Why Angels and VCs Are Flooding Startups With Funds
The availability of financing for early-stage companies is hitting levels not seen since the halcyon year of 2000, when venture capitalists poured a record $105 billion into young enterprises. So far this year, the National Venture Capital Association (NVCA) says VC investments of $33 billion have exceeded the total for 2013. The full year figure is expected to top $40 billion—about twice the typical annual level since the bust early this century.
Meanwhile, the "Halo Report" from the Angel Research Institute reports that deals in which angel investors co-invested with others reached a median size of more than $2 million, a figure that's higher than it’s been in more than a year.
All told, the picture for early-stage fundraising is extraordinarily rosy, says Cameron Yuill, a partner in San Francisco seed venture firm Structure Capital. “If you have an idea and want to start a company, there’s never, ever been a better time to go after the money,” Yuill says.
Part of the reason for Yuill’s optimism is that the cost of starting a company, especially software, Internet and other technology-related ventures, has dropped sharply in recent years. The tools for developing, marketing and distributing products are also better and less expensive.
And now that the availability of financing is catching up, it's creating what some describe as a "near perfect storm" for entrepreneurs. “I encourage anybody who has any entrepreneurial bent to do it now,” Yuill says. “We’re awash with money.”
Late Stage Versus Early Stage
Despite Yuill's optimistic expectations for startups, some numbers show that you might have better luck landing funding for your later-stage company. The $33 billion invested so far this year by VC funds has been flowing lopsidedly to later-stage ventures. NVCA’s report for the third quarter showed seed stage investment fell by 5 percent in dollars, while investments in later-stage companies increased by 3 percent.
The investment activity also varied by industry. VCs were heavily into software, followed by media and entertainment. Less popular investments were the life sciences, including biotechnology and medical devices. The financial services, industrial, and energy and consumer products and services sectors also attracted less VC dollars.
The big news from angels was that, while the average investment by an angel firm decreased, the size of the investments that angels participated in with other players, including VCs, rose to $3 million this year from $2.7 million in 2013. Another change was the addition of angel investors from Texas to the nation’s most active states list, along with investors from California, New England and the Mid-Atlantic states. Internet, healthcare and mobile startups got nearly three-quarters of all angel dollars, with software companies taking another 11 percent.
Behind these figures, a major change in angel investing has been the rise of small seed funds that fill the gap between early-stage angels and later-stage venture capitalists. Over the past year and a half, a new crop of firms such as Yuill’s has assembled funds that range from around $10 million to $150 million for investing in very young companies. Structure Capital, for instance, which launched in 2013, is raising an additional $50 million for its second investment fund. Many similar, new investment firms are also helping young companies obtain financing.
“There’s been an extraordinary influx of angel capital the past few years,” says attorney Buddy Arnheim, who works for Palo Alto, California-based law firm Perkins Coie and specializes in advising new ventures. “We’re closing an angel round for a startup every two to three days.”
It's Still Who You Know
While venture, angel and seed fund financing is more available now than it's been in years, the route to finding it hasn’t changed much. “It’s most effectively done via personal relationships,” Arnheim says. That means people already known to entrepreneurs, their advisors or others associated with the venture have to be able to provide introductions to sources of financing. “If you talk to investors, very few of them say they’ve invested in a company via a cold call,” Arnheim adds. “It just doesn’t happen that often.”
Although the past year or so may have been a great time to start a company, that doesn’t mean tomorrow is going to be any worse. Today’s early-stage investors are eager to place frequent bets even on very young and speculative enterprises. Structure Capital, for instance, has made 82 investments in a little over a year, and Yuill doesn’t see that slowing down. “We’re ready to put our money to work,” he says. “We intend to keep doing that.”
Early-stage ventures are also attracting new funding partners, including potentially big-money investors such as hedge funds and mutual funds, which previously tended to avoid the field. And while the amount of speculative investments is at its highest since 2000, this could still be just the beginning of a very promising era for entrepreneurs seeking financial backers.
“It’s never easy to raise capital, but these sources of capital are easier than they used to be," Arnheim says, "and I don’t see it going away. I think it’s here to stay.”
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