ELIAN D. ALVAREZ

- VENTURE CAPITAL - ANGEL INVESTMENT -
- ENTREPRENEURSHIP - LATAM - INNOVATION -
- INVESTMENTS - PRIVATE EQUITY - FINANCE -

Rising Trend of Initial Coin Offerings

Nov
09

According to a report by Mangrove Capital, 204 ICOs have made a return of about 1,320 percent.

At the same time, investment banks and hedge funds have shown increasing interest in the digital currency with over 55 crypto-specific hedge funds. Before diving deep into why investors are showing greater interest in cryptocurrency, let’s take a look at what ICO is.

 

What is ICO?

Unlike conventional financial system, ICO or Initial Coin Offering is an alternative and unconventional way of crowdfunding. It has enabled a number of successful firms and projects to get the finance to start their business. New businesses and startups around the globe are getting millions of dollars in funds by issuing digital coins. The rising trend of digital currency has made people both worried and excited.

In ICO, the coins bought by investors are for businesses and marketplaces that are not developed yet. By purchasing these coins, they make a bet that a firm or startup will end up becoming successful and as a result, the coin will increase in value.

In average it takes about six months or a year to raise money with conventional venture capital (VC) system, but it is different when it comes to ICOs. In this token crowdfunding, you get to have a large crowd of engaging supporters who want to see you succeed. Not only do they campaign for you, but they are also your early adopters.

 

Growing Trend of ICO

Startups have raised more than 2 billion dollars since the start of 2017. It is a huge amount of funding, given the fact that not many people knew about it a few years ago. Businesses are making money via this mode of funding faster than usual.

In April this year, Gnosis (prediction market for Ethereum) managed to raise 12 million dollars in just ten minutes. In June, Mozilla’s founder raised 35 million dollars by selling Basic Attention Tokens in under 30 seconds for his new web browser startup called ‘Brave’.

ICOs have become the name of the game as they have left the venture capital market behind and are the biggest source of funding. It is a great option for those companies that are pursuing the application of blockchain technology.

 

Concerns by the Regulators

Despite the increasing trends of ICOs, regulators have shown serious concerns. They are warning investors that it is a high-risk investment.

Although, some coins value has dramatically increased, a very high volatility cannot be ignored. Some have also considered it a ‘speculative boom’, but that did not stop investment banks and hedge funds from showing their interest by making an investment in cryptocurrencies and ICOs.

 

Reason behind the Increasing Interest of Institutional Investors in ICOs

The digital currency market has made massive profits in the past one year or so. Initially, institutional investors were curious about what this is all about, but they started getting a hang of it gradually and became less apprehensive and more interested in this alternative investment. It is a kind of chain reaction that started with the rising interest among venture capitalists and now institutional investors, including mutual funds, investment banks, and hedge funds are following their lead. They have shown growing interest and are making an effort to estimate and grab the opportunities in the cryptocurrency market.

The reason why they are more interested in the new and unconventional currency is that it promises a higher return as compared to market averages. According to a fintech analytics firm, there have been at least 55 cryptocurrency hedge funds and a former manager at Fortress, Mike Novogratz, has recently announced a plan to use 500 million dollars for a new digital currency hedge fund. Blockchain Capital also made an announcement of raising 150 million dollars; a part of this fund will be for cryptocurrencies.

 

Goldman Sachs’ Approval

Goldman Sachs is planning to set up a bitcoin trading desk, as they believe that institutional investors are interested in cryptocurrency more than ever. The firm has reported it to be ‘a major milestone’. They believe that the investors need an over-the-counter brokerage platform where they can sell or buy as much cryptocurrency as they want. Goldman Sachs is of the opinion that it can take up this role, but there will be other issues, including market infrastructure and serious concern by the regulators.

 

If, however, ICOs becomes regulated, it will change the way how businesses raise money and will also impact the venture capital market.

A Useful Funding Tool for Less Segregated and Diverse Communities

Oct
26

Communities with a mixed ethnic background and more diversity are likely to come up with new ideas. According to a study by the Yale School of Management, having people in a community with different backgrounds is beneficial for Venture Capital (VC) firms as it leads to economic development and innovation.

In various countries around the globe, communities, universities, and businesses are pursuing diversification. Apart from the immediate benefit of getting fairness, having multiple points of view and diversity of experience is very useful for the overall performance of these sectors.

