The Changing Trend in How VCs Invest
With the success of Y-Combinator many Business Angels and Venture Capitalists are changing the way they invest in start-up companies. In the last number of years the cost of starting up has plummeted. This is particularly the case with Web 2.0 companies.
As a result, Venture Capitalists are adjusting their investment strategy to reflect this. The days of a $5million series A could be over. However, there are benefits to this new level of prudence. As an Entrepreneur, I know that if the money is there it will be spent. Conversely, If a start-up has to live on less then it will adapt. In fact, it’s a win win for both parties.
By taking on less investment at the start, the entrepreneur avoids unnecessary dilution. On the VCs end, they haven’t gone “all in” with a massive series A round. Their risk is mitigated.
Ultimately, this will result in less waste and better business models. Given the current global downturn, restructuring VC investment methodologies to something more similar to Business Angel groups will help get the sector out of it’s current slump.
Start-up accelerators such as Y-Combinator and Berkerley Ventures seem to be the most sustainable method for new business investment. I predict that we will see more and more established VC funds following suit in the next few years.
