Not so long ago, just 10 or 15 years ago, many venture capitalists were ready to bet on the early and even initial stages of startups. This happened after they hit the jackpot at companies such as Yahoo, etc. The early generation of technology investors now has more money that they can spend.
However, the paradox is that they are less likely to spend them on financing young startups that need time and effort to grow further. This leads to the fact that it is incredibly difficult for young companies to attract outside investors who are ready to believe in their idea and invest money. Do not despair. You can still find the money if you know where to look.
Why it happens?
Investments in startups at an early stage entered a period of cooling. While huge pools of venture capital money continue to grow, startup finance has fallen from 10 percent to 5 percent. Venture capital firms are less likely to take risks by investing in companies at an early stage, preferring instead to invest large sums in fewer more established enterprises.
The reason is simple. A decade and a half ago, many of them enjoyed investing in a deal that could ultimately bring significant returns. This first generation of technology investors has matured. They got older, and their risk appetite was significantly reduced. This is good news for large companies that already have results. However, young companies are forced to seek the financing that they need for a successful start.
However, for startups, there is also money that some investors, accelerators and incubators offer, as well as some other opportunities.
Need to grow up and move on
Funding for startups began to accelerate in the early 2000s, when many new technology companies burst onto the scene with great energy and promises. Many of these startups have capitalized on advances in open and cloud computing, making them cheaper and easier than ever.
Almost two decades later, people who invested early in Yahoo, etc., turned into experienced investors. They moved upstream to larger, more profitable deals.
However, as the group ages, this group of investors has shorter time horizons to obtain an acceptable return on investment. They also have less time for supervision and active participation in several transactions. It is wiser to manage five transactions for one hundred million than fifty transactions for the same amount. Small deals that cannot bring noticeable profits are no longer worth their time.
Disproportionate financing
Financing transactions for companies in the early stages are declining, the amount of available capital has reached a record level. A significant part of it is concentrated in transactions that can reach hundreds of millions. Experts say that we are in a “money bubble” when “too much money is spent on a small number of transactions.”
Instead of risking a company at an early stage, which, according to statistics, can break up within the first year, experienced investors are increasingly taking a wait-and-see approach, betting on companies that become the main contenders in a particular niche or sector.Investing in well-established companies may have lower risk, but these transactions also have higher capital requirements.
Alternative Sources for New Companies
Despite a recent trend, some investment companies are returning their attention to early stage financing. For example, in January 2019, it announced the creation of a new fund worth six hundred million dollars to finance startups.
Entrepreneurs are also gaining momentum from the expanded ecosystem of startup accelerators, which provides another development path for young businesses. They help young startups grow by providing funding, training, mentoring, and space to develop their prototypes.
The past decade has also seen significant growth in organized investment groups, many of which focus specifically on startup deals. A significant handful of elite colleges even formed graduate investment groups.
Not so bad
Even in today's highly competitive environment, startups definitely have development prospects. It cannot be argued that investors completely refused to finance companies that are at an early stage of their development. If they benefit from such projects, it will attract new investors.
Niche technology areas such as data security and software testing are at their peak, so numerous startups are becoming powerful players. Some of them are valued in impressive amounts.
Attraction of investments
The main question is how startups can best position themselves to win the funding race. After the founding of the company, the fittest survive. Few companies will survive without investors.
Despite the general decline in the investment trend in startups, the good news is that there are still many investors, accelerators and venture capitalists who will help prospective startup owners stay on the market and prosper.
The startup ecosystem today certainly looks different than it did ten years ago, but opportunities are still abundant for entrepreneurs who are willing to learn from experts and seek creative financing alternatives. Entrepreneurs who do not allow themselves to go down have nowhere to go except up.
Even if something did not work out right away, do not despair and give up. You need not be afraid to try different options for attracting investment. One day your attempt may succeed. This is better than immediately leaving the market, giving way to more arrogant competitors.