 

Effect of VC on Integrated Communities

The study also revealed that VC investment is more beneficial for ethnically integrated communities as compared to segregated communities. The effect of VC on the integrated communities was 30 percent higher as compared to segregated ones, especially in terms of creating more wealth, jobs, entrepreneurship opportunities, and facilitating innovative activities. The startup businesses create more value and job opportunities that eventually lead to economic growth.

In a diverse community, you get to interact with people having diverse backgrounds, which leads to getting access to more resources and information as compared to segregated communities. In the past, studies have shown that economic vitality is enhanced as a result of social interaction within a community.

 

Implications of Social Interaction for Venture Capital

The purpose of the study in question was to identify whether a social structure is vital for economic development or not. The VC was the focus of this study, given the fact that it is a useful financial tool for high growth businesses.

It was revealed that such relationships have significant implications when it comes to VC investments. VC investors put their money in new businesses that are in the close vicinity. They tend to rely on professional relationships and friendships for leads and information that cannot be received via cold calls or internet search.

VC investments were compared to aggregate income, employment, new businesses, and a number of patents. It was found that VC performed much better in less segregated and diverse areas, resulting in more patents, more jobs, and created more value.

Social interaction has benefited various communities. One of the many factors that led to high level of innovation in the United States is the increasing number of immigrants that bring diverse culture. When they interact with one another, it creates room for transferring valuable information and ideas, which leads to better economic outcomes. Besides, when people from different ethnic backgrounds live close to one another, it brings about healthy relationships and effective interactions that is favorable for the wider economy.

 

Diversity Leads to Innovative Thinking

Diversity is also very useful to promote innovative thinking that leads to success in the venture capital market. Any sector that does not have diversity or mixed race is very limited in innovative mindset and thought process. This results in similar thinking with not many innovative ideas. In addition to that, there is gender bias in the VC sector that restricts the overall growth prospects. It is a widely known fact that female founders represent the rapidly growing entrepreneurial group in the United States and their firm’s experience growth 1.5 times faster than the average growth rate in the market.

 

Providing Solution to Promote Innovative Decision Making

Despite the lack of diversity, it is quite likely that change is taking place gradually. An increasing number of entrepreneurs with diverse background are entering into the market. They are focused on providing a solution to the problem and make a profit in the process.

It has become really important to promote diversity in the communities and in societies at large so as to promote economic development and prosperity. Not only will it be beneficial for the venture capital industry, but it is also going to help the masses in getting equal opportunities in every sector.

 

The venture capital market has also derived benefits from diverse communities in terms of innovative thinking and plethora of useful information. To continue moving in the right direction, countries around the globe should embrace diversity in order to have successful businesses and create more job opportunities that will eventually bring economic prosperity in the long run.

Struggles of Entrepreneurs Based on Investors’ Perception

Oct
12

The first quarter of 2017 was closed with a total financing of $27 billion worldwide and the hot sectors in the world of Venture Capital (VC) have been fintech and technology. Despite the booming industry, VC has its own ups and downs.

 

Overlooking Entrepreneurs

Innovation has always been at the heart of the United States and the country has always encouraged entrepreneurship, yet, the ideas are often overlooked when it comes to immigrants and women in the sector.

Jerry Nemorin, the founder of LendStreet, is a fine example of that case. He initiated a company to support individuals who find it difficult to pay off their debt. He looks for people who are struggling with loan repayments, buy and consolidate their debt and refinance it at a fair rate of interest. Despite such a brilliant idea, he struggled with raising funds. According to him, investors recognize a defined pattern and the chances of funding the idea of a black person who is out to solve poor people’s problem are very low.

However, he is not alone. There are a large number of entrepreneurs with brilliant ideas who have been struggling with raising funds. Less than 1% investment in new startups goes to people of color, whereas, 10% investment goes to female entrepreneurs. Only 15% of the Unicorns that are making over $200 billion have made it to the real-world industries for day to day dealings.

 

Blind Spots – Another Cause Behind the Struggles

In an economy that promotes innovation, a lot of the best ideas are left out of the conversation due to blind spots.

  • Bias

Bias is the first blind spot that they face. Although, investors don’t do that intentionally, yet, it happens. Investors tend to invest in the ideas that come from people like them.

