Trying to advise entrepreneurs on the workings of venture capital firms has always been a bit of a moving target. Over time, they have moved from earlier stage to later stage firms, have gone from highly specialized to broader in their interests, and have changed their target returns from incredibly high to astonomically high.
Recently, due to the impact of various forces including Sarbanes-Oxley and a glut of capital available for investment, we have been seeing another shift in the VC industry.
The latest twist and turn is a move of investment dollars away from smaller VC firms in favor of larger, more established firms. From Red Herring:
The median size of new venture capital funds raised during the first half of the year jumped 20 percent to $192.5 million, up from a median of $160 million during 2004, according to VentureOne. The 2003 median was $100 million.Sub-$100-million venture funds garnered 40 percent of the total capital committed during the first half of 2005. "In the pre-bubble days, that number would have been closer to 70 or 75 percent," said Joshua Grove, a researcher at VentureOne.
What this means is that start-up firms will need to look more at the angel market for money. This is a rather sharp change from less than a year ago, when we saw more money flowing into start-ups from VC funds.
The investment capital is never stable, so entrepreneurs cannot rely on "common wisdom" on where to look for outside funding. They often have to pay as much attention to the trends in the capital markets as they do to the market for their new product or service.
