Early Stage – Startup Funding Life Cycle

Following the seed stage of a new business or venture is the “Early Stage.” sometimes it is difficult to distinguish between these two stages.  In the early stage, aspects of the company remain incomplete, although there is usually evidence of progress in the company’s development. Typically, the management team is incomplete, the product or service is still in development, or if developed is in the testing stage and has not yet gone to market on a commercialized basis.  If the product is commercially available, it is generating revenue on a very limited basis. The company has filed for but not received any patents for the proprietary technology and their product and websites are usually identified as being “beta” versions. It is in the early stage that entrepreneurs typically begin seeking funding from accelerators, angels and VCs as their previous funding is typically provided by the founders, friends, and family, individual angels and occasionally accelerators. Early stage companies seeking financing are typically only a couple of years old.

Angels are individuals who provide investment and intellectual capital to entrepreneurial startups. These resources are provided to startups in exchange for convertible debt and/or equity in the startup.  In recent years, these investors began organizing into groups for the purpose of sharing the efforts related to identifying and assessing potential opportunities and pooling their investments.

Background Information

Originating from the theatre industry, the term “angel” originally described wealth benefactors who provided funding for theatrical productions. Today it applies to high net worth individuals, (accredited investors under the definitions of such by the SEC) who provide seed capital for scalable, high growth companies. The Angel Capital Association and the Angel Fund, the major industry associations in the United States both promote membership rosters which exceed 200 groups.

There are two types of angel groups, angel networks and angel funds.  Groups whose members participate actively in the identification, screening, and vetting of the investment opportunities, who make their own investment decisions for each investment opportunity, and who invest as a group through a shared investment vehicle, are generally described as angel networks. When the members of the group invest based on established criteria and guidelines and primarily utilize the support of third parties to identify, screen and complete the due diligence on the opportunity, they are generally identified as a fund.  Under the fund structure, members commit capital and invest in all opportunities identified as appropriate based on the criteria established for the fund.

Angel investment carries with it a high degree of risk. As a result, angel investors usually seek returns of 10X within five years as most early stage investments fail, resulting in the angel losing their entire investment. These issues cause the angel investor to focus on developing a highly diversified portfolio, thereby reducing the risk of the overall investment.  Analyses over time has revealed the typical stable angel group with diversified portfolio returns at a rate in the mid to upper teens to the low to mid-twenties on a percentage rate basis.

The statistics concerning angel groups and investment vary widely.

  • Groups may have as few as 10 members or as many as 150.
  • Some syndicate, some don’t.
  • Some invest locally, regionally and nationally, even internationally, others invest only locally.
  • Different groups invest in different industries and at differing levels.
  • Smaller and newer groups may provide investments from $50K to $250K while large established groups may invest up to $1.5M or more.

It is therefore extremely important that the entrepreneur understand the angel groups structure, approach and criteria thoroughly.  Otherwise, pursuing an investment from any given angel groups may be little more than a shot in the dark, wasting the entrepreneurs’ time and resources, something they have in extremely limited quantities.

Resources

Angel Capital Association
The Angel Capital Association, (ACA) is a “leading professional and trade association supporting the success of angel investors in high-growth, early-stage ventures.”  With a membership of more than 200 angel groups and 12,000 angels / accredited investors, the ACA is a provider of professional development, industry representation, public policy advocacy and an array of benefits and resources to its membership.

ACA indicates its mission is “to fuel the success of angel groups and private investors that invest in high growth, early-stage ventures.”

Angel Pool
AngelPool is one of the largest organization of angels and accelerators in the world. They have a membership of Over 200 angel groups including 5,000 angels which share knowledge, deals, best practices, and learnings with each other. They are comprised of over 500 volunteer leaders who graciously volunteer their time on our various boards, judging and mentoring. Their mission is to help angels, groups, accelerators, and funds profitably find and invest in the best tech disruptors and founders globally to drive jobs, innovation, and growth.

