A New Investment Landscape

July 26th, 2010 | Posted in Capital Markets | By chengwei | 0 Comments

Let’s say you’ve got a fantastic business idea. You develop it a little, write up a business proposal and talk to a few potential partners. It is now time for you to raise some capital before your little startup truly takes off.

A few years back, a venture capitalist (VC) would probably be your best bet. Being in the business of investing in new companies and ideas, they are well placed to invest millions in your startup; should they like your idea. But today, in 2010, it seems the time of VCs is nearing its end. With its current average returns, VCs simply no longer represent a prominent asset class.

The VC market is clearly on the decline when in the last quarter, it only managed to raise a meager $1.9 billion – the lowest in 7 years. Yes, even lower than during the recent Global Financial Crisis. Yet, while VCs are raising less money (-48%), their investments have continued to grow (+34%). The investment paid out by VC firms in the last quarter totaled at a whopping $6.5 billion.

This means that as VCs invest more than they can raise, they are tapping into past reserves, leaving them with even less money to invest with in the future. Consequently, VC firms have adopted increasingly conservative stances towards new investments.

Stepping up to fill this void are the angel investors. As the industry evolves, angel investors have slowly filled the majority of the funding that takes place. In fact, out of the 42 funded graduates from the Founder Institute, only 3 were funded by VCs.

However, it is not only the role of angel investors that have changed. The makeup of this group of investors has also evolved with time. They used to be doctors, lawyers or professionals who have some extra time and money on their hands. Today, angel investors are mostly entrepreneurs who have made it themselves, wishing to give the next generation the same chance they had. This places them in the perfect position to not only provide startups with the necessary capital but also invaluable expertise and experience.

The hive of action that used to be the VCs has migrated to the angel investors. It seems that VCs are slowly being ushered out to make place for the angel investors. With the latter becoming so prominent, it is no wonder that some VC firms have made their own attempts to enter the market of angel investors. To do so, VC firms have adopted 2 main strategies: (1) granting mote autonomy to each partner so as to facilitate quick decision making; and (2) leading deals.

In a recent interview, Founder Institute’s Adeo Ressi has predicted that in 2011 we will see “a replacement of traditional funds with new models incubated by entrepreneurs in the angel market.”

The full interview can be found here.