A study was conducted by the National Bureau of Economic Research in which it was identified that applications that read ‘Greg’ got more calls as compared to the résumés that had the word ‘Lakisha’. This is not surprising, because only 5 percent of the partners in VC firms are female, whereas, people of colors are significantly lesser than that, i.e., less than 1 percent. Hence, the distribution of funding is largely based on the decision makers who are investors in this case.

  • Availability Bias

This is another blind spot that comes in the way of funding the brilliant ideas. Investors tend to invest in the ideas that are closest to them, or the last good idea they heard, versus the best. Almost 80 percent of the money goes to the firms that are situated within 30 miles of the investors.

  • Two-way Thinking

Lastly, most investors have two-way thinking when it comes to funding the ideas. Many people believe that they should focus on making a profit from a business, regardless of whether it is good or bad for the society at large, while engaging in philanthropy and nonprofit activities for the benefit of the society without paying much heed to financial sustainability.

Jerry’s idea supports this ideology, i.e., making a profit from a business that helps people in paying off their loan.

 

Overcoming the Blind Spots

Although, these blind spots are deep-rooted, yet, people can overcome these obstacles if they make an intentional effort to welcome new ideas. Kapor Capital intentionally invested in LendStreet to support Jerry’s idea. As a result, an initial investment of $500,000 turned into a portfolio of 40 million dollars, which enabled Jerry to refinance the financial statements of thousands of families in the U.S.

 

These ideas are available in abundance, but investors have to look closely and more carefully to fund new startups based on the merit so as to reap substantial benefits.

ICOs Surpassed Early Stage Venture Capital Funding

Sep
15

New startups that raised funds through Initial Coin Offerings (ICOs) have now surpassed the early stage VC Funding for internet firms.

But before diving into it, it is important to know what ICOs are.

 

What is Initial Coin Offerings?

This is another way of raising cash.

Cryptocurrency and blockchain startup companies raise capital through ICOs by selling tokens of investors in exchange for equity funds. It is somewhat the same as Initial Public Offering in which stocks are issued in exchange for equity. Just like crowdfunding, ICOs provide a way to get funds from users by enabling them to have a share of the business. They get digital currency in exchange for the money they invest in the business.

 

Rising Popularity of ICOs and VC Funding

ICOs have gained massive popularity in the last few months among blockchain and cryptocurrency startups. In April this year, the total capital raised via these offerings was around $100 million and in May, the amount went up to about $250 million. The month of June turned out to be the biggest surprise when the total funding exceeded $550 million. According to Goldman Sachs, it was the first time that it performed better than seed and angel venture capital funding. Early stage and angel venture capital funding was less than $300 million in June.

In July, the offerings were a little more than $300 million, whereas, early stage and angel funding was just a bit higher than $200 million.

 

Popularity Among the Celebrities

ICOs have become so popular that even the celebrities, including Paris Hilton and Floyd Mayweather, have started jumping on board. In fact, Paris has been involved in it for over a year now and also met the COO of Ethereum last year.

 

Total Value of ICOs in 2017

The total value raised by 92 ICOs in 2017 is $1.25 billion. This is a really good number, given the recent boom of such offerings in the VC sector. There are so many firms that have used these offerings to raise money. For example, Tezos managed to get the capital of over $200 million by creating a new blockchain, whereas, another firm, Bancor secured $153 million via ICO.

 

Criticism and Scrutiny from Regulators

Despite the boom, this phenomenon has been under severe criticism and scrutiny from regulators and other authorities. For example, the Monetary Authority of Singapore (MAS) released a statement in which it was mentioned that these offerings are exposed to money laundering and other terrorist financing risks, because the nature of these transactions remains anonymous. Another concern raised by the MAS was the collection of large amounts of capital in such a short time frame, which makes ICO vulnerable to high-level risk.

On the other hand, the Security and Exchange Commission (SEC) said in July this year that the security law of the U.S. will be applicable to this cryptocurrency. The experts are also showing concern over its legitimacy. They have highlighted that the sale of a cryptographic token makes the investor entitled to a certain share of profit in the firm, which can be considered as a violation of financial rules and regulations. The People’s Bank of China and a lot of other government departments have released a joint statement that people and firms that have raised money through ICO should also make arrangements to return that capital.

