Less Venture Capital Available

There will be less VC funding available next year. I recently read about the trend in USA Today and wanted to share it.

“Venture capitalists predict that venture investing will fall 10% to $27 billion next year . . . 72% of venture capitalists don’t expect the market for initial public offerings to heat up again until 2010 or later. However, they believe that funding will grow or remain stable for start-ups in clean technology, life sciences and biotechnology” (USAToday.com). Apparently, this information is based on a survey that was sponsored by the National Venture Capital Association.

So how long will this trend last? I don’t know. But the takeaway is that VCs will be scrutinizing their investments even more heavily than before, which obliges entrepreneurs to really nail their business model before soliciting funds. And assuming entrepreneurial activity will not reciprocate this downward trend, angel investments will likely play a critical role in the fund raising process.

However, Richard Branson will be offering entrepreneurs and and their angels a silver lining. His new company, Virgin Money, will formalize lending relationships among friends and family effectively acting as a third party broker that will manage the payment plans to angels, such as friends and family. This could represent a new era in financing that makes sourcing angel capital a less complicated process. The CNN Money business blog explains how.

“Why do you need Virgin Money to borrow from your mom? These relationships can get emotionally complicated. Virgin Money mitigates any awkwardness by handling the payments; consequently default rates decrease to 5% from 14%” (CNN Money).

So maybe it’s time to mail that Christmas card to uncle Fred.

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4 Responses

  1. I love new business models. I always welcome fresh new approaches to new enterprise financing. Richard Branson also happens to be a fun guy to watch so I hope his new Virgin Money gains some traction. It will be the really creative or really desperate entrepreneurs that will be early adopters of his service. It’ll make for entertaining observation.

    Things to Consider:

    * How will the SEC react to the service once/if it gains critical mass adoption.

    * Will professional, institutional venture funds leverage the platform to diversify their exposure and experiment with seed stage funding?

    * Could this platform internationalize seed stage funding?

    Merry Christmas, I can’t sleep waiting to open presents so I’m sadly browsing the Web.

  2. Great points, Allan. I completely agree. Branson is fun to watch. I heard a lot about him while living in London. He’s like the Warren Buffet of Europe that way. I don’t think the SEC will have much problem with the new service as long as it’s conducted ethically. It’s simply a third party broker that acts as a mediator for angels and their debtors. I’ll bet that institutional funds will strongly consider diversifying their platform to incorporate a similar service once they see it gain traction. And I’ll have to think more about how this new service could internalize seed stage funding. Great question. Have a merry Christmas!

  3. Another option (with a similar business model) for entrepreneurs is 40billion.com, which focuses on entrepreneurs and helping them to raise money for their small businesses through friends and family, rather than through traditional financial institutions. It is the first friends-and-family funding network for entrepreneurs.

    Entrepreneurs connect with their social networks – friends, family, friends of family, colleagues, and others – to raise capital by requesting loans and contributions, and entrepreneurs can share their fundraising pages on MySpace, Facebook, and LinkedIn too.

    Check out http://www.40billion.com

  4. Interesting. I’m going to check this out. Thanks for the heads up, Janie.

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