Thursday, May 6, 2010

Raise a seed now! Raise a series A in 12 months! :)

A Uniquely Good Time To Raise Capital
The last 2 years have been pretty rough for the average entrepreneur. However, this has led to pent up demand on the capital side to fund startups. I explain below why I think now is a uniquely good time to raise money.

Events Leading Up To 2010
In 2008, the venture market froze due to the financial crisis.

Early 2009 was a bit of a "nuclear winter" with very few deals getting done and VCs sitting on their wallets.

Late 2009 led to a slate of M&A activity and some companies shutting down.

The Early 2010 VC Feeding Frenzy
This led to the following dynamics in early 2010 that will continue through mid-late 2010:
  • A lot of VC portfolio companies have/will shut down or be sold - freeing up a lot of VCs to take on more board seats
  • A number of investors are feeling pressures to do deals - they haven't invested for 1-2 years and now feel pressure from their partners and LPs to move more capital and take on board seats
  • A lot more startups are being founded (since the markets are beter, more people are taking risks) and funded (due to the dynamics above + companies who waited through 2008/9 now raising cash)
  • A number of investors will develop "investor burn out" - they will have done 1 or 2 or 4 deals and will need to take time to digest the investments they have made and to start helping the companies
What This Could Lead To - And Why You Should Raise Money in the Next 6 Months
I have been hearing more and more early stage investors say "I have done a ton of deals lately - I am looking for all this to slow down." or "I have not seen deal flow like this in a long time - it is fun but exhausting".

I think in general early stage funding will slow down in 3-6 months due to pent up demand (i.e. capital) having been met via VCs and angels taking board seats and investing in more companies in early 2010 then they expected to.

Reasons for this predicted slow down in funding pace in 6 months:
  • VCs will have made investments and no longer feel the pressure to "do something"
  • VCs/angels will have done more investments in early-mid 2010 then they planned for and will want to "pace themselves" in terms of deploying capital
  • VCs/angels will spend time helping new portfolio companies rather then seeking new investments as actively
All these things will likely cause the funding environment to slow down a bit relative to where it is today. So if you can raise money now, all else being equal it seems like a good option.

The Coming Post-IPO Bump in 2011
In 2011, a number of companies are likely to go public including Facebook, LinkedIn, Zynga, and (who knows?) Palantir or Workday.

With this liquidity a few things may happen.
  • VCs/angels will feel like there is a better exit environment so will invest more
  • There will be a number of companies with liquid stock who will have the currency to buy more startups more rapidly
This will lead to second funding bump in 2011, making 2011 a great time to raise the next round (assuming no macro collapses etc.)

Either way - it is amazing to see how things have loosened up compared to a year ago.

Thoughts? When do you think is the best time to raise a round?

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