 

Firms Facing Increasing Risk of Getting Hacked

Despite all the boom and criticism, the risk of ICOs cannot be ruled out. A clear example of this is CoinDash that initiated an ICO, but ended up getting hacked in July. As a result, all of its funds got stolen. Although, it has gained popularity in the past few months, yet, the risks cannot be ruled out entirely.

 

Future of ICOs

The Chief Information Officer of UBS, Oliver Bussman, raised his concern and said that strict regulations and measures, as applied to IPO businesses, are required in ICO to safeguard the interest of investors. However, he is quite confident about this new mode of raising funds and expressed that such offerings will continue to happen in future. He said that as a new business model that is benefiting the blockchain technology, ICO will continue to sustain by combining hybrid equity ownership/currency and crowd funding.

Venture Capital Ecosystem – Now

Aug
17

The current Venture Capital ecosystem has begun to revive and experienced growth in the last two-quarters. Let’s take a look at the situation of the venture capital ecosystem to evaluate the liquidity and investment position in the market.

 

Overview

In the first and second quarter of 2017, VC sector continued to grow despite the rolling financial market in China, Euro crisis, UK’s exit from the EU, controversial election in the U.S. and obstructed technology IPO market. Although, new uncertainties have surfaced, investors have learned to adapt and adjust. Whereas, the profits made in the first quarter further increased in the second quarter.

 

Funding Activity at a Global Level

The number of deals around the world has also increased. Equity funding rounds in the second quarter of this year increased by 5.7% as compared to the first quarter, adding about 300 rounds. This change took place as a result of angel investment and seed stage investment.

If you compare it with the second quarter of 2016, the overall growth in the funding rounds was about 8.8%, which came about as a result of early stage firms.

 

Dollar Volume

According to a report by CrunchBase, the overall investment increased by 16% in dollar terms, which is an increase of about $6.6 billion in the deployed capital. There was a fair distribution of gain. Late stage startups, early stage startups, startups at the seed stage and angels received about 20% funding in the current quarter as compared to the previous one. The only thing that faced a downturn was a technology growth rounds.

However, the global VC market is not yet restored. In the second quarter of last year, the total investment amount was $51.5 billion, but this year it was $47,8 billion, i.e., 7.2% less than the previous year. On the other hand, technology and seed sector experienced growth by 10.75% and 16.5% respectively.

 

Leading Investors

In a CrunchBase report, a total of 3200 VC rounds was analyzed during the second quarter of this year. During the first quarter, it was Tencent Holdings, Sequoia Capital and Accel Partners that secured the first position, wherein, each had a total of 9 rounds. In the current quarter, however, Tencent led 11 rounds, whereas, Sequoia and Accel led 14 and 20 rounds respectively.

In this quarter, some newcomers were also in the leading position, including Samsara, Grammarly, and General Catalyst. SoftBank also formed part of this list in the second quarter of 2017 along with True Ventures. Some firms dropped down from a leading position, while other newcomers made it to the top.

 

Technology Growth

Growth capital in the technology sector is also known as a growth equity in the business. Technology growth rounds have been defined as private equity rounds in the CrunchBase report. In these rounds, some VC investors from the previous rounds also participated as a continuation.

The dollar and deal volume also increased in this quarter compared with a volume of the same period last year. The overall increase was about 32%. The increase in dollar volume was of $160 million. Although, the deals in the current quarter were two times more than the deals in the previous quarter, the total value of funds was 45% less than the last quarter. This downfall represents the decline in round sizes over time.

 

Initial Public Offerings

The second quarter of 2017 experienced a small increase in the technology initial public offerings (IPOs), both in the United States and the Europe. This toned down the speculative noise that IPO window was closed for everyone except the big firms.

No significant regulatory filings or announcements were made in the third quarter of this year. Redfin, a real estate brokerage, filed documents with the Security and Exchange Commission, showing its interest to raise $100 million. And so far, it has managed to raise over $167 million from investors like Tiger Global Management, Draper Fisher Jurvetson, and others.

 

Although, the global VC market experienced a severe decline at the end of last year, the second quarter of 2017 was relatively better. Growth was observed in the dollar and deal volume for two-quarters back to back. Rounds are also experiencing growth; some venture capitalists doubled the bet on their investing activities. If the upward trend continues, the third quarter will bring the market back to normal after full recovery.

