Economists are becoming increasingly pessimistic about the state of the U. S. Economy. This, coupled with a limited range of opportunities for big investment exits — it’s an era of M&A or else — can mean tough market conditions ahead for startups. But there is a path through this morass. One way, is to walk the distance with an angel investor.
I heard one radio briefing on the economy this morning that spelled out things very simply. There are 3 big negative factors indicating an emerging Recesssion:
1) Housing market collapse, it’s not getting better any time soon.
2) Oil pricies rising (over $90 a barrel)
3) Tightening of credit conditions
The last condition is the one that will impact founders most because it means it’s harder to borrow money. While there is plenty of venture capital available, funding conditions are not easy for small startups just now, either. The continued lack of diversified “exit” opportunities for VCs, a.k.a., not enough IPO opportunities, means a dependence on large-scale M&A: hence big ticket acquisitions like MySpace (NewsCorp), YouTube (Google) and now Microsoft’s $240 million stake in Facebook. More importantly, this equates to Microsoft CEO Steve Ballmer’s stated mission to acquire 20 companies a year for each of the next 5 years, at valuations as high as $1 billion, each.
Professional investors might have lots of committed capital for which they need to find a home, but parsing it out in small doses isn’t going to be efficient for them. (The average early VC round is now about $8 million, and that includes a lot of first round deals, according to Dow Jones VentureOne’s recent 3rd Quarter data.) The recent $15 billion valuation of Facebook is just another piece of evidence of this. It all means that if you’re a small company, with small scale cash needs, professional investors might be inclined to overlook your company.
So what’s a founder to do? There is good news: According to a recent report in the Boston Globe, investor-angels are eager, and able, to “pick up the slack.”
Angels typically invest $100,000 to $1 million per round.
US business angels, many of them wealthy entrepreneurs who have sold their companies, injected $11.9 billion into 24,000 ventures in the first half of this year, Jeffrey E. Sohl, director at the University of New Hampshire’s Center for Venture Research, told the Northeast Regional Angel Investor Conference meeting here last week.
In the same period, venture capital firms invested $14.5 billion in just 1,822 companies (according a survey by PricewaterhouseCoopers and the National Venture Capital Association.)
“We’re individuals who can be very flexible in seeding deals,” said George McQuilken a serial entrepreneur and cofounder of the eCoast Angel Network, which hosted the conference. “We can invest in your pizza parlor if we want to. We can invest in lunatic ideas.”
But if you need money you need to move — now! According to the report, angel financing appears to be leveling off in 2007, too. So-called “yield rates,” the share of proposals presented to angels that are ultimately funded, slipped to 20.1 percent in 2006 and 19 percent in the first half of this year, after climbing to a five-year high of 23 percent in 2005.
3 things to consider, that ought to help you, strategically:
1) Go global. Why? Because the weak U.S. dollar means a strong opportunity for exports, where our goods will be cheaper and therefore more competitive.
2) Go global. Why? Because strong foreign economies–think China, India– means a ready consumer base overseas to whom you can sell your products and services.
3) Go global. Why? Because the strength of the U.S. economy, and our own ability to spend consumer dollars, depends upon a continued strong job market. And that depends on U.S. companies having a global presence. So, you need to have a global play to contribute to continued strength in consumer spending, as well as to be able to benefit from it.
OK, so you’re thinking a small startup can’t necessarily afford global outposts or global operations. So when we say “go global” we mean develop your Web-based business–or the Web-strategy of your business–to cultivate a global customer base. Do anything you can to give your company global scope. Found|READ, for example, has readers from all over the world. We’ll be back later with some resources for where to get angel funds, and how to give your business global scope.