Small Business Labs

The Explosion in Seed Round Funding

Crunchbase's How Seed Funding Has Exploded In The Past 10 Years reports that:

Fewer than 3,200 companies received seed funding in the period between 2006 and 2010. A decade later, that had ballooned to more than 23,000 startups.

Crunchbase data also shows that the average seed investment has grown from $1.7 million in 2011 to $4.6 million in 2020.

The article points to the launch of Amazon Web Services in the mid-2000s, which made it cheaper and easier to start a software company, as a driver.  

That's certainly true.  But many factors contributed, not the least of which is the broad adoption of technology across industry and society during this period.  This opened up a wide variety of new market opportunities for tech startups. 

Also contributing is the massive increase in public and private valuations for tech firms.  This is attracting more capital to seed rounds, which leads to more seed stage firms raising money.

Pitchbook's Seed market braces for an onslaught by top VC firms covers the influx of large VC to seed investing.  Key quote:

Earlier this year, Sequoia and Index Ventures each unveiled seed funds of roughly $200 million. Then, Andreessen Horowitz and Greylock Partners announced seed-focused pools of capital with $400 million and $500 million, respectively.

In the past, the large A-list VC firms did few if any seed rounds.  But getting in early means the opportunity for greater returns. It also greatly increases the VC's the ability to put more money into successful firms in later, highly competitive rounds.  

We expect seed funding to continue to grow, which is good news for entrepreneurs.

The Growing Silicon Prairie

The Hustle's Life in the Silicon Prairie: Tech’s great migration to the Midwest covers the continued growth of the Midwest's tech sector.

Key quote:

Investors are flocking to Middle American cities like Omaha and Des Moines. Startups are forgoing the paradisiacal pastures of California for a little Midwestern mojo. And the “Silicon Prairie” — cornfields and all — is having a moment in the unrelenting sun.

The article stresses how much lower the cost of doing business - and living - is in the Midwest. And that's certainly a strong draw.

But as the article chart below points out, the Midwest is also an economic powerhouse that has traditionally been undervalued by the tech industry.

It's not just startups and VC's that find the Midwest attractive. As we pointed out in the Venture Beat article Tech companies are choosing the Midwest as costs of outsourcing rise, larger firms are also moving tech jobs to Midwest. 

Regular readers know we've long covered the tech industry's growth in the Midwest.

And to keep up, we've recommended reading the Midwest tech website Silicon Prairie News since 2010. It's continues to be a great site.

While we very much liked The Hustle's article, we have one quibble. The article ends by saying "And as they say, the cows are coming home."

Anyone who has spent time with cows know they don't come home, at least not on their own. 

Jobbatical Raises $2 Million to Democratize Expat Assignments

Jobbatical is a startup online talent marketplace that connects people looking for short term experiences combining work and travel with global employers offering short term gigs. Their tagline is:

Travel. Work. See the world. Connecting talented professionals with inspiring career adventures at startups around the globe.

In other words, they provide access to expat assignments. 

In the past expat assignments mostly went to a small number of employees at large corporations. Jobbatical is creating a marketplace that democratizes access to these jobs.

The company just raised $2 million in venture funding from powerhouse early stage VC Union Square Ventures and others. Key quote from USV on how they see the opportunity:

The specific opportunity here is an interesting one: the rapid global shift towards internet-based businesses made tech startups a strategic priority for dozens of countries around the world and venture investors are putting more capital to work in increasingly diverse geographies. So the number of properly capitalized tech companies outside of gravity centers like San Francisco, New York and London is skyrocketing but the bulk of talent remains concentrated in these saturated locations (or looking to move there).

Jobbatical is redistributing that talent more evenly around the world with a proposition that’s as daring as it is reassuring: work elsewhere – anywhere – for a year. It’s a simple message that has earned the company a talent pool of over 30,000 people looking to take jobbaticals and over 1,200 companies in 40+ countries looking to hire them.

Another interesting angle comes from another of Jobbatical's investors. Key quote from a Tech Crunch article on the funding (which playfully includes "catch me if you can" in the article's URL):

“The world of work is changing fast, and Karoli’s vision of millions of people one day soon taking 7-to-10 ‘Jobbaticals’ over 10 years, instead of working a single job over the same period, is one we wholeheartedly share,” he says.

We've covered the digital nomad trend and jobbatical in prior posts and there's clearly a rapidly growing number of people who want to travel and work outside of their home country. 

We often read in the press dire predictions about the future of work. And there are definitely reasons to be concerned.

But the rapidly changing world of work is also creating an array of new opportunities and Jobbatical is an exciting example.

The State of the VC Industry - Fewer Firms, More Funding

TrueBridge Capital Partners recently released a report on the State of the Venture Capital Industry. It covers venture capital firm fundraising, investments, valuations, exits, and returns with a focus on 2014, but also has a lot of historical data.

A couple of charts jumped out at me. The first is the number of active VC firms. As the study chart below shows, there's been a steady decline in the number of VC firms since the Internet bubble of the late 1990's.