Why Venture Capitals should back companies with female founders?

Aug
03

Although, venture capital has invested a huge amount of money in the IT sector and contributed to innovative developments, yet, it still faces the same gender equality problems as any other sector does. A study by the Babson College examined the state of women in the venture capital sector. Around 7000 companies that got venture capital (VC) funding were evaluated.

According to the study, the percentage of women partners in VC firms was 10 percent in 1999, but it has reduced to only 6 percent now and venture backed companies that have female founders make 12 percent more revenue than companies with male owners. Despite that, only 2.7 percent of the companies fueled by venture capital had female chief executive officers between 2011 and 2013. Whereas, according to a 2014 research report of the Fortune, only 4.2 percent of the partners are women in the VC sector.

 

Issues Faced by Women in the IT Sector

Women in the IT sector have initiated a number of campaigns that are based on ‘asking for more’, especially when it comes to STEM (Science, Technology, Engineering, Mathematics) education, fair policies, mentors, pay raise, and salaries. Moreover, women have also come forward with the hardships that include unfair salary negotiation and maternity leave policies and gender bias.

These issues have led to many campaigns, conferences, and summits. However, despite all these stories of hardship and inequality, no change has come. A clear example of this is a when Ellen Pao lost her case in 2015 for gender discrimination. She claimed to have been left out of networking events because she was a female and was not promoted to be a partner while her male colleagues were promoted ahead of her.

A partner at Canaan Partners, John Balen, said that the male dominating culture begins right from the school and there should be a conscious effort to break that cycle. Candy Brush who carried out the Babson College study is of the opinion that a journey toward becoming a venture capitalist starts from your college and professional network. If 2.7 percent of the firms have females at the executive position and 15 percent of the venture-backed companies have one female on their team, it represents the small possibility of it happening.

 

Macro Factors – The Cause of Decline in Female VC Partners?

As discussed, the percentage of female partners in VC firms have reduced from 10 percent to 6 percent since 1999. Macro factors, including a dot com bubble burst of 2000 and credit crunch of 2008 have also contributed to the decline. VC companies had to go for downsizing during those downturns. The majority of the firms were not so big; they had to lay off on the basis of “last in, first out” – minorities and females in this case.

Another macro factor was the rising popularity of the technology market during the past two decades, especially after Facebook and Google. Having a technological edge was what mattered the most. Although, there has been a shift in this attitude, yet, there are so many investors who still want a technical partner in their team.

The founder of Brooklyn Bridge Ventures, Charlie O’Donnell, said that there are only a few females who are software engineers, therefore, it automatically leads a firm to hire more male partners.

 

Can Gender Equality Lead to Business Opportunity?

The managing directors and co-founders of the Women’s Venture Capital Fund, Monica Dodi and Edith Dorsen, once had a rendezvous with finance and investment professionals to talk about the more risk-intelligent approach in the VC sector. Their fund is the outcome of that meeting. Dorsen was of the opinion that the purpose of initiating this fund was to explore the untouched opportunity with female founders as a focal point. She further went on to say that firms with gender inclusive teams tend to perform better and are very competitive, but not everyone fully understands it so as to generate return out of it.

In a research carried out by Babson college, it was revealed that companies with females in the executive team are 64 percent more likely to have better valuations after the first funding and 50 percent chance to perform better at the last funding.

The founder of the Female Founders Fund, Anu Duggal, said that she visits the Silicon Valley four times a year to interact with partners of the top venture capital funds. She has observed a shift in attitude with a positive change. If the current trend continues, the VC sector and technology market might experience a major shift and massive success in times to come as it moves in the direction of gender equality.

Rising Trends in the Venture Capital Industry

Jun
27

Today, the most successful companies in the world, such as Snapchat, Xiaomi, Uber, or SpaceX have been funded by  venture capital (VC) investors. The venture capital funding pattern has changed and gained popularity in different countries over the years.

In 2015, the VC market around the world consisted of $128.5 billion, wherein, 71 VC backed companies managed to reach a unicorn status along with a total of 7872 deals made.

