The Money Game
Early Options
Tech entrepreneurs looking for seed money have more places to turn these days
By JACLYNE BADAL
April 30, 2007; Page R6
The world of dot-com financing is changing, and entrepreneurs are reaping much of the benefit.
While the competition for deals remains stiff, investors and researchers say tech entrepreneurs looking for seed money have more varied options these days. Indeed, some investor groups and venture-capital firms are giving companies that are still in the concept stage faster access to modest amounts of cash, and asking for less equity in return.
Seed money -- used to turn an idea into reality -- is among the toughest financing to secure for tech-related start-ups. Banks and professional investors are frequently reluctant to jump in at such an early stage. The few entrepreneurs who manage to cut deals with venture-capital firms tend to give up huge chunks of equity, something a lot of founders want to avoid.
Easier Terms
But with the new approach -- driven in part by the falling cost of launching Internet start-ups -- some venture capitalists and so-called angel investors are writing smaller checks and issuing them faster, in return for either relatively small stakes upfront, or convertible notes that can be turned into equity under certain future conditions.
Angel investors -- wealthy individuals who fund companies and tend to take a hands-off approach to day-to-day management -- were the largest source of funding at the seed and start-up stages last year, backing roughly 23,500 such ventures, according to the University of New Hampshire's Center for Venture Research. Jeffrey Sohl, director of the center, estimates that roughly 35% of the $25.6 billion in angel investments last year went to early-stage companies.
Dr. Sohl says some 46% of angel deals were at the seed or start-up stage, a proportion that the center expects could grow to as much as 55% in the next several years.
Venture capitalists, meanwhile, invested in more than 300 seed and start-up deals in 2006, up from 184 such deals in 2005, the center says.
"There's tons of money around, and if you can't find it, you're not ready to start a company," says Kenneth Morse, managing director of the Massachusetts Institute of Technology's MIT Entrepreneurship Center.
Tech Coast Angels Corp., a network of angel investors started in Irvine, Calif., recently launched a "seed track" funding program to get earlier access to companies. Candidates who look good on paper are invited to a screening session and have 30 minutes to sell their idea to about 10 angels, with half the time used to field questions. If investors are impressed, the entrepreneur can get a check the same night, or a few days later, in return for as much as 10% or so of the company, depending on valuation and check size.
The Tech Coast network also offers more traditional funding for entrepreneurs, but that route, because it usually involves bigger investments, can require about 500 hours of due diligence.
Checks for $25,000 to $100,000 in seed-track funding are common, says Tech Coast Angels founder Luis Villalobos. In some cases, the angels won't take equity upfront but will issue a convertible note, which would be turned into stock if the company later provided equity stakes in a formal funding round.
Quick Loans
On the venture-capital side, QuickStart Seed Funding Program at Charles River Ventures LLC, Menlo Park, Calif., offers loans of as much as $250,000 at 6% interest and takes no equity upfront. If the start-up does well and sells to venture capitalists, the debt -- plus interest -- converts to stock at a discount of as much as 25%. (A $250,000 loan, with interest factored in, would be worth up to $353,333 in stock a year later.) Entrepreneurs should note, however, that the firm wants to be an equal investor in any future funding round, so it could ultimately end up with a more traditional venture-capital-size stake in a company -- say, 20% or more.
Successful companies that never go for another round of funding but are bought o...
great article - nice to see the "launch on the cheap, fail on the cheap, small investment" model is garnering so much press. Charels River and Y Com sure have reaped the rewards of taking a lead role in this new model.
I am told that most angels and ventures are pretty cold hearted and would not put any money on internet start-ups unless they see an existing revenue stream. Is this true? What are some scenarios in which you can get seed funding for developing a fairly advanced prototype that could attract the clients (the revenue stream generators)?
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[ 982 ms ] story [ 297 ms ] threadNot sure where to find a public copy on the web?
The world of dot-com financing is changing, and entrepreneurs are reaping much of the benefit.
While the competition for deals remains stiff, investors and researchers say tech entrepreneurs looking for seed money have more varied options these days. Indeed, some investor groups and venture-capital firms are giving companies that are still in the concept stage faster access to modest amounts of cash, and asking for less equity in return.
Seed money -- used to turn an idea into reality -- is among the toughest financing to secure for tech-related start-ups. Banks and professional investors are frequently reluctant to jump in at such an early stage. The few entrepreneurs who manage to cut deals with venture-capital firms tend to give up huge chunks of equity, something a lot of founders want to avoid.
Easier Terms
But with the new approach -- driven in part by the falling cost of launching Internet start-ups -- some venture capitalists and so-called angel investors are writing smaller checks and issuing them faster, in return for either relatively small stakes upfront, or convertible notes that can be turned into equity under certain future conditions.
Angel investors -- wealthy individuals who fund companies and tend to take a hands-off approach to day-to-day management -- were the largest source of funding at the seed and start-up stages last year, backing roughly 23,500 such ventures, according to the University of New Hampshire's Center for Venture Research. Jeffrey Sohl, director of the center, estimates that roughly 35% of the $25.6 billion in angel investments last year went to early-stage companies.
Dr. Sohl says some 46% of angel deals were at the seed or start-up stage, a proportion that the center expects could grow to as much as 55% in the next several years.
Venture capitalists, meanwhile, invested in more than 300 seed and start-up deals in 2006, up from 184 such deals in 2005, the center says.
"There's tons of money around, and if you can't find it, you're not ready to start a company," says Kenneth Morse, managing director of the Massachusetts Institute of Technology's MIT Entrepreneurship Center.
Tech Coast Angels Corp., a network of angel investors started in Irvine, Calif., recently launched a "seed track" funding program to get earlier access to companies. Candidates who look good on paper are invited to a screening session and have 30 minutes to sell their idea to about 10 angels, with half the time used to field questions. If investors are impressed, the entrepreneur can get a check the same night, or a few days later, in return for as much as 10% or so of the company, depending on valuation and check size.
The Tech Coast network also offers more traditional funding for entrepreneurs, but that route, because it usually involves bigger investments, can require about 500 hours of due diligence.
Checks for $25,000 to $100,000 in seed-track funding are common, says Tech Coast Angels founder Luis Villalobos. In some cases, the angels won't take equity upfront but will issue a convertible note, which would be turned into stock if the company later provided equity stakes in a formal funding round.
Quick Loans
On the venture-capital side, QuickStart Seed Funding Program at Charles River Ventures LLC, Menlo Park, Calif., offers loans of as much as $250,000 at 6% interest and takes no equity upfront. If the start-up does well and sells to venture capitalists, the debt -- plus interest -- converts to stock at a discount of as much as 25%. (A $250,000 loan, with interest factored in, would be worth up to $353,333 in stock a year later.) Entrepreneurs should note, however, that the firm wants to be an equal investor in any future funding round, so it could ultimately end up with a more traditional venture-capital-size stake in a company -- say, 20% or more.
Successful companies that never go for another round of funding but are bought o...