What VCs really invest in and how to get funding for your startup

According to Dow Jones VentureSource, 2008, first-time investments accounted for 55% of overall deals, but that percentage fell hard in 2009 to 41% as venture firms helped their companies navigate troubling economic conditions. 2010 numbers are not available yet. But this reinforces my view that the VC world is changing for good: VCs have too much money and too few partners to focus on a real startup that needs “only” one or two million of an investment. They have to focus on M&Es and later stage deals in order to spend their money with the amount of partners and bandwidth they have.

The question is, who’s going to fill the void for startups… There are some VCs that fit that bill, but even more Angels are pursuing that business… or could it be that a whole new class of investors will emerge to address this need in the future?

official numbers in the angel investment market size has shrunk significantly during the past few years. Angel funding is The Center for Venture Research reports that Annual US Angel Market Investments (billions) went from $30.0 in 2001 to $19.2 in 2008.

I found an interesting presentation by MIT Venture Mentoring Service’s Alec Dingee on this topic.  Funding statistics vary he says, but:

• Worldwide: 62% funding provided by  entrepreneurs themselves (source: Global  Entrepreneurship Monitor)
• US : 87% of INC 5000 companies self‐funded,  with only 3% receiving venture capital (source:  INC)

Here is a list of Alternate Investment Sources he cites in this presentation:

• Founding team: Family/relatives or friends

• Government
• Angel investors
• Strategic partners
• Universities
• Banks
• Bootstrapping method

Ways of bootstrapping:

• Consulting or current job
• Sweat equity
• Savings
• Spouse salary
• Loans against personal property
• Credit cards

It looks like that last item on the list: Bootstrapping is going to be the way forward for now. But that’s not all bad news. After all, some very successful companies started off by that method.