Recently, the National Venture Capital Association reported that $33B in VC capital had been deployed by Q3 2014; $3 billion more than the amount invested in all of 2013. In fact, the projections show that the industry is on track to reach more than $40B in venture capital deployment by the end of the year. The only year when more money was invested by this point in a year was 2001, the year the tech bubble burst when $40.94B was deployed. Hence the recent chatter about a tech bubble. There is plenty of chatter about cheap money and how easy it is to raise capital. But none of that is happening for you. The bubble certainly has not reached you and raising capital has not been easy for you, in fact you may have even given up.
Part of the reason why you are not having much success is that the competition is much stiffer today and in some ways the quality of the competition is much better than in the past. In my opinion, the bar is getting higher, especially for first time seed/early stage entrepreneurs, even with the abundance of capital in the market. This is who you are competing with for investor dollars (taken from my observations of companies that are getting funded and those that are in top accelerators):
1) Repeat entrepreneurs
You are competing for investor dollars with other entrepreneurs who are on their second or third companies. The ease of raising funding is luring serial entrepreneurs to start their next companies. I am seeing more seasoned repeat entrepreneurs in accelerators. In part, it is also due to the fact that many of the founders of the first wave of Web 2.0 companies have exited and are on to their next projects. While some, perhaps most, of them may not fit the young twenty-something profile of a startup founder, what they have going for them are stories of companies they have built in the past, the exits they have had and the returns on investment that they have brought their investors. That is music to investors' ears because it is part of what investors factor to lower their risk. So when you meet an investor right after they have met with a person who meets the above-mentioned profile, keep in mind that that is the person with whom you are competing for investor dollars.
2) Self-accelerated "seed stage" startups on steroids (SASSOS)
While some are skeptical about accelerators; accelerators, especially the top tier accelerators, in my opinion, have raised the quality of early stage startups to levels unseen (I was in the early wave of accelerator companies in 2007 and the difference in quality and preparedness of companies today compared to then is night and day). Here is a simple example of how top tier accelerators have raised the quality of early stage companies: a company applies to an accelerator, gets rejected and gets some feedback telling them to come back when they have some traction; applies again the next cycle with some traction and they are told to go back and show more traction and are finally accepted on a third try. By the time they are accepted into the accelerator they have significant traction either in customers or revenues or both (or any other meaningful metric that reflects traction). In fact, whether they know it or not, these companies are accelerating before they get into an accelerator. They are self accelerating. My observation has been that at Demo Days now, almost all companies have very impressive stories of traction and those stories have their genesis before the companies were accepted into the accelerator. These companies have found product/market fit and are ready to scale. In some ways there is re-definition of the expectations of a "seed stage" startup that is happening right in front of our eyes primarily because accelerators have been under pressure from investors to showcase better prepared (more viable) companies at Demo Days. These redefined "seed stage" startups on steroids are the companies that you are competing with for investor dollars.
So what are you to do? Its simple, to play the game with the above mentioned types of players, if you are not a repeat entrepreneur with a demonstrable track record, then you've got to evolve into a seed stage startup on steroids with demonstrable traction. You have to self accelerate. While you can still be successful raising money with just an idea and a pitch, you increase your odds dramatically if you have irrefutable proof that you have a business. Just a pitch is not going to cut it because your competition for investor dollars is showing up with a pitch in hand AND MORE. Dave McClure of 500 Startups once said "if you don't got traction, then you better have a damn good story of how you are solving your customer's problem".
[If you are still having problems raising money with irrefutable proof that you have a business, including demonstrable traction, then contact me at tom [ at ] startupsillustrated.]
- Tom Chikoore