Alliance of Texas Angel Networks
The Alliance of Texas Angel Networks, (ATAN) is a non-profit organization established to facilitate cooperation between the angel investor groups in Texas.  Over the last several years, these groups have worked together and shared investment opportunities and “know how”.

Appalachian Regional Commission
The Appalachian Regional Commission, (ARC) supports various activities in order to promote entrepreneurship and business development in the Appalachian Region. Their objective is to help diversify the region’s economic base and enhance entrepreneurial activity by developing and marketing strategic assets, increasing the competitiveness of existing regional businesses, and fostering the development and use of innovative technologies.

Angel Association New Zealand
The Angel Association New Zealand was established in 2008 to facilitate the efforts of business angel networks and early stage funds to work towards an agreed national vision. The Association desires to increase the quantity, quality and success rate of entrepreneurial investments in New Zealand facilitating the strengthening of the New Zealand entrepreneurial ecosystem.

The primary objectives of the association are to:

  • Promote the growth of angel investment by encouraging and educating entrepreneurs, new angel investors and angel groups.
  • Ensure the ongoing industry success by developing an industry strategy, providing education and encouraging collaboration among its members.

Angel Resource Institute
The Angel Resource Institute, (ARI) is a non-profit organization focused on providing information on best practices and educational information related to the field of angel investing.  ARI’s programs include educational workshops and seminars, research projects and reports, and information about angel investing for the general public. Their programs are available to those interested in the early-stage capital including investors, entrepreneurs, policy makers, entrepreneurial support professionals, and many others.

Australian Association of Angel Investors
The Australian Association of Angel Investors, (AAAI) is a not for profit company which serves as the national voice of the early stage investment community. Their objective is to provide a platform for the growth of the early stage investment capabilities of Australia.  They provide information and resources, a platform for collaboration and internationally recognized professional development programs to the countries angel investors and entrepreneurs.  AAAI also advocates on behalf of the participants in the entrepreneurial ecosystem to shape policy and uphold professional standards.

Business Angels Europe
Business Angels Europe, (BAE) is the European Confederation of Angel Investing.  It represents the European Business Angels’ Federations and Trade Associations. Its objective is to bring together the most active and developed countries operating in the angel markets in Europe and serve as the voice of angel investing on the continent.

Council for Economic Development
Membership of the CED includes a wide range of startup companies, maturing entrepreneurial companies, corporate partners, investors, academics, service providers, and individuals interested in entrepreneurship.  The organization, located in the North Carolina Research Triangle provides education, mentoring and capital formation resources to new and existing high-growth entrepreneurs.

European Business Angel Network
European Business Angel Network, (EBAN) fuels innovation and growth throughout EMEA. Representing the early stage investor community, EBAN membership includes over 145 member organizations from 46 countries throughout Europe, the Middle East and Africa. Their members include angel networks, early stage venture capital and seed funds, electronic funding platforms, individual angels, crowdfunding platforms and accelerators.

Launch Tennessee
Launch Tennessee, (LaunchTN) is a public-private partnership focused on supporting the development of high-growth companies in Tennessee. Their objective is to make Tennessee the No. 1 place in the Southeast to start and grow a business.  LaunchTN is funded in part under an agreement with the State of Tennessee.

National Angel Capital Association
National Angel Capital Association, (ACO) was established as a non-profit in 2002 to promote and support the creation of a vibrant Angel community in Canada.  The ACO provides Angel investors with a secure environment to network and collaborate.

ACO has more than 2,000 members across Canada. Their members are a diverse group of individual investors, Angel groups, and other industry partners that provide support to early-stage companies.

Pipeline Fellowship
Pipeline Fellowship is an angel investing bootcamp for women which works to increase the diversity in the U.S. angel investing community and create capital for female social entrepreneurs. Launched in NYC in April of 2011, the Pipeline Fellowship has expanded from NYC to Atlanta, Austin, Boston, Chicago, Los Angeles, Miami, San Francisco, Seattle, and Washington, D.C.

