Fundraising · Entrepreneurship

Is there enough angel investment and venture funding in the startup ecosystem?

Kashif Jehangir Assistant Manager Administration at Private Company

November 2nd, 2016

We, entrepreneurs, need angels investors. The whole startup concept is lost without them. I got a bit worried recently while I was reading that the number of angel investors is on a decline and that there are too much startups of which most of them fail or are not sustainable. Is it possible that the startup sector is saturated with companies and that VCs are losing interest ans perhaps moving up on the cycle towards Series Bs and Series Cs? What would this mean for the startup ecosystem? Is this even true?
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Martin Omansky Independent Venture Capital & Private Equity Professional

November 2nd, 2016

Several things are true: (1) there are many more ventures than ever, due mostly, I think, to the inexpensive ways of developing certain digital products; (2) there have always been shortages of risk capital, probably because most investors are risk averse; (3) except for a short period in the 1980's, the Federal Tax Code has not encouraged risk investments; (4) many projects, especially in the life sciences, demand large amounts of capital up front, thereby squeezing out less expensive, smaller market projects; (4) despite Internet-based efficiencies in the capital markets, identifying angel investors remains difficult - probably because true angel investors are (a) hiding; (b) over-solicited; (c) bloodied by the many failures; and (d) tired of the high legal and due diligence costs associated with risk investments. I think that a change in the tax code would be the best single thing we could do to encourage research, innovation, and entrepreneurship. In summary, there is entry of cash, but insufficient financial tools to improve economic activity. Sent from my iPhone

Steve Owens

November 2nd, 2016

It is purely anecdotal, but my experience is that there is not nearly enough great startups today.

Money seems easier today than it was 20 years ago.  Not counting the *.com bubble.  Investors can not find quality companies to invest in.

Not sure why this is, but I guess that something has changed, and the truly capable people do not do startups any more.  

Of course, there will always be a gaggle of bad startups.  

Rogue Startup

February 27th, 2017

Lots of capital out there: angel, VC, strategic, etc.


One issue I see is that the hurdle to get angel capital, is higher than in prior years (anecdotal). Seems like angel groups are acting more like Series A venture investors, which requires the startup to show solid traction that reduces the angels risk.


I think the key is focusing on gathering good evidence/data that your "idea" is a "business" and is showing initial traction towards product-market fit. As I travel along that road, I generally find investors who are interested in the sector/market of my startup.


Just some thoughts.


roguestartup.com

Ugur Cirak A New Journey Starting From Japan: SpeakMates.com

February 27th, 2017

Angels invest their own money and VCs invest other people's money, so I think when there is limited exit possibilities in a market initial hype about angel investment fade away quickly. However one trend I see is that micro or early stage VC funds (sometimes as incubators, accelarators or just funds) are increasing, this might compensate for the lower level of angel interest in some markets.

Philip Regenie CEO at Chimera IoT

November 5th, 2016

My view of this is based on pure economics. The reason Angel Investors are moving up the ladder towards higher funding rounds is the calculated return on their investment.  Seed round funding requires more risk in a very high density BS target.

The quality of business opportunities is lower than it was because of ease of entry from the technical perspective and just the sheer volume of entrants. 

I believe in self funding for this very reason.  Self funded enterprises must pass the acid test through the entire business lifecycle. The risk goes to where it belongs,  on the executioners. 

Valeriia Timokhina Eastern Peak Software: Custom software development

November 9th, 2016

There are a lot of funding opportunities and sources apart from angel investors, but many startups focus on harassing angels and VCs and ignore them.
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Rupert Meghnot MBA CXO, Burnout Game Ventures, LLC

