Circular Patterns in Venture Capital and Angel Investing: Interesting Trends and Tips

1. During the past decade, the size of seed rounds has remained stagnant and number of deals have decreased. To the untrained eye, it seems that there is more competition for seed dollars. Below the surface, however, startups are recycling founders experience. The reason why the number of deals has decreased is that teams are better prepared, are more financially savvy, have access to better-priced support, waste less time and resources, are using other forms of funding PRIOR to seed rounds, and are pivoting or deciding to get out earlier -at the pre-seed stage. (Founders will jump into exploring new opportunities).

Founding teams are recycled

2. More firms seeking seed rounds already have sales, expression of interests, and some form of market validation as a result of the circular economy of entrepreneurial mind and action. Firms that seek seed rounds are more advanced than 10 years ago. Founders are using other ways to get funded (as they should! Because seed funding is very expensive!), AND they are also recycling the experience of founding, co-founding, advising, and/or being early employees in previous firms. This is creating a circular economy of entrepreneurial experience. Not just serial entrepreneurs but a large pool of people who have experienced startup development (failed, successful, and everything in between, in so many roles!).

Supplier of funds are recycled

3. More investors are getting into each round, and seed rounds have become more collaborative. More and more small funds, angels and angel groups are co-investing. That means more eyes are evaluating deals (GOOD) but also BAD deals are getting through because the impact of each deal in the overall portfolio is lower, and the FOMO (fear of missing out) can get that signature! Think Theranos (ouch).

TIP: Nobody talks about the herd mentality and there will be some lessons to learn going forward. Because of the cycling and recycling nature of funding, early investors are able to scan deals early, with lower amounts, and, if they want to play in future rounds, they need to get in early and with others: pay to play.

Founders and funders’ recycling is also changing the exits:

4. Exits are being recycled too! Companies are being acquired, taken public, broken into pieces, resold, privatized, re-public’ed, and there are many emerging opportunities for exit. This is actually an area ripe for disruption. Welcome to the world of recycling exits.

And the funding process has become more interesting and complex.

5. As both entrepreneurs and funders become more comfortable navigating many options of funding startups or grownups, new funding options are emerging: there is better knowledge about crowdfunding, cryptocurrencies, hybrids (safes/convertible notes), and SFI-types (can we call this special funding instruments?). Capital suppliers are borrowing mechanisms from SPV, SPE, and SVI. I can’t wait to see what new options sprout of this.

All of these recycling and repurposing has an impact on ROI and capital markets

6. Cycles are longer: It takes longer to climb a larger mountain, especially if, along the way, there have been some quasi-exits, pivots, more and larger rounds. This is having an impact on the way we negotiate funding going INTO the firm, because there is light at the end of the tunnel, but the tunnel is getting much longer. Combine this with the uncertainty of how investors get OUT. Again, this is an area ripe for disruption and I can’t wait to see new options emerging. With longer cycles, the return on investment decreases, so firms are pushed into finding new and disruptive ways to excite investors and NEW investors who supposedly are more risk-averse and adventurous, but in reality are reckless.

Longer roads need more resources,

But the supply of capital does not exist in a vacuum

7. Public markets are shrinking, and investors -especially institutional investors- are navigating through a rollercoaster of political insanity. Mostly derived from the surprising interest in protecting borders than in having healthy global economies, financial and economic illiteracy is permeating the political arena where decisions are reckless and financial managers are focusing on reducing stupid (gasp) risks instead of creating and supporting new wealth.

Overall, a combination of healthy recycling of talent, capital, and technology is fueling the economy despite mistakes made by politics.

For investors the signals are clear: Get in early, support many startups, learn and collaborate.

For entrepreneurs the signals indicate: Use many forms of funding, use dynamic funding, ask investors for support (not just money), and create dynamic teams.

Oh, and for small business owners that think “small is beautiful”, now, more than ever, my famous quote of 100% of 1 is 1, but 1% of 1000 is more, is more valid than ever. Get in line, ditch the illusion of a “safe” and embrace the “growth” mindset. If we stop growing, we start dying. Small IS beautiful, it is just not sustainable.

For Government and Economic Development Agencies, the puzzle is getting more and more complex… Hang in there!

We really don’t know what we are doing, but we are doing!

Venture Capital and Angel Investors

Despite the fact that Venture Capital funding fell during the 2008-2009 fiscal year, venture funding also picked up along with mergers and acquisitions. There is no question that there have been some tough times for both entrepreneurs and venture capitalists alike. There are signs that VC funding will be back in the norm at the beginning of 2012. There is no question that in most cases, when entrepreneurs are looking to raise capital from angel investors or venture capitalists, the odds are almost always against the entrepreneur.

In most cases, the entrepreneur ends up dealing with conservatives who invest in start-ups, which involves a rather high risk to the investor. In any case, for an entrepreneur to have any chance in raising venture capital he has to do quite of bit of work and research to make sure that everything is right and that the investor agrees with the research. The most important thing to look at here is that you need to make wise decisions in your business plan and all your research when going to propose your company to an investor.

As far as different industries are concerned, venture capital firms usually invest in the industries and sectors that their partners have experience in. In most cases this primarily depends on the firm itself and the expertise of the partners in that firm. Through services you can get online you can gain access to many investors with a wide range of different industry expertise. There are thousands of investors with all kinds of different industry, geographic and stage preferences. All of these preferences are very important in choosing investors.

The difference between angel investors and venture capitalists is that, on one hand angel investors invest their own money, whereas venture capitalists invest money from funds that they manage. Furthermore, angel investors are not professional investors, whereas venture capitalists and other institutional investors are professional investors. What does this mean? Well, it is quite simple. Angel investors usually invest their own money and since it is their own money, they have a wide range of different reasons for investing it. On the other hand, venture capitalists and equity investors invest on a professional basis and do not invest their own money. Institutional investors usually work for a private equity firm or, in the case of venture capitalists, a venture capital firm. These firms manage equity and the money invested usually comes from different firms. These funds can come from pension funds, endowments or the private funds from wealthy families.