Are VCs Still Funding Startups?

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Nearly every university is plowing money into academic programs on entrepreneurship. Nearly every major city is sponsoring and funding centers for innovation in the hopes of attracting startup companies. But wait, now the news is out that venture capital funding for early-stage companies is way down. And everyone is ignoring the fact and knocking on VC doors anyway.

According to TechCrunch, since 2014 the amount of VC money pouring into tech companies worldwide has nearly shrunk in half from 19,000 that year to 10,000 in 2017. And here is the point worth noting for entrepreneurs: the amount of dollars invested is about the same – it’s just going into later stage companies, not into Series A companies. For the first time entrepreneur just starting out this is not good news.

Everyone has theories about why this is happening including the shift away from funding apps and increasingly risk-averse angel investors. For some there is also the belief that fintech, edtech and SasS startups are so last year.

As an investor and former big firm venture capitalist, I have my own ideas about why the VC community is shying away from early stage companies. Entrepreneurs take note!

Too many early stage company ideas are just not big enough. When the venture community is talking about flying cars and curing cancer, it’s hard to get any attention. Entrepreneurs – make your idea big or don’t bother with VCs.

Early stage entrepreneur naiveté. Having a good idea does not mean it is right for a venture firm. Too many early stage entrepreneurs just don’t understand how venture firms operate. Venture firms stake out the industries and areas in which there could be interest in investing. Any idea outside of that staked out area is not fundable. Entrepreneurs – know who might fund you and don’t waste your time with others. And don’t get your feelings hurt if all you hear is no.

Venture fatigue. Startups are hard work. Some VCs just don’t want to put in the energy to work with a pre-revenue startup, no matter how good the idea. Entrepreneurs – make it easy for a VC to help you.

Do we really need that? My favorite phrase from the venture world is, “There is an infinite demand for the unavailable.” Meaning, maybe there is no market for that early stage idea.

  • Maybe we don’t need another app for finding coffee shops.
  • Maybe we don’t need Siri with more accents.
  • Maybe we don’t need a smarter pool sweep.
  • Or, maybe we do but the VCs aren’t biting.

A big bunch of companies are waiting to scale up. Think of the pig in the python metaphor. Sometimes digestion takes a long time. Based on many investments in early stage companies that happened earlier, we are now waiting for them to scale from a three million dollar company into a forty million dollar company. When that happens, there will be more capital available for the startups. Entrepreneurs – make sure you are always thinking of scaling up.

Entrepreneurs, take heart. The VCs are not abandoning startups. A huge amount of venture capital is still interested in big ideas and great entrepreneurs.  Many great firms only focus on and invest in early stage companies. All the good ideas are not gone. Take a deep breath and think of BIG, NEW ideas.

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