by: neil
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angel funds getting smaller and leaner

Clicking through a tweet by Alltop’s Guy Kawasaki lead to the discovery of this brilliant post by Dave McLure :

MoneyBall for Startups: Invest BEFORE Product/Market Fit, Double-Down AFTER.

Though the post comes with a disclaimer for those who are not up for a lengthy read, Dave has really hit the nail square on the head in terms of covering the current angel investment and startup funding scenario and it was well worth the read. Where is all this going?

The bottom line is: we are in the midst of a completely new era when it comes to startups one which has taken a 180 degree turn from how founding startups was done a couple of years ago. The dynamics of building a new innovative startup has changed considerably! The way the venture capital model that funds them hasn’t changed. It’s like trying to fit the tires of a Ford Model – T on a Toyota Prius. Not going to fit!

Grow VC caters to the early stage startups looking for smaller investments typically $100k to 1 million and the initial reaction of seasoned investors as well as a number of entrepreneurs is “what am I going to do with that?”. It’s barely enough or “what will other entrepreneurs who bagged $250 million think?” Does it really matter what they think? While understandably some business models may be capital intensive and need that kind of funding to get them running, most startups in today’s radically different era are far leaner than their predecessors and don’t need that kind of investment to become successful businesses. As Dave says as a summary to his view on how the scenario differs today:

So to summarize: PRODUCT development cycles are shorter, required materials & resources are free or low-cost, development teams are smaller, and new services mashup & build on top of old services that already deliver terrific value in the cloud via features, data, network effects, & APIs. MARKETing costs are lower, due to a variety of broadly-available, low-cost, online distribution channels, which can be used in more measurable and predictable ways than ever before. high-bandwidth to the home means video and other data-intensive media are commonly available to anyone with cable or satellite TV. REVENUEcan be generated simply & continuously, via direct business models & online payment methods that are becoming mainstream all over the world… such as mobile payments even in the remotest, poorest economies.

As the way in which early stage startups function evolves, the support infrastructure that supports them needs to simultaneously evolve with them to continue being relevant at the very least. If the gap continues, there will be more deserving startups that don’t get the support they need, more investors losing money through investments that go into today’s market through yesterday’s investment models and businesses who are spending more than they need to in the wrong areas.

There is a lot that can be done with a smaller investment under $1 million if the startup is operating in the nimble and highly networked environment that we have today. There are some fantastic companies who hire talent globally where they can find it within their budgets, make the network organization connected through the internet their offices, leverage cloud computing resources, the social web for marketing and turn out more profitable than a capital intensive one. What we need is smarter, leaner angel investors supporting smarter and leaner startups. The lean movement in startups needs to translate into a similar reform for angel investment with a more organized network through which everything remains transparent. We either move with the change or refuse to see it and get left behind a few years from now!

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This entry was posted on Sunday, August 15th, 2010 at 9:00 am and is filed under Entrepreneur Motivation. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.