Where Entrepreneurs Can Still Find Private Capital

Even though VC and angel investments are down, small rounds are available to solid companies from private investors

By Karen E. Klein

Venture capital investments dropped dramatically in the first quarter from 2009 from 2008, and angel investments dropped as well, according to the latest figures. But that doesn't mean startup and early-stage companies are not looking for—and getting—private funding.

Mark Heesen, president of the National Venture Capital Assn. headquartered in Arlington, Va., says he has noticed angels and venture capitalists looking at early-stage deals more seriously today than in the recent past. "Valuations are good right now, so I'm seeing VCs interested in shepherding along these early-stage companies that can't get traditional financing, and not only in the typical entrepreneurial hotbeds but all around the country. There's a kind of schizophrenic activity going on with VCs trying to keep late-stage companies alive when they can't go public and there's no acquisition market, but also seeing a lot of really good deals out there in early-stage firms."

Jeffrey Sohl is director of the Center for Venture Research at the University of New Hampshire, which has done research on angel investment since 1979. He says there is a huge uptick in interest from entrepreneurs who cannot tap traditional funding sources, such as second mortgages or friends and family, but that angels are funding about 10% of the deals they see, which is at the same level as 2008. "The number of deals seems to be staying flat, but the dollars invested went down about 30% because company valuations are down, as is the net worth of angel investors generally," he says.

Dramatically Lower Valuations

Elon Boms, managing director of LaunchCapital, says his Cambridge (Mass.) venture capital firm is looking to make as many as 40 investments this year. The firm, with 17 young companies in its portfolio, raises pre-seed money for startups in the development stage and typically invests $125,000 to $150,000 in syndication with angel investors and smaller VC firms.

"From LaunchCapital's perspective, it's a great time. Valuations have come down dramatically, people are willing to work for free initially, and the cost to start a business has come down dramatically," Boms says. "Companies are getting better at starting businesses cheaper, and they're coming to us with full-blown beta products that have been totally bootstrapped."

Would-be entrepreneurs faced with the empty pockets of friends and family and quick rejections from bank lenders have also turned to angel investors like the Tech Coast Angels, a 300-member investment group based in Southern California. Luis Villalobos, the group's founder, says their most recent "fast pitch" session, which typically attracts 70 or 80 entrepreneurs, this year fielded more than 250.

"Entrepreneurs are very resourceful and they'll do whatever they can, including tuning down their needs and finding ways to make do with less," he says. His group recently invested growth capital in Bikestation, a turnkey firm that designs, builds, and manages facilities for bicycle parking and services in a dozen U.S. cities, with four more under construction.

Shovel-Ready Projects

"We like it when we see companies that have already been commercialized or can get aid from the stimulus package," says Raulee Marcus, a Tech Coast Angels member who has joined the board at Bikestation.

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