Wisconsin Angel Network
The Wisconsin Angel Network (WAN) fuels the growth of capital in Wisconsin by operating as an umbrella organization providing services and resources to the early stage investing and entrepreneurial communities. It is part of the Wisconsin Technology Council’s overall economic development and job creation efforts. WAN is a Wisconsin public-private initiative operated by the Technology Council.

The process of raising funds by obtaining small amounts of money from large groups of people, through the internet is known as crowdfunding.  Following are information, resources, and tools, related to this financing methodology.

Background Information

Crowdfunding is a process of raising funds for an opportunity by obtaining small amounts of money from large groups of people, generally through internet sites designed specifically for this purpose.  The internet facilitates crowdfunding through fundraising platforms, which, when leveraged with social media websites such as Facebook, Twitter and Linked-in are able to rapidly and efficiently attract vast numbers of potential investors resulting in successful fundraising campaigns for opportunities ranging from personal projects and social support to entrepreneurial ventures.

Crowdfunding, a recent phenomenon, has the potential to radically change the fundraising processes for individuals, non-profits and for profit entrepreneurial endeavors.

Crowdfunding can be utilized to obtain “Money for Goods”.  Under this funding model donations are solicited for creative personal projects, social welfare projects/non-profits, scientific and research and to a lesser extent, “for-profit” projects.  Monies obtained under this approach are generally categorized under one of the following three funding models:

  1. All or Nothing (AON)
    Fund-raising pledges are pursued with a pre-determined minimum. If the minimum is not met, no money is collected.
  2. Keep it All (KIA)
    Fund-raising is pursued without a pre-determined minimum. All of the funds collected (less commission) are provided to the entrepreneur. Even if the entrepreneur has insufficient funds to meet the objectives, he/she has the discretion as to whether or not to refund the funds.
  3. Bounty
    Funds are raised for the purpose of creating a product or providing a solution to a particular problem (i.e.; a software bug). Funds are awarded when someone successfully provides the requested service.

Crowdfunding can raise equity or borrow money for entrepreneurial opportunities/business ventures. Under this model, crowdfunding platforms and social media websites are leveraged to expand the potential investor base providing significantly higher numbers of potential investors for entrepreneurial opportunities.

Currently, in the United States, the options here are somewhat limited as the processes generally continue to require “Accredited Investor” status and transparency. However, the regulators are reviewing current regulations based on the “Jobs Act” and some liberalization my result in expanding the pool of investors to include non-Accredited Investors use of the crowdfunding platforms and capabilities. The environment is dynamic and interested parties in all countries should monitor the environment on a continuing basis for change.

As described above, crowdfunding for equity and debt can be further defined as follows:

  1. Debt crowdfunding The start-up borrows money which must be repaid, usually with interest.
  2. Equity crowdfunding Equity is provided to investors for funds invested in start-ups raising funds.
  3. Property crowdfunding Owners raising funds provide investors an interest in the underlying property.
  4. Other crowdfunding Various structures generally unique to particular services, (i.e.; perqs, publication, or rewards).

Resources

Crowdfunding Professional Association
The Crowdfunding Professional Association (CfPA) is a 501 (c)(6) nonprofit trade organization that was established following the signing of the Jumpstart Our Business Startup Act (“JOBS Act”) in April of 2012. The association is dedicated to representing the Crowdfunding industry, engaging the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA) and providing the industry with education, a professional network, and tools that will accelerate the capital formation and ensure investor protection.

JOBS Act
The Full Text of the America JOBS Act posted on the White House website.

SEC Press Release (SEC Issues Proposal on Crowdfunding)
The Securities and Exchange Commission, (SEC) press release related to the commissions proposed rules on crowdfunding.