 

Industries that Receive the Most VC Funding

According to a 2016 report by Martin Prosperity Institute, VC funding is available across different industries. In the U.S., software sector has around 36 percent of the VC investment with a value of about $12 billion, whereas, bio-technology and media and entertainment comprise 17.3% and 9.5% respectively. The top five industries consist of $25 billion investment constituting 76% of all VC investments.

Software sector received the highest funding even in the last quarter of 2015, i.e, $4.5 billion with 369 closed deals. On the other hand, bio-technology collected $1.5 billion via 95 deals and media & entertainment sector managed to secure $881 million by closing 114 deals.

 

VC Funding Trends

Venture capitalists invest in different stages of a business. According to a 2017 report by Crunchbase, the average seed funding in the first quarter of 2017 was approximately 38% higher than 2016’s first quarter funding, which shows that a number of investors are ready and excited to invest in new startups. These investors are basically accelerator programs that offer funding to newbies showing strong potential to grow in the future.

 

Major Cities for Venture Capital Investments

In another report by Martin Prosperity, it is stated that industry wise VC investments are also confined to small geographical locations. For example, half of the VC investments in software sector have taken place in San Francisco, representing 25% of the investments, whereas, San Jose represents 20%.

In the US, the flow of VC investments mainly comes from Boston – New York – Washington corridor and San Francisco Bay Area, representing 40% of all the VC investments around the world.  In 2012, a total of $42 billion worth of VC investment was recorded worldwide. The data included 150 cities and the center point was the U.S. that accounted for 70% of the global investment, whereas, Europe and Asia only represented 14% investment.

 

Popular Sectors for VC Investments

Some of the popular sectors that have received a large percentage of investment are advertising, big data, cloud computing, SaaS, marketplaces, hardware and software.

 

Advertising – Although, it has been a center of attention for many years, but in the past 5 years, it has lost its position and the investment has decreased from 15% to only 5%. Advertising business models are gradually losing their value in the eyes of investors. One of the key reasons behind it is the heavy influence of advertising networks, including Google and Facebook.

Big data – Business models, in which the driving factor is big data, have experienced a growth in VC investment. In 2010, the series A funding comprised of 2.5% investment, but by 2015, the funding rose to 7.5%. On the other hand, seed investment has not shown any improvement or decline over a period of last 4 years.

Cloud computing – It is an infrastructure used by product developers to create services. In the last 4 years, this particular business model has also remained the same, i.e., 4%, in both series A funding and seed investments. However, it slightly went downward back in 2013 to 2014.

E-commerce – Although, e-commerce has been one of the well-known business models in terms of VC investments, yet, the seed stage investment suffered a decline from 15% to well below 10% and series A remained the same.

SaaS – In case of SaaS, series A investors didn’t perform as good as seed investors. Series A increased from 5% to 10%, whereas, seed stage experienced a surge from 5% to 15%. This sector shows attractive prospects for funding as merely less than 2% of the software market shifted to SaaS.

Marketplace – This sector experienced a surge in seed funding from 2.5% to 10% in the last four years. Uber and AirBnB are the reason behind its massive success. The current growth rate has motivated investors to consider it a potential sector for investment. Series A investment, however, remained at 5% of the dollar amount.

 

All in all, it is quite evident that VC investment has become one of the key sources of finance for many successful businesses and is currently dominating the world’s market at a rapid pace.

Startups Worthy of Investment … or not

May
11

It seems like those days are long gone when venture capitalists used SPRAY and PRAY strategy in the hope that one of the startups in the entire portfolio would make it big.

In other words, it is about time that startup companies show their ability that they are worthy of the venture capital (VC) funds.

 

Decline in the Number of VC Funded Companies

The PitchBook released the first quarter of the 2017 issue in collaboration with the National Venture Capital Association (NVCA). The statistics presented in that report were based on the thorough analysis of VC activity in the United States. According to that report, $16.5 billion was raised by 1800 companies alone. PitchBook and NVCA also observed that even though the amount of investment in the Q1 of 2017 was a bit higher than the capital invested in the fourth quarter of 2016, the number of startups has dramatically decreased to its lowest level since the fourth quarter of 2011.

 

VC Investors and Entrepreneurs Exercising Caution

It looks like the VC sector is facing a gradual decline after experiencing effervescent days of glory back in 2015.

