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.
1 trackback so far
7:12 AM PT
[…] We’ve written recently about how domestic and global economic trends make it important for today’s entrepreneurs to take a global view with their startups. This doesn’t necessarily mean you should be investing your precious cash in setting up long-distance operations in other countries—which can be costly in ways other than labor; it can tax your strategic and managerial attention at a time when focus is of critical importance. (Noted angel investor Guy Kawasaki pointed this out to me, recently.) […]
4 comments so far
1:02 AM PT
I agree that we need to look overseas for investment; in fact, in my case, we are targeting the international market before the domestic market.
Two questions:
1. How do I find these international investors? What angel groups exist beyond the US?
2. What complexities do I introduce into my venture by having foreign based investors?
3:13 AM PT
I don’t think the original post referred to overseas angels. I read it to say that VC money is hard to come by in smaller increments, but a solid (domestic) angel and a global strategy can help avoid the twin perils of too-fast expansion and single-market focus.
Still, I can speak to question #2, at least in legal terms.
Securities laws allow for foreign investors relatively simply. Foreign investors generally fall under what is called Regulation S within the federal securities law regime (as opposed to Regulation D for domestic investors). A slightly different investor questionnaire covers the important issues there, but the basic principles (understanding of the investment, sufficient means to withstand loss of investment and knowledge that liquidity may be a long way off) still apply.
(Also note that this works best for C corporations. S corps can’t have non-US taxpaying shareholders and LLCs can create major accounting headaches when overseas owners are involved)
That said, professional investors may worry about foreign shareholders because it can be difficult to adequately diligence the investors. Who are they and where does their money come from?
A friend just told me a true story about a company that found an investor in a former Eastern-bloc country who wanted to invest, but only wanted to pay in cash! This was someone to avoid for sure.
As in the US, there are reputable and disreputable sources of investment capital. The challenge is figuring out which is which when you don’t speak the local language.
4:54 AM PT
What does a strike on Iran mean to the US economy? Is the spiraling price of a gold a foreshadow of future instability? –
Perhaps some froth will be let out of the market in coming months – but the US is still the far and away leader in innovation on the web, good post on going global – some deeper detail an insight on real strategies for hooking up with global investors would be a great next post.
12:58 PM PT
Thanks for that insight and you’re right, the article was referring to “going global” with the business, not necessarily with your investment. My bad.