 Key quote from the report:

... 200 funds invested in five or more deals in 2014, 4% fewer than in 2013 and 83% fewer than in 2001.

Despite the steady decline in the number of funds, the amount of money invested in startups and the number of companies receiving venture capital has consistently increased since the early 2000s.

 

This is in part due to heavy spending by large VC firms on later stage firms such as Uber and Airbnb. The large funds are able to do this because they are garnering a larger share of industry assets. Key quote:

During 2014, we continued to see fundraising dominated by a handful of large funds, with Accel Partners, Andreessen Horowitz, Founders Fund, Kleiner Perkins Caufield & Byers, Lightspeed Venture Partners, Technology Crossover Ventures, Tiger Global Management and Norwest Venture Partners each raising over $1 billion. These firms represent only 4% of the total number of firms that raised capital during the year, but account for 44% of all capital raised.

The venture capital industry has been going through a lot of change over the past decade. We've reported on it's problems in the past, but as this data shows the industry is still healthy.

The Bottom Up Economy

Homebrew is a new seed-stage VC fund focused on investing in what they call the bottom up economy. They define this as "the idea that technology is now helping individuals and small businesses drive economic growth and innovation." 

Key quote from their blog post explaining their investment thesis:

For many decades, the cost, complexity and rigidity of technology limited its power and benefits to large corporations - a Top Down Economy. Today, we’re in the midst of a transformation where technology is increasingly accessible enough, cheap enough and flexible enough to empower individuals and small teams. Teams of 5, 50 or 500 can compete with organizations tens or hundreds of times their size or create entirely new markets with innovative products and services. 

They go on to explain the drivers of the bottom up economy are technology and the shift to the business of one, meaning solopreneurs.  They have a nice description of the business of one:

The path back to personal economic stability?  It’s no longer a career in middle-management and a pension.  We’d argue it’s entrepreneurial activity.  Being able to enter the marketplace not as part of a large corporation but as an individual, team or emerging enterprise.  Building small businesses or offering talent, time, creations or assets directly to customers with little friction.  Not a single wage, but many wages.  Supplementing or creating entirely new income streams.  

We've long followed and forecasted the growing role solopreneurs and micro-businesses (those with less than 5 employees) are playing in the economy.

Homebrew is yet another example of the growing recognition by a broad range of organizations that self-employment and independent work has not only entered the mainstream, but is a key driver of economic success in today's world.

Cleantech 2.0 = Cleanweb

The cleantech industry has fallen on some hard times. The U.S. energy boom - and especially the "shale gale" of cheap natural gas - has led to lower prices for fossil fuels. 

While good news for the U.S. economy, the energy boom has taken the air out of cleantech investing, especially in the areas of wind power, solar and biofuels.

Key quote from SiliconValley.com's article Latest cleantech funding woes spark fears of industry slide:

New figures from the National Venture Capital Association paint a sobering picture: Investments in alternative energy and related fields have dropped for five of the past six quarters. The $368 million that venture firms poured into cleantech in the first three months of this year was roughly a third of the total from the same period in 2012.

So what is the Cleantech industry doing? Pivoting, of course.

And they're calling their new focus the Cleanweb.  The Cleanweb marries information and Internet technologies - think the social web, big data, mobile, apps and sensors - with clean/environmental initiatives. 

According to an article in Gigaom, this means staying away from capital intensive hardware and clean energy production companies. Instead, Cleanweb investments focus on companies "that are “capital efficient” and have business models that deliver immediate value to customers, like asset recovery, reuse and efficiency." 

A presentation on the Cleanweb has a number of interesting company examples. They include firms that make immediate sense like smart thermostat company Nest.  But they also have a few that I find to be a bit of reach, like peer to peer travel rental company Airbnb.  

Yes, I get that the sharing economy reduces the demand for resources. But this claim seems more like a PR ploy to try to counter act the negative press Solyndra and Fisker have given Cleantech rather than an accurate description of their business.

Regardless, this pivot will be good for small businesses. The Cleanweb focus is on improving energy efficiency, the mitigation of environmental problems and a greater focus on conservation. All of these create opportunities for small businesses to play a role.

And the Cleanweb is needed. Climate change continues to be a major economic and political risk, environmental degradation is still all too common and resource efficiency is becoming more critical. We need innovative companies to help fix these problems.

Is the Venture Capital Industry Broken?

According to the Kauffman Foundation, the VC industry is very broken. Their report "We Have Met the Enemy ... And He Is Us" is a damning analysis of Venture Capital as an asset class and the Venture Capital industry in general.

The news here isn't that the VC industry is broken.  This has been actively discussed for years.  

The news is who's saying it's broken.  

The Kauffman Foundation has long been a close friend of the VC industry.  In addition to investing many millions of dollars with VCs, Kauffman's mission of supporting entrepreneurs and high growth companies has resulted in them closely collaborating with the VC industry.  

