It’s getting tough to get funded
While much attention has been paid to the woes of the finance industry in relation to poor quality loans, little reporting has been done on the demise of venture capital. These are the funds that invest in early stage businesses. Many funds are fully invested, but can’t get another funding round taken up by investors, so they can’t invest in new opportunities. Angel funding (friends, family and wealthy individuals) still exists for start-ups, but VC money is drying up. This means problems for two types of company:
- The smart start-up with a great product, a great team, but no money to build the business (the first round of serious venture funding).
- The proven concept, which can’t attract money to scale up (the second round of venture funding).
Apart from Xero (update: and indirectly, Fronde Anywhere), I haven’t made an early stage investment for several years. It seems I’m not alone. You know something is seriously wrong in the venture capital business when admired global VCs (Apax, 3i and Sequoia) announce they’re shifting to private equity (buying into established businesses). The story is repeated at local levels too. Why?
- Too few successful ventures, too many duds.
- Investor flight to quality.
- The long term shift offshore of manufacturing has eroded the pool of talent for technology start-ups.
- You don’t actually need much money these days to get an online software/service business going (which means low barriers to entry and lousy on-average returns).
This is serious food for thought, if you’re a policy maker, an entrepreneur, an investor, a student, a worker, a unionist, indeed everyone; even more so, when you add in general global uncertainty.
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