November 2nd, 2016

Cannot speak for the rest of the nation. Only know that Florida received 0.8% of the $54B in venture capital invested last year. In a state that has 3 of the top 10 entrepreneur cities. We (startups) require a new paradigm - away from the equity for unrealistic returns (which usually turns into investor stuck holding worthless stock). Everything Martin says is true. If I may add some context regarding #4 (based upon personal experience): a) they're not hiding, they just don't know how to begin investing (i.e., know who to call, unsure to take the leap - "risk averse", limiting themselves to only what they know, etc.); c) they're "bloodied" because they utilized a failed model - even after they go through all that due diligence, and invest in only a small fraction of the opportunities presented, they expect to lose 50% of their investment, have 20% break even, have 20% generate 2-5x, and 10% do 10x. Seriously? They PLAN to throw away 50% of their hard-earned money? And everyone calls this a good model? And, d) this is what you get when you insist on equity. The suggested new paradigm is one which utilizes loans (Convertible Notes?) and share in the revenues (which can be immediate). No equity hassles (and MUCH less legal costs), chance of $0 return is extremely low, investment required is much less - hopefully, more attractive to risk-averse investors (i.e., toss in a few grand & see what happens! If it works & you like it, you can always invest more. If if fails, you haven't lost much at all). The problem, of course, is finding angels that can actually think outside the "box" they're in, and appreciate new financing models (which mitigate or avoid the risks mentioned in this thread). And, yes, we desperately need a new Tax Code.

Nick Damiano Co-Founder & CEO at Zenflow

November 2nd, 2016

In an efficient market, the relative number of angel investors, VCs, and startups would always hover around an equilibrium. In reality, several factors prevent that from being the case. To name a few:
1) Glorification of the startup world, leading many to jump in even though it's difficult, stressful, risky, and not suitable for all personality types
2) Unrealistic expectations on the part of less informed investors, particularly angel investors, who may overestimate likely returns
3) Motivations on the part of angel investors other than pure profit (e.g. interest in better cancer treatments and contributing to companies aiming to develop those)
4) Greed and fear on the part of investors, including VCs and their LPs, leading to overreactions. For example, medical device returns were fairly weak from 2000-08, so many investors shifted entirely to healthcare IT, yet there's no certainty that the latter vertical will produce better future returns. If anything, the opposite is likely to be true, as only the strong startups will survive in an industry where funding is scarce, whereas an industry with lots of investor interest will see many weak startups get funded. This is why contrarian strategies often do well.

In general, I think there are too many startups and too many angel investors putting seed money into companies right now. This is the primary cause of the supposed "Series A crunch." I've see a lot of companies stay in the seed stage and raise convertible note rounds for 5-6 years, constantly one big break away from being "Series A ready." Needless to say, these companies are unlikely to produce great returns for the angels, at least in an annualized sense. 

These early investors would be better served by investing only in very strong teams with a much better solution to a real, substantial user need and a proven ability to make progress. I've seen many startups that fail on one or more of these criteria raise loads of seed funding but never get anywhere. The risks facing these companies should have been obvious from the get-go.

Regarding later stage funding, I think the VC world is a little better at regulating the amount of funding it doles out than the angel world is, notwithstanding typical market volatility. If VC returns are higher than other asset classes, LP money floods in, and if they're lower, the reverse happens. Overall the amount of later stage funding is probably about what it should be, with temporary inefficiencies based on greed/fear around specific verticals (see medtech vs. health IT above) and macro economic conditions.

Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

November 2nd, 2016

I cannot speak to Pakistan but in the US we have seen more capital deployed to start-ups than at any time before. The start-up sector is certainly saturated with companies that will never get funded for a variety of reasons. Companies that have a good chance of success and profitability still seem to find the funding that they need. A lot of funding sources will dry up when the US stock market pulls back which may happen within a year if not sooner. 

Daniele Cesano Sustainability Entrepreneur

November 3rd, 2016

The experience that I have with my own startup is that it took 2 years to develop the idea and it is taking an additional 4 years to structure it in such a way that we can bring everything up to scale... We got a lot of grants at the beginning and only recently we got investment from a structured bank and during next phase, in about 1,5 years when our commercial pilot will be validated, we will be able to eventually scale up our operations and move to a commercial mode. I think we need a lot more of first loss guarantees and mechanisms that do protect investors and entrepreneurs. We have a few today, but many of them are not accessible by startups because they require institutions with credibility and a long history of success, which is not the case for 90% of the start ups if looked purely form an institutional perspective. We would have never been able to do what we did without grants and research money we accessed through NGOs and research institutions and universities that partnered with us. We could have sold ideas but consistency comes with time and action oriented trials and erros, and ultimately with commercial pilots that require a lot of time and details to prove they work. After that, things may go better... I think we need some innovation on the way in which we fund these start ups and government money may need to allow funding to flow also to those companies that do not have a consolidated  truck record of success... Who you partner with determines a big chunk of what you will be in the future...