Kauffman has many reasons why the industry is broken.  But the quick summary is the industry simply hasn't performed well.  Only 38% of the funds Kauffman invested in over the last couple of decades beat public market small cap indexes.  This is primary due to the expensive fees VC firms charge.  

For more details on the industries woes, see the report or this summary article in GigaOm.  Another interesting perspective is provided by this article on A list VC Fred Wilson.

There's little doubt this report will have a major, negative impact on the VC industry.  Institutional investors - the source of funds for VCs - were already cutting their investments in venture capital.  This report will accelerate this shift.

Expect to see more VC firms closing and fewer, smaller funds raised.  The report is particularly damning of funds with more than $400 million - which is going to make raising larger VC funds extremely hard.  

The good news here is the rise of angels, Super Angels and crowd funding means the problems of the VC industry will have little or no impact on the vast majority of small businesses.  

We'll have more on these topics in the coming weeks.

Manta Raises $44 Million; Small Business Sector Attracting VCs

One of the more interesting venture funding shifts we've seen over the last decade is the growing interest by VCs in investing in startups targeting small businesses.  

Even as recently as 5 years ago, few VCs would even consider investing in companies targeting small businesses.  The reason was was straight forward - VCs felt it was too hard to market to small businesses and too expensive to support them.  

This, by the way, was also common wisdom at most large corporations.

But two things have changed the view on the small business sector by both VCs and large corporations:

1. the reach and customer self-service capabilities of the Internet has fundamentally changed the economics of serving the small business sector;

2. a number of venture backed companies targeting small businesses have become hugely successful (Google, Yelp and Groupon are but a few examples).

So we weren't surprised to learn that Manta, the rapidly growing online community and marketing site for small businesses, recently raised $44 million in additional venture funding.  This round brings the total VC investment in Manta to $61 million.  Impressive numbers.

I had a chance to catch up with Manta CEO Pamela Springer to find out what they are planning to do with their new treasure trove.  Springer says they're building more tools and capabilities to help small businesses generate more leads and referrals.  

They're also expanding their community features and creating a social, Facebook-like capabilities for small business owners to network with one another and share insights, ideas and referrals.

We think both intiatives are spot on.  

Small businesses are always looking for leads and referrals.  And research by Manta - which echoes our research (and research of others) - shows that small business owners most often turn to other small business owners for business advice.  Providing a social network to allow small business owners to tap into a broader network is bound to be useful.  

Small businesses should check out Manta.  The service is relatively inexpensive and it's easy to join. They have a free version but most will want to test their paid versions, which start at $29 per month.  

Angels Versus VCs

Fred Wilson has a great post on his A VC blog covering the differences between Angels and VCs, and who entrepreneurs should turn to for funding. 

His first point comes as a big surprise to many:  VCs don't like to invest in companies unless they have a product in market that shows customer traction.  Key quote:

"I believe entrepreneurs should seek angel money when their product is not yet complete, is not in the market and thus they cannot demonstrate real market traction to investors ... Some VC firms will invest at this stage but I am not sure its entirely appropriate for VCs to invest at this stage."

VCs, of course, used to invest in raw start-ups.  The first 3 companies I worked for (one I co-founded) were funded at the business plan stage by VCs.  And even as recently as 5-10 years ago, VCs regularly invested in pre-market stage companies. 

This is a big change and one that a lot of VCs still will not admit to.  Check out VC websites, many still encourage pre-market companies to look to them for capital.  Kudos to Wilson for telling it like it is.

So where should early stage entrepreneurs go for funding?  Wilson suggests Angels and seed funds, which he refers to as "Institutional Angels."

This shift to Angels and seed funds for early stage funding is well known in the venture industry.  But based on our work, much less known to entrepreneurs.  So if you are looking for early stage funding, make sure to read Wilson's post and blog before attempting to reach out to traditional VCs. 

The Rise of Super Angels

Several interesting articles this week on the growing role Angel Investors are playing in the funding of tech and Internet related start-ups.

Seed Deals Account for 26% of Early-stage Web Investments from Giga Om covers the frothy state of angle investments in web start-ups and the growing clout of "super angels."  These are folks who are experienced tech entrepreneurs or investors who look, act and behave in many ways like traditional VCs. 

But unlike traditional VCs, super angels actively invest in seed stage companies.  They also invest lower amounts of money than traditional VCs, between $25k-$250k. 

They generally invest in groups with other angels.  Some of these groups, like the famous Silicon Valley group The Band of Angels, are formal.  Others are informal groups that invest together as it makes sense.   

The article suggests - and we agree - that angels are disintermediating traditional VCs in many cases. 

But even though Giga Om describes the web start-up market "frothy," the Forbes article Calling All Angel Investors points out that relative to demand, very few start-ups are able to attract angel investment. 

The article uses as an example Pasadena Angels, an angel investment club that reviews 400-600 business plans a year.  Of those, roughly 20% are invited to present to the club, and only about 15% of those get funded.  If you do the math, this means roughly 97% of the companies submitting plans get turned down.

So while a lot of companies are getting funded, it is still is not easy to raise money from professional angel investors.