What Startups Need to Know About the VC Upheaval

iStock_000003690791SmallTwo gloomy reports were released yesterday that may have some startups questioning their fundraising chances over the near term. The National Venture Capital Association issued returns data showing lousy results and said the industry should expect more of the same over the next few quarters due to a crummy exit environment and a shrinking pool of funds. Topping it all off was the news that angel investing was down for the first half of the year. Angels put $9.1 billion into companies, a decrease of 27 percent from the same period year before, but invested in the same number of deals, meaning that the same number of financing occurred, but they were for smaller amounts.

Over at GigaOM Pro (sub. required), I’ve taken a look at what the overall capital trends might be in the venture market and laid out how that may affect startups as they seek funds. I discuss everything from the fact that less capital is going into startups to how the increasing emergence of small funds might affect them, using information taken from a paper by Industry Ventures, a secondary firm (Disclosure: Industry Ventures is an investor in True Ventures, which backs our parent company, Giga Omni Media. Om Malik, founder of Giga Omni Media, is also a venture partner at True.).

Some other key takeaways for dealing with the new environment include how startups need to be realistic about their exit opportunities and seek appropriate amounts of funding for them. Another suggestion is to aim at a market that can be reached using limited funds. Big money will still be there, but it won’t be as readily available. But rather than end on a down note, here instead are some words of encouragement from the report:

First, it’s going to be harder to get funding, but as Paul Kedrosky said via email, “All of this is conspiring to make venture capital harder to come by, which will likely only mean it’s as hard to come by as it was in the mid-1990s, when it wasn’t really that hard to come by at all, historically speaking.”

See, for companies that are realistic about their prospects, have a clear plan and don’t need too much capital, it won’t be so bad. A revenue model may not even be necessary.

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