John Gabbert, the CEO of PitchBook, said that during the past few years, the VC activity managed to attain intensified growth in the United States and now it seems to be coming back to earth. He further added that it feels like startup founders and investors have started following a more disciplined approach to investing the funds and taking reasonable caution by adopting measures, such as due diligence. These activities are carried out to secure fair deals on both sides so that each party gets something good out of it.

Ernst & Young, a London based auditing firm, reported that companies in the United States raised about 41.3 billion dollars in 2,802 VC deals in the third quarter of 2016. The San Franciso Bay area represented a total of 916 deals having a value of 16.9 billion dollars.

Jeffrey Grabow, the leader of VC in the U.S. based Ernst & Young, said that VC funding has slowed down and there are various reasons for the declining trend. The prominent reason, however, is the fact that investors want the market to absorb the already distributed capital in the market. Momentum capital has reached a later stage of VC funding and injected capital in almost every that was available in the market. Therefore, it is about time to see how it all turns out.

 

Comparison of the Number of Exits

In spite of the huge funding to a limited number of IT companies, a lot of companies fueled by $9.05 billion worth of venture capital took an exit in the first quarter of 2017. This exceeds the combined value of the IT companies’ exits in 2006, 2008 and 2009. The situation is relatively close to how it was back in 2007. If the same trend and immensity of initial public offerings and acquisitions follow, 2017 will either reach the same figure of 2014, i.e., 39.74 billion dollars, or might exceed it. Only time can tell what is to come next, but it continues to happen at the same pace, it would probably exceed the value of 2014.

IT firms around the world continue to leave behind all other kinds of businesses that are funded by venture capital. According to the NVCA and PitchBook report, Initial Public Offering of Snap and acquisition of AppDynamics by Cisco has been ranked among the top 10 biggest exits of their types during the past 10 years.

 

Investments in VC Activity

California has left behind all other states in the United States in terms of the number and value of VC investments. A total of 560 investments was made in 556 companies, which were worth 8.3 billion dollars. As far as the number of investments was concerned, New York was ranked second with a total of 218 investments. Whereas, Massachusetts was in the second position in terms of investment value as it was slightly higher than 2 billion dollars. Although, there may be a rising trend in the remote work among startup companies, yet, the concentration of venture capital is still high in the Silicon Valley.

Women Still Struggling in the World of Technology and Innovation

Apr
13

Although, it seems as if things are moving in a positive direction for female entrepreneurs, there is yet a lot to be done. Women have made accomplishment in every field, but they are still facing a number of challenges, especially when you talk about the increasing number of female startup owners and their ability to get funding.

David S. Ricketts, the senior innovation scholar at the Technology and Entrepreneurship Center at Harvard, said that this is the number one challenge they face when their businesses are experiencing growth.

 

Challenges Faced by Women Entrepreneurs in the IT Sector

Female owners of IT companies have to come across various obstacles when they try to raise capital from venture capital firms. This holds true in case of the Silicon Valley and tech hubs in Amsterdam, Berlin, London. Not only does it adversely affect the progress of women entrepreneurs, but it is also bad for the technology sector, because restraining their leadership and talent hampers the overall growth and impede innovation. Moreover, the gender gap is rapidly increasing around the world, with 90 percent of the venture capital going to male entrepreneurs and only 10 percent retained by female founders. In addition to that, only 10 percent of the strategic level positions in tech companies are occupied by women.

According to the report by the National Women’s Business Council, women invest half the amount of capital invested by men in the startup businesses. It was further mentioned in the report that firms with female founders usually get far less equity financing from venture capitalists and angel investors as compared to companies with male owners, i.e., 14.4 percent vs. 3.6 percent.

Furthermore, only 1.8 percent of the women ask their close family or friends to raise capital as opposed to 9.2 percent men.

 

Female Entrepreneurs in the European Market

A similar trend has been observed in the European market as well, wherein, the IT sector is on the boom, yet the percentage of women leaders is a lot less as compared to men and only a small percentage of venture capital is allocated to startups led by female entrepreneurs. The United Kingdom (UK) is the second biggest startup hub after Berlin. 86 percent of the startups in the UK that receive venture capital funds are owned by men. Whereas, the percentage of angel investment secured by men and women is 56 percent and 44 percent respectively. Unfortunately, even in the IT sector, the distribution of capital is not based on merit.

