Business Magazine

Hard Times for Capital Ideas

Posted on the 18 October 2011 by Alanhargreaves @RechargeToday

Is your great idea ready to roll?

It’s tough raising funds for new ventures right now. The market for startup capital is being squeezed at both ends. On one hand, soft valuations have put exit sales into limbo. On the other, nervousness about a successful exit Hard times for capital ideasstops investors from entering in the first place. It also means less capital returning for reinvestment.

The larger end of venture capital still has some dry-powder, but a lot of that was raised prior to the financial crisis, often with a five or six year time horizon. Many funds are approaching the end of their mandate with a poor track record and significant undrawn commitments. In current conditions, much of the dry powder will simply expire.

As for high-risk angels prepared to punt exciting ideas, there are fewer around and they have less money. Even the heavily engaged investor bases that reside in incubator hubs like Silicon Valley seem to be marking time.

What profile works in these conditions?

The first hurdle is having a product, not just a concept. Money to build your great idea is either difficult to attract or too expensive to raise. A diligent investor wants to see and test a working model.

Secondly, you need barriers to entry. First mover advantage is a powerful dynamic but the rapid emergence of look-alike competition can quickly erode even your worst-case revenue forecasts. You need some time inside the city walls.

It’s a big problem for technology start-ups. The accessibility of the cloud – pretty much a wall-free entity – means good ideas that are easy to launch can be quickly duplicated and commoditised. Once that happens, profitability gets squeezed.

Hard times for capital ideas
Deal sites are a classic case. Early movers generated strong subscriber bases and good returns but the business model is already under margin pressure. That’s all happened in less than two years.

Thirdly, if you’ve got something that works, will it work in the market? You may have technical proof-of-concept, but do you have commercial proof? If you can realistically demonstrate demand, you are asking for money to roll it out. You have already started to de-risk the investment and it’s looking more attractive.

Lastly, if you successfully raise funds, will you be capable of self-sustaining growth? The turn-off for early stage investors is not so much having to ante up for a second round of founding. It’s the reason for it. 

It’s fine for a marketing rollout. But if it’s for more product development rather than revenue generation, investor appetite will be limited. If there is appetite at all, the cost of raising those funds – in terms of the equity you have to give away, or the caveats they will demand – will be correspondingly higher.

Does your proposal have what it takes?

You may have a comprehensive business plan and a great PowerPoint presentation – everyone does – but do you have a working model with clear commercial potential? Will you have some time to build momentum in a well-defended walled city? When the drawbridge is finally lowered and the marketplace rushes in, you will need critical mass, immediate traction and competitive protection.

You can you tick all those boxes and still get it wrong, but there are investors who will take that chance. In the current environment, that’s where the money is. 


You Might Also Like :

Back to Featured Articles on Logo Paperblog

These articles might interest you :

  • Dying Games – Steve Robinson

    Dying Games Steve Robinson

    Crime Fiction5*s The genealogical expert Jefferson Tayte is back! I love this series which has taken me back to historical eras I know little about while tellin... Read more

    14 hours, 13 minutes ago by   Cleopatralovesbooks
  • Crushed a Flower with a Footstep

    (Photograph by Abhay Tiwari) Please, talk to me about who you were before the walls were painted blue; Tell me the bruises, the aches, and time just added... Read more

    15 hours, 20 minutes ago by   Shantam Sahai
  • Make My Day . . .


    Read more

    15 hours, 36 minutes ago by   Vickilane
  • Lifestyle: Productive Procrastination

    Lifestyle: Productive Procrastination

    I’ve moaned about it enough, so you’ll all know by know that despite having graduated last summer I’m still studying. I’ve chosen a career path which pretty muc... Read more

    16 hours, 35 minutes ago by   Ninegrandstudent
  • Why I’m Not At the MidAmerica Region Annual Assembly

    I love Chicago. I have family there that I'm normally always looking for a way to be with. And I have friends that I don't see nearly enough. So when I first... Read more

    17 hours, 50 minutes ago by   Eastofmidnight
  • Lemon Stuffed French Toast

    Lemon Stuffed French Toast

    Whenever I have stale bread I want to make one of two things . . . either I want to make a bread pudding, or I want to make French Toast. Today the French... Read more

    18 hours, 36 minutes ago by   Mariealicerayner
  • Safety First And Workout Related Injuries Last

    Safety First Workout Related Injuries Last

    (Image Credit) Like most things in life, exercise can be a dangerous game. It’s very easy to injure yourself while you’re exercising; if you fail to take the... Read more

    22 hours, 32 minutes ago by   Peppertan