Angel Profile

Casting a Wide Net

When entrepreneurs look for funding, they should cast a wide net to attract different types of investors, according to John Taylor, Vice President of Research for the National Venture Capital Association.

While angel investors continue to be a prime funding source for most startups, venture capitalists remain in the hunt for great businesses from startups to final rounds. In short, rumors that venture capitalists have stopped investing are greatly exaggerated.

Taylor believes the statistics tell the story: VC firms continue to fund seed and early stage companies. NVCA research shows that in 2001, VC firms funded 199 seed or startup stage companies. Granted, this marks a drop from a high of 740 companies in 2000 when the economy was riding high and the deal flow had peaked.

“It’s still a very busy time for the VC industry. Venture Capital is alive and well,” Taylor says. “It only looks slow compared to the heady years of a couple years ago. Regardless, 2001 ends up the third best year in VC investing history.”

VC funded firms continue to pump life into the economy. Consider that VC funded firms account for:

• 7.6 million employees
• Annual revenues of $1.3 trillion

These figures represent:

• 5.9% of the U.S. payroll
• 13.1% of the U.S. GDP
• 7.9% of U.S. company revenues

Taylor argues that while angels typically fund startups, many VCs are willing to consider first-round funding after seed investment. The bottom line is entrepreneurs should consider a mixed bag of financing possibilities to create deals. For example, it’s common for angels and VCs to partner on deals.

Despite the continued growth of VC funding, there’s little doubt the investing has slowed. Taylor says many VCs are monitoring their present investments through sluggish economic times. Ironically, the economic environment makes it an ideal time to make new investments; and he’s certain VCs are out shopping for good business ideas.

“With valuations of companies at a low level, this is a very good time for investing money,” Taylor says. “VCs are in the investing business. Each time there’s a downturn; there are still plenty of opportunities out there. VCs are not taking out a full-page ads, but they’re out there looking for the next e-Bay or Amazon.”

To prove his point, Taylor points to the last major economic downturn 1990-mid-1992 when many of today’s major companies found Series A funding:

• Starbucks
• McAfee
• Palm Computing
• EFax.com
• Shiva Corp.
• CheckFree
• RF Micro Devices

To find funding from VCs or angels, entrepreneurs need to follow the three investment commandments:

1. Have a killer business plan that stresses the clear high-growth opportunity. Point out how your management team can execute the plan.
2. Target VCs that invest in your business area and at appropriate stages. For example, if investors specialize in later round biotech firms, they’re not likely to match well with those seeking seed funding in a non-technical field.
3. Find a credible accountant or lawyer who can get your business plan in front of a VC firm. However, Taylor recommends avoiding any middle man in negotiations. VCs prefer to interact directly with the entrepreneur.

 Taylor points out that part of the strategy for finding funding is to partner with the right investors. It’s important to consider the expertise of the investors and what they can bring to a startup. Visit NVCA (www.nvca.org) to get a copy of the NVCA directory of VC firms.

Despite the collapse of dot.coms, VC investors are still interested in Internet firms. However, the online business model has changed; VCs are more concerned with enterprise software. For example, in the past VCs might invest in companies selling dog food over the Internet; now investors are looking for companies that sell to a wide range of markets, such as software, security data management and data bases. Bio-technical/medical companies continue to attract a significant share of financing.

“VCs are still investing in the Internet,” Taylor says. “But rather than investing in companies that sell lettuce over the Internet, they’re investing in the companies that are selling to everyone on the Web.”

In Taylor’s opinion, when entrepreneurs search for startup funding, they should look at many possible sources. Consider a shotgun approach that might draw angels and VCs to provide funding.

“It’s an awfully good time to be coming forward with a business plan,” Taylor says. “The VC industry has money to invest; especially when investors can buy low and sell high. There’s a continuing shift from funding existing companies to new ones.”