Money often unites people, and so it was in late May when the Canadian Venture Capital Association (CVCA) held its annual meeting of top venture and private equity minds, this time in Vancouver.
According to Steve Hnatiuk, event chairman and Vancouver venture capitalist, Vancouver broke every record set in the CVCA event’s 23-year history: more than 650 attendees, serious international participation and a deep bench of top-quality speakers and panellists.
So what’s going on?
It’s all about startup fever. B.C. networking and investor events are jammed. Company accelerators and incubators are full.
In the late 1990s it was all about the new Internet. No one knew how wacky startups would make money, but they built audiences fast and we all bet they could monetize. Thus the Internet bubble formed – and burst – soon thereafter.
Things are different now. Yes, it’s all about the Internet, again. But it’s also about mobile technology and smartphones, about a very different landscape and different success factors.
The startup ecosystem has radically changed. Oodles of startups are using capital-efficient models, benefiting from lower costs and Internet-enabled delivery, and are reaching serious revenue with minute investments.
It’s dirt cheap to start a company now. Internet bandwidth is huge, even for mobile devices. Storage and computing power are almost free. Mostly free open-source tools enable creation of applications, websites, games and mobile sites. Online business models are proven or low-risk. And huge social media momentum and infrastructure make it fast and cheap to spread the word.
For under $100,000, companies can put usable product into customers’ hands for validation and refinement. Once there’s a bit of traction, an angel round can be raised to beef up team and marketing depth.
Small wonder that a key theme at the CVCA event was the new breed of angels, super angels and smaller venture capital (VC) funds now prominent in startup investments.
Angel investors are wealthy individuals who fund business startups, usually in exchange for convertible debt or equity. Angels are increasingly organizing themselves into groups or networks to share research and pool investment capital. While angels invest their own funds, venture capitalists (VCs) professionally manage others’ pooled money.
The pace of angel investing has skyrocketed, now funding over 20 times more startups than VCs. Small investors can breed with small startups to birth incredible companies – all at light speed.
Today is a fantastic time for startup investing. Sure, companies may be valued lower than in recent decades, but the cost of achieving those valuations is also a fraction of what it has been – thus delivering much higher investor returns.
Truthfully, startups are about fast failure.
Savvy entrepreneurs are emotionally intelligent enough to push hard, but know to cut and run if their market foray fails. Failing fast is much easier when only minimal cash is raised and few investors need to be appeased.
Ah, but here’s the bad-news catch. Though starting a company costs a 10th of what it used to, a startling number of startups blow up because they fail to realize that expanding their company costs twice as much as before. So entrepreneurs expend all their energy chasing money rather than building the business.
Once seed capital from angel investors has been spent to obtain market validation, a company’s “real” financing effort starts: millions in capital that come from classic VCs or super angels – all seeking traditional metrics, valuation and execution.
Moving from the seed stage to follow-on financing has changed substantially. According to Amar Varma, managing partner of Extreme Venture Partners, the Holy Grail of early-stage VCs is now a “race to get in early, then get out as quickly as possible. Building up big, high-value companies requires linking arms and co-investing with others at different levels of investment and expectation.”
VCs now make tiny early-stage cheques to secure a seat at the follow-on table, despite the burden inherent in holding lots of small investments. Today, traditional VCs hold a lower ownership in companies than in the recent past.
The implications of all these changes to the companies, angel investors and other financiers in the company’s lifecycle are profound and worthy of a deeper look.
Next column: moving from startup phase to company growth.