Proposed SEC Rule on Crowdfunding
The Securities and Exchange Commission, (SEC) proposed rules on crowdfunding.

Venture Capital is a type of private equity capital in which concept, seed, early, growth (Series A), and mezzanine funding are provided to ventures to support their growth, development, and expansion, in exchange for equity. Earlier round financing is less common and convertible debt is utilized; however, preferred equity is the typical form of investment in the later Series A rounds, which are much more common to the VC. VCs want to generate a return through a future liquidation event, such as a sale to a strategic player or an IPO.

Venture capital firms source their funds for investment from high net worth individuals through professionally managed funds, then invest the funds in return for an annual management fee and carried interest on the profits of the fund.

Background Information

An individual who provides financial capital for venture investment, as well as managerial and/or technical expertise, is generally referred to as a venture capitalist.  These resources are usually invested through a pooled investment vehicle such as an LLC or LP and invest primarily in highly risky but scalable seed, early and growth stage ventures. These funds are professionally managed by venture capital firms. The firms may employ managerial and technical experts with business and industry experience.

Two Types of Venture Capital Providers. 

  1. Venture Capital Funds – This firm is generally recognized by the public for providing financial capital or resources focused primarily on a financial return for its investors.
  2. Corporate Venture Capital Funds – CVCs come from existing corporations that invest their money and expertise directly into startups external to the corporation, for both strategic and financial purposes. Corporate venture capital is a significant subset of the venture capital industry.

The objectives of venture capital firms vary significantly as do their approaches. As noted above some may invest with financial goals in mind while others invest for strategic purposes. A recent phenom is the creation of firms with a societal focus. Venture capital firms may focus on startup companies in different stages of development or from different industries.  Some may operate locally only while others operate regionally, nationally or globally. Some may invest only in disruptive concepts while others invest in existing established companies which simply need support to grow.  They invest in differing business models with differing growth curves, trajectories, and capital intensity. It’s very important that the entrepreneur fully understand the objectives and approach of the venture capital firm in order to utilize their time and resources as efficiently as possible.

Worldwide Venture Capital Groups

African Venture Capital Association
African Venture Capital Association, (AVCANET) is an industry body which operates across Africa to promote and enable private equity on the continent.

Australian Private Equity & Venture Capital Association LTD
Australian Private Equity & Venture Capital Association LTD, (AVCAL) is an Australian association representing the private equity and venture capital industries in the country.

Canadian Venture Capital & Private Equity Association
Canadian Venture Capital & Private Equity Association, (CVCA) promotes the venture capital and private equity industries in Canada.

Digital Venture Capital Association
Digital Venture Capital Association, (DigitalVCA) is a non-profit which represents the venture capital and private equity industries globally with the objective of growing the digital and high growth technology sectors for the benefit of society.

European Venture Capital Association
European Venture Capital Association, (EVCA) seeks to shape the future direction of the European private equity and venture capital industries while promoting it to its stakeholders.

Hong Kong Venture Capital and Private Equity Association
Hong Kong Venture Capital and Private Equity Association, (HKVCA) was established in 1987 to promote and protect the interests of the venture capital industry in Hong Kong.

Indian Private Equity & Venture Capital Association
Indian Private Equity & Venture Capital Association, (IVCA) established in 1993 seeks to promote the development of the venture capital and private equity industry and to support entrepreneurial activity and innovation in India.

Latin American Venture Capital Association
Latin American Venture Capital Association, (LAVCA) is a non-profit association which is supports the growth of the private equity and venture capital industries in Latin America.

National Venture Capital Association, (NVCA)
National Venture Capital Association, (NVCA) advocates for the US venture capital community encouraging policies that encourage innovation and reward long-term investment.

New Zealand Venture Capital Association, (NZVCA)
New Zealand Venture Capital Association, (NZVCA) has, as its mission to ”develop a world-best venture capital and private equity environment for the benefit of investors and entrepreneurs in New Zealand.

Resources