With such funding constraints, women owned startups in the UK only represent 15 percent of the entire sector. They either revert to self-funding or seek crowdfunding opportunities to survive in the long run.

 

Female Entrepreneurs Generate More Revenue than Male Founders

It is worth noting that female owner companies earn 12 percent more revenue as compared to companies run by men in the IT industry, and their return on investment is 35 percent higher than the firms owned by their male counterparts. If they are given appropriate support, not only do they give better performance, but also make exceptional achievements. This holds true for women living in any part of the world.

 

How Can Female Entrepreneurs Contribute to Better and Sound Economy?

According to one estimate, if women in the UK, who wants to have their own startup companies, get the right support, they can instantly generate more than 300,000 new businesses and create more than 400,000 employment opportunities. Moreover, female-led businesses can contribute to innovation and better quality products with great consumer satisfaction.

 

The U.S. Firms, such as Backstage Capital and Kapor Capital, and the UK firms like Albright are some of the prominent examples of women-led capital firms that have proven to be the game changers in the venture capital (VC) community. To let the innovative and productive ideas flowing in the IT market, VCs should open the doors to give female-led companies a head-start, because it is possible that the owner of the next big unicorn is a female entrepreneur.

Angel Investors & Friends and Family – The Key Source of Funding

Mar
30

Investing in startups is a challenging task. Some startups make big promises, but end up failing, while others turn out to be quite a success. For example, the early investors of Instagram got more than 300 times return on their initial investment within a period of two years. But these are one of the mega jackpots. On many occasions, investors suffered heavy losses as well. This is the reason why they are wary of investing in startups.

However, it has been observed that the key sources of funding for a startup are either angel investors or their family and friends.

 

Friends and Family as a Key Source of Funding

According to a survey, friends and family invest more than $60 billion every year. Moreover, around 38 percent of the startup owners gather funds from their kith and kin and the average investment value is around $23,000.

There is no better way to raise money than to seek the help of your own family members or friends. They can be an ideal option to give your business a head start. If you have reliable family members who are willing to invest, it can be a valuable resource and a long-term opportunity, especially because their main motivation will be to provide support and show loyalty toward the founder rather than expecting a high return on investment.

It is basically a close circle of those individuals who have a strong affinity with your brand or with you.

However, it is very important that these investments are officially set down in writing. All the documentation should be signed by the investors with their consent to the fact that there is a risk that they might not get their cash back.

 

What is the Risk Involved?

It is crucial to know that business should not be mixed with pleasure. Taking money from friends and family is a huge responsibility and risky at the same time. Make sure you share a strong bond with them so that your goals do not get affected when things go wrong. By accepting the funds provided by the family members or friends to start your business, you risk their money. Therefore, it is of vital importance that all parties come to a consensus before anything is initiated.

To manage and control the risk, every party should sign a promissory note that contains repayment terms. In case, your friends or family members want to partner with you, sign a partnership agreement and keep the official documents with you.

 

Angel Investors as a Key Source of Funding

According to a report, more than 268,000 angel investors are active in the United States. Every year, they make an investment of 20 billion dollars in around 60,000 businesses. The average investment amount is approximately $75,000. As per the Angel Resource Institute database, in 2012, the recorded number of angel groups in the U.S. was 385.

Angel investor is an affluent person who provides funds for startup companies, mostly in exchange for equity ownership or convertible debt instruments. A lot of these individuals are either business professionals, higher-ups in the corporate sector, or renowned entrepreneurs. Similarly, there are angel groups as well that consist of individual angels who come together for a common goal, i.e., to evaluate and fund the startup companies. These groups allow such investors to pool their money and make larger investments.

 

Benefits of Having Angel Investors as a Source of Funding the Business

They are usually the ideal source to fulfill funding requirements, because they are focused on the healthy growth of a startup company. Moreover, they also contribute as a coach or mentor based on their own experiences. For example, angel investors introduce startup founders to prospective investors and potential clients. They also identify the problems, advise solutions, and help these businesses to get recognition and credibility in the market. All in all, angels take a lot more risk as compared to other institutional investors. This is the reason why they are so dedicated and seriously concerned about the profits and losses of their portfolio companies.

 

 

To summarize, there has been a rising trend of getting funds from angel investors or family and friends, as they have not only been beneficial to fuel the startups, but have also contributed toward a better economy around the globe.