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Tuesday, November 18, 2008

Raising Seed Capital In A Recession

Yes, you can raise capital in this economy. Individuals and institutions are investing. Yes, the environment has created some unique challenges and advantages.

So what is different about the current state of the affairs?

1.) The VC's may not be your first stop on your way to raising money. Are the VC's still investing? Yes they are but they are also preoccupied with managing there current portfolio of companies through these tough times. They are a bit more conservative with new investments and are going to have a wait and see tendency. There are certainly exceptions. If you are in one of those domains where even a turkey can fly then perhaps your first stop is a VC. VC's are herding creatures and they feel most comfortable in areas where a number of other VC's are also invested. This is perceived as the perfect storm scenario where enough intelligent and savvy investors have decided that a certain domain is most likely to capture the imagination and pocketbooks of a very large number of consumers. The iPhone application space is a classic example. This could be a big market that can support a number of successful companies.

2.) If your idea is not in the perfect storm sweet spot then the individual investor route is a better approach. High net worth individuals are in an interesting position right now. Where are you going to invest your money? Certainly the stock market appears very risky and volatile. High yielding bonds maybe. However, an investor has to have confidence that the principal will be still there at the end of the term. Also, you might get a 10% return. Is that really an investment? Where might you get a 100% return or better on your investment? A startup company might be a very good alternative investment.

Startups are transparent allowing an investor to really understand what is going on with the business. An individual invested in a small startup really gets to know the people, processes and economics of the business.

Many high net worth individuals are or were entrepreneurs and they got rich being entrepreneurs. It is their money and they are usually not beholden to an investment group. They can make decisions about their money. They are also usually very good at picking winners because they know what a winner looks and feels like. They can also move faster then a VC or an investment group. They can bring expertise and advice to your team. They usually have relevant business expertise that you might be able to take advantage of.

Overall, I am heavily weighted in the individual investor camp for raising funds in this environment. It appears to be a good way to get a seed round and a good start in a relatively short period of time. Certainly VC's should not be discounted given the right circumstances.

No matter what route you pursue to raise capital there are certain ways to have a higher likelihood of being successful at securing funding. Also finding individual investors or open minded VC's is a skill in an of itself. This is a subject for a future blog entry.

Stay Tuned and Good Luck!!!

1 comment:

Kevin Flood said...

This blog has received a very high hit rate and a number of excellent comments by entrepreneurs. Kevin Flannery has provided some good feedback on his experiences. Cassandra has as well. Clearly, this is a topic and area that could use some structure to assist putting good ideas and teams into play. Not so sure that the current relatively unstructured and fragmented process is the best way to get new ideas and products in the market. Would like to hear more on this topic.