What every entrepreneur should know about financing right now

By boris, July 22, 2014

Over the past few years, we have seen an explosion of start-up activity as the traditional barriers to entry have come down. The ability to raise money no longer determines one’s fate. With lowered costs to build and run websites, acquire and retain users, virtually anybody can pick up coding and start a tech company.

At the same time, funding opportunities have expanded for early-stage start-ups. More money is flowing in from a new crop of angels, newly wealthy from a number of tech IPOs. AngelList makes it easier for founders to reach angels and there are hundreds of accelerators and incubators to choose from. On top of all this, crowdfunding has now become a viable funding option for many start-ups, particularly those hardware projects that have had a tough time getting funding from the VC circles.

But this boom landscape might change soon.

While the top of the funnel has grown with all the angel and early-stage activity, the bottom of the funnel is still roughly the same size (about 10-20 billion dollar companies/year). We have all heard about the Series A crunch in the Valley (there might actually be up to 2000 companies in the Series A pipeline right now), and perhaps there’s a Series B crunch now too.

Additionally, we need to watch out for two developments on the horizon. First, there will be a consolidation in the accelerator space, with the net effect of reducing the number of available spaces for start-ups. And, we should expect angel activity to drop as new angels discover that returns from their seed investments aren’t so easy to come by.

Any entrepreneur trying to navigate the financing landscape should be aware of the over-abundance of angel money compared with subsequent rounds. You need to assess early on if your business is venture-fundable. Is your opportunity at least $100M? If not, revenue from your customers will be your best source of financing. That’s okay: many great companies have been built by bootstrapping.

There’s a lot of “easy” early-stage money floating around right now, but don’t get fooled into taking seed money if you don’t have a viable path for later rounds. It will just be leading you down the wrong track.

  • Completely agree, Boris. Further complicating the venture landscape is the plethora of late stage capital moving in to the market from hedge funds, newly-formed large ($1B) venture funds and corporate VCs. As long as the public markets hold up I don’t see this changing in the short term, but with the NASDAQ almost at dot-com levels it is scary.

    This also has a huge effect on angels/VCs as these late-stage rounds are propping up valuations and thus, returns, for them. Everything is looking good on paper, but things can change quickly. While frustrating, early stage entrepreneurs need to realize that a collapse at the top of the market is going to trickle down to them as VCs, then seed funds and, lastly, angels are going to all tighten up. Interesting times…

  • bwertz

    Agreed – good point

  • If the $100M is a market cap target, then we should count the $100M companies, not the billion dollar ones, no?

    When I did the Global Unicorn analysis for the past 14 years, I lowered the threshold to $250M, and gathered roughly 400 companies since 2000, so it’s roughly 30 companies / year. If the threshold goes down to $100M, I think that number would easily double to perhaps 60 companies / year, maybe even 80-100 (globally).

    But regardless, I think the abundance of angel money has an advantage: it gives more experience to more entrepreneurs. Although it’s not so good for the investors to not have follow-on investments, it’s good for startups who learn from failing and often go on to try again.

  • bwertz

    Good point re the experience that “easy” angel money provides for many entrepreneurs – counterargument would be that they could have become much stronger companies if entrepreneurs hadn’t raised seed money in the first place when their company wasn’t VC-fundable down the road

  • I read that as 100M top line revenue. Is there enough of an opportunity for you to make 100M…

    100M recurring in saas seems to be commanding a 1B IPO… Thinking of zendesk and box right now…

  • bwertz

    Correct – $100M in revenues.

  • The challenge is to figure out your trajectory while you still have runway. Otherwise if you’re not on the VC path you could be out of luck or forced to do a down round (if you’re lucky) or acqui-hired by Yahoo! In their deal of the week. It’s tough. All I can say is good this take time. Don’t believe what you read in Techcrunch. Don’t blow all your cash and make success dependent on raising more.

  • Adam Komarnicki

    Boris, why do you think that the consolidation in the accelerator space will reduce the number of spaces for startups? At Fundacity we see a huge number of new accelerators entering and think that as long as there will be interest from startup side (which are growing in numbers), there is no reason to believe access to accelerators will become more exclusive due to limited number of spaces.

  • bwertz

    The key question is ongoing funding for accelerators – it is unclear to me how 90% of them can ever make money so unless they are all getting funded by investors that don’t care about returns (e.g. could be local governments) we will see a huge reduction in them going forward.

  • Things that make you go emm.. 🙂

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