I am positively surprised by the number of existing and prospective entrepreneurs in Utah who are venturing out to start businesses during this recession! One of the most frequent questions that they ask us at CFO Solutions, L.C. is: “Can you help me raise money for my new business?” Many entrepreneurs start seeking equity investment or debt financing to start or grow their business too early – before they understand what the right kind of financing is for their business, what is available or how much they really need. We will discuss these issues in a later post – today I want to review recent trends in venture capital investing in the hope that this information will help you understand what to expect if/when you decide to secure financing.
According to the Fenwick & West Second Quarter Survey, venture capitalist invested 33% more during the 2nd quarter of 2009 than during the 1st quarter but nearly 40% less than during the 2nd quarter of 2008. In addition, only 8% of the amount invested was the initial investment in a specific company (Series A rounds). This has declined significantly from 23% in the 3rd Quarter of 2006. This trend indicates that VC’s are not inclined to invest in seed rounds with start-up companies – if they do, they are likely to back serial entrepreneurs who have had successful exits in the past. Angel investors have also changed their investment criteria as a result of the recession – stay tuned, we’ll talk more on that in a future post as well…
If you are wondering about where the VC’s are investing their funds, 42% was invested in health care / life science while information technology attracted 37%. Clean technology garnered the bulk of the balance invested.
Business valuation is always an important issue and is probably the 2nd most common question that I’m asked by entrepreneurs. During the 2nd quarter of 2009, 46% of financing rounds were at a lower valuation than the prior round (down round) while 22% were flat and 32% had an increase in valuation. Just FYI, down rounds are much more likely in later financing rounds than in early rounds. This makes sense when you think about it because if a company needs to secure a Series C, D, E or higher (3rd, 4th or 5th) financing, they likely have not performed as expected and the investors will ultimately either stop funding the company or will take control and make the changes needed to make the business successful or will liquidate the business and get some return of their investment.
There is a lot of good information available – if you are interested in learning more about the current VC and Angel investment environment in Utah, please call us for a free consultation.
Kent Thomas, Founder