Venture capital firms want a piece of the angel investors’ lunch. A growing number of established venture capital firms are investing smaller amounts in early-stage companies, in an effort to “seed” more successful start-ups.
Dow Jones reports that many are investing in consumer Internet and software-as-service start-ups, since many of these types of companies are succeeding faster and using less capital upfront. The VC firms are investing much smaller amounts than usual – often five-figure sums – to help entrepreneurs get started and have a seat at the table when the company takes off and needs next-round financing.
The article mentions FirstMark Capital as an example of a firm that has set up a formal program to sprinkle small sums into a larger number of early start-ups. To help, FirstMark is speeding up the approval process for investments and agreeing to more friendly terms for entrepreneurs.
Other firms, such as Norwest Venture Partners and Adams Street Partners have taken a different approach. They are handing over money to angel investors or seed-fund managers and giving them carte-blanche to invest as they see fit.
These investors are following the recent successes of other firms that created formal seeding programs a few years ago. Charles River Ventures, for example, began seeding a select number of start-ups in 2006 and is now seeing the benefits. Its portfolio of 22 young companies has generated more than $30 million in total revenues in 2009, according to the Dow Jones article.
One drawback is the hidden message that a venture capital firm sends out if it decides, for any reason, not to invest in the start-up at the next round of capital raising. While it could be for unrelated reasons, not investing has the potential to “spook” over venture capital investors and make it more difficult for the start-up to raise the necessary funds.
What’s your opinion? Should venture capital firms make a concerted effort to help very early stage start-ups get off the ground? Should it be a formal program? Add your comments below.
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