taking an equity position in the company and will often require board representation. Thus they often typify companies that have demonstrated more than just startup returns–but are actually producing a product that challenges other competitors. That being said, the toughest part for most entrepreneurs when dealing with an angel fund is the group presentation and dealing with competing and contradicting influences from the group of Angels. Angel Funds mean you have got the ball rolling, but your still stuck in startup limbo.

Venture Capital:

This is the big kahuna. While Angels help get you going on your startup, and Angel Funds provide the immense amount of support and capital to get you to a product development and testing, venture capital funding is that final stage of funding that all entrepreneurs dream of. Venture Capital is institutional and comes from professionally managed funds that have $25 million to $1 billion to invest in emerging growth companies. Here it’s not just a bunch of benefactor-like Angels pooling resources together. This is a money management fund with professionals and expertise in knowing where to invest and where the big payouts are coming from. They don’t invest in something unless they expect HUGE dividends.

Venture capital is ideal for high-growth companies that are capable of reaching at least $25 million in sales in five years and is best use from financing product development to expansion of a proven and profitable product or service. The costs and funds are typically expensive and not readily available to most entrepreneurs. This is because institutional venture capitalists demand significant equity from a business. For example, the earlier the investment stage, the more equity is required to convince an institutional venture capitalist to invest. Thus the range of funds typically available is $500,000 to $10 million.

Institutional venture capitalists are choosy and few startups make it to this stage of funding. Compounding the degree of difficulty is the fact that institutional venture capital is an appropriate source of funding for a limited number of companies. Yet once you get Round 1/A the levels of funding and finance begin to skyrocket (see chart above). So if you can make it over the first round of VC funding, and your company is already headed toward the black, venture capital funding is “just right” for you.

Weathering the Storm: Entrepreneurial Outlook for 2012

–By Stephen Fiedler

It’s no secret that the 2000s were a rough time for entrepreneurs and venture capitalists. As compared to the booming 1990s, where credit was cheap and readily available, dot.com IPOs drove the NYSE to new heights and US patents dominated innovation, the 2000s have been a bust for many stary-eyed VCs and entrepreneurs. Sure, we still have the Zuckerbergs, and Google sits poised to rule the world–but for the rest of us, the credit crunch and plunge in consumer confidence has made it very difficult for entrepreneurs to receive funding the past decade.

In our previous post, The VC State of Mind (Click for article), we demonstrated just how far VC funding has dropped since the all time high of $100 Billion in 2000, with the largest drop coming the past 4 years (following the 2007-2008 Financial Crisis). Sustained economic stagnation, coupled with US political impasses has worked to not only close VC wallets, but has also pushed entrepreneurs and innovators to look for work and funding overseas, drying up the once overflowing well of startup capital in the US.

But optimism springs eternal in the startup world (otherwise why would we even bother?), and after weathering one heck of a recession, signs point to a (tempered) revival of US entrepreneurship and VC growth in 2012. Winter is coming…but so is another fiscal year, this time with better economic indicators across the board. For the first time in nearly five years entrepreneurship outlook in the US is looking up:

There is a silver lining that bodes well for entrepreneurship in 2012 and beyond. While it may sound counter-intuitive, the US economic free-fall has created a new class of hardened entrepreneurs–simply out of necessity. In these uncertain times, this new class of entrepreneurs has hardened themselves, becoming more independent and more ambitious. I call it the “Honey Badger Syndrome,” which in these trying financial times, forces a driven business person to “takes what he/she wants” directly and side-step the corporate ladder.

“Young people know that there’s a high likelihood they’ll have to make it on their own,” says Thomas Knapp, associate director at the University of Southern California’s Lloyd Greif Center for Entrepreneurial Studies which has seen a 13.2 percent year-over-year increase in students taking entrepreneurship courses at the school. Across the business school board, entrepreneurship programs are growing in popularity.

The numbers support this claim as well. According to the Kauffman Foundation, 565,000 new businesses were created in 2010. For full market data and an interactive chart, check out the Kaufman Foundation’s Index of Entrepreneurial Activity. That’s the most in 15 years (although is amplified by the recession), as many new entrepreneurs had little choice but to create their own company in lieu of finding one to work for. While the numbers aren’t out yet for 2011, one would expect this trend toward “any means necessary” entrepreneurship to continue. After all, necessity is the mother of invention.

See if your industry is on the rise here with the “Top 10 Small Business Predictions of 2012”.