We have recently experienced some of the worst financial and economic conditions that we (hopefully) will see in our lifetimes. Most of us have been touched personally by these conditions. It appears that economic and financial conditions will continue to get better, but these situations have created some ongoing challenges that will continue to face early stage companies and entrepreneurs even under better conditions.
The apparent changes in the traditional roles of the venture capital, private equity and angel investing models are some of the changes that will impact early stage companies. This appears to be the “new normal” for the financing of early stage companies. Financing from venture capital and angel investor sources has historically been a vital source of funding for early stage companies. Most early stage companies are not able to qualify for bank financing and are too early for private equity financing. Venture capital and angel investor financing traditionally stepped into this gap and gave these companies the critical financing that they needed to survive and expand. Private equity firms tended to remain out of the early stage financing arena until a company had reached a certain level of revenues or profitability.
This traditional financing model has changed. Many private equity firms have shifted their investment focus to an even more mature class of companies. There has been a concurrent shift in focus by venture capital firms as many of them have also shifted their investment focus to more mature companies and are subjecting target companies to stricter investment criteria.
These shifts in investment focus are understandable, but they have significantly reduced the availability of crucial funding sources for early stage companies. These shifts happened at a very tough time for most small companies as they tried to recover from bad economic conditions. This reduction in financing opportunities coupled with the overall slow pace of the economic recovery has caused a dire situation for many early stage companies and entrepreneurs. Fortunately several events have occurred that should help to fill this financing gap. Continue Reading Financing Early Stage Companies–Dealing With the “New Normal”