Venture Capital – late vs. early stage

Posted on July 19, 2007


An interesting article in the San Jose Mercury News by Mark Boslet discusses the higher valuations of venture capital deals – Venture capital funding, valuations rise.” (links to PDF file of the article on the Saints Capital website).

Some thoughts on the article to consider:

1. The investors that compose the continuum of private equity, ranging from LBOs to traditional venture capital to angel networks, are growing individually, and as a result, are creeping into each other’s territory. Look at the investment parameters of many “Private Equity” companies and you’ll see a growing number targeting later-stage companies (not the traditional LBO/MBO private equity model of 10 years ago), creating competition for the market. The article states that “too much money [is] chasing too few late-stage deals.” The result is the increased valuations.

2. Angel networks are becoming more and more sophisticated – what used to be the territory of the traditional VC companies. “Angels” used to mean people like your Uncle Bill who did well in the market before retiring and could afford to throw $10K your way. Now angel groups are targeting investments up to the $2 mln range (and higher in some cases). Even organizations like the Angel Capital Association now exist that did not 5 years ago.

The article also states that early-stage companies are forced to suffer. I disagree to some extent.

Firstly, good companies with good ideas, good products, and good managers will get funded. The market works. There may be fewer investments and funding events at the early stage, but perhaps that is better to better information availability about markets, products, and strategies.

Secondly, the wave of VC capital that was thrown at Web 1.0 companies was often spent on outrageous marketing campaigns (i.e. $1 mln for Super Bowl ads) to build brand recognition.

Take a moment to consider where we are with Web 2.0 and marketing:

• Long-tail marketing
• Viral Marketing
• Blogging
• User-generated content
• Google Ads

I don’t have any hard statistics to back this, but I suspect that marketing costs for start-ups are relatively lower as measured by capital than they were 7 years ago. With decreased capital costs for marketing, a significant chunk of the demand for early-stage VC capital infusion diminishes. Start-ups can focus resources on technology and product development and launch their products to market by effectively utilizing a Web 2.0 marketing strategy.