Last week my colleague Kevin Crowley and I attended the youngStartup Ventures VC Outlook event in New York City – an event sponsored by Connecticut Innovations. This well-attended event attracted numerous VCs and entrepreneurs. During the event, both Kevin and I held pitching sessions for two hours nonstop, and we heard some very interesting business ideas.
While a lot of people came to pitch their ideas to CI, several entrepreneurs just wanted to get feedback on their products from VCs. This is a great strategy. The entrepreneurs not only get initial feedback on their prototypes, but they also make great connections for future meetings with VCs and start to be on the VCs’ radar. It helps an entrepreneur to be a “known entity” when raising venture capital. A VC may remember an entrepreneur from, say, six months ago, and he or she may note a considerable ramp up in the company’s product, a sign of great progress that can help the entrepreneur raise capital on better terms.
A panel during the event featured speakers from top VC firms and angel groups, including our own Kevin Crowley from CI, Phin Barnes from First Round Capital, Stephen Davis from Goodwin Procter, John Basile from Holtz Rubenstein Reminick LLP, Eliot Durbin from Penny Black, Jon Karlen from Flybridge, David Rose from New York Angels and Medha Vedaprakash from Rho Capital Partners. The panelists provided valuable insights about current trends in the venture capital industry. Although the panelists were concerned about the frothy valuations and the “bubble” in the tech community, all agreed that this is a great time to be an entrepreneur. Startups are being funded at a faster pace than before, and there are more sources of funding – family and friends, angels, early-stage VCs and incubators.
The panelists were very bullish on 2011. Medha Vedaprakash from Rho Capital Partners said that her firm saw three IPOs in 2010 among its many exits, and she does not see that trend slowing this year. This is good news for entrepreneurs, as it suggests they will not need to sell their startups to large companies like Google for $30 million; instead, they can continue to build their own large companies that can go on to have their own IPOs.
Ironically, although this was an event to help entrepreneurs raise capital, most of the panelists recommended that startups raise only the minimum amount necessary from VCs early on. Because venture capitalists have been investing heavily in startups lately, it has been fairly easy to raise a seed or Series A round – but high expectations come with this funding. Milestones, for example, must be met. In contrast, the number of funds offering follow-on investments is still very small. So, later-stage funds can pick and choose the companies they want to invest in. This will result in a lot of startups that will not be able to raise larger, follow-on rounds.
The key for a startup in today’s market is to be as capital efficient as possible and try to secure more non-dilutive financing. Kevin Crowley from CI suggested that entrepreneurs look at sources outside traditional venture capital, such as angel capital. The new Connecticut Angel Investor Tax Credit Program was designed to move more angel capital into circulation. It provides an incentive to Connecticut angels who invest in Connecticut high-tech startups – a 25% tax credit on the angels’ investments. Other sources of financing for startups include small business loans or grants from the government.
David Rose from New York Angels repeatedly stressed that the best way for a startup to be successful in today’s environment is to bootstrap as much as possible and raise financing only as a last resort. When there is enough traction – both in product strategy and customer acquisition – startups could consider seeking venture capital. But they should demonstrate that new investments would be used to help their companies achieve well-defined, achievable sets of milestones.
Jon Karlen from Flybridge and Phin Barnes from First Round said that this environment is actually good for entrepreneurs. The early-stage capital enables them to test a hypothesis about a product or market, but only those who validate their product or market can go on to raise more money. This ensures that only the most promising startups progress to the next stage. If an idea/company is not gaining traction, the entrepreneurs leading those ventures can cut their losses and focus their energy on their next startup.
It was a pleasure to attend this useful event. I wish to thank youngStartup Ventures for hosting yet another sold-out event, and to thank the energetic entrepreneurs who pitched to Kevin and me.
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