This is the third article in a continuing series that examines the state of the ecosystem necessary to successfully bring technology to market. Based on dozens of interviews with entrepreneurs, venture capitalists, angel investors, business leaders, academics, tech-transfer experts and policy makers, this series looks at what is working and what can be improved in the go-to-market ecosystem in the United States, Canada and Britain. We invite your feedback.
In our previous post, we explored the massive changes that have occurred in North America and Europe that have led to a contraction of traditional venture capital investment.
These long-term trends have left early-stage companies in a tight spot. They must become increasingly creative to shorten time to market, become more capital efficient and generally figure out how to do more with less. The cash-burn of years past is no longer an option, if it ever was.
Rise of the super angels
All is not bleak, however. While traditional VCs may have become easily spooked by the prospect of sinking cash into an unproven startup, many angel organizations have stepped up to fill the void. Ronald Weissman, chair of the Software Special Industry Group at one of Silicon Valley’s oldest angel organization, Band of Angels, said many angel organizations have come to act like early-stage VCs.
However, this also means that angel funding may come with more strings attached than in the past.
“They want proof points and market validation,” Weissman said. “They want to see the strength of your management team and your pipeline.”
What is interesting about this trend is that a robust angel industry has traditionally been the prerequisite of a sustainable VC industry, said Denzil Doyle, chairman of Ottawa’s Doyletech Corp. According to Doyle, supporting a strong angel community is fundamental to growing a healthy and sustainable VC industry in any country, a point that is particularly relevant to Canada.
But the importance of fostering a strong angel eco-system extends far beyond Canada. In its May 2010 report, “Government Involvement in the VC Industry, International Comparisons,” the CVCA cited studies in both the U.S. and the U.K. that emphasize the importance of angels, and not just as investors.
Because let’s make one point clear right now: If angels are banding together and stepping up to fill a VC gap, it is not due to a surplus of cash they are simply looking to shovel out the door. They are themselves investors who are struggling with low returns and uncertain outcomes. However, they recognize the importance of keeping the innovation pipeline full with new companies and new ideas. They just have the advantage of having their own money to invest, unlike VCs who must account for how they have invested other people’s money.
What angels provide to startup entrepreneurs in addition to capital is experience, credibility, contacts and connections that improve the flow of high-quality firms available to the VC sector.
Diamonds in the rough may not be afforded sufficient runway and resources to become polished gems, Campbell said, due to earlier exits at lower dollar values as angels look to recoup their investment. For Canadian firms in particular, this can often result in sales to U.S. acquirers and the loss of what could have been the country’s next Research in Motion or Cognos.
There is no ‘normal’
To what extent this is true is open to debate. (Please, debate it; the “Comment” section is just a little to the south of this post.) What’s important is that, when cash is tight and the runway is short, the onus is on startups to get their act together fast.
According to Iain Klugman, president and CEO of Communitech, “The new normal is there is no normal.” Startups must mitigate existing gaps in their go-to-market strategies by casting as wide a net as possible to identify the resources they need for success, from securing federal grants and tax credits to plugging into organizations that provide networking opportunities and mentorship.
“Now the capitalization of a company can be a whole combination of different resources and sources of funding,” Klugman said. “A lot of people think the old normal still exists, but only for a small group of companies.”
“A lot of companies are coming to us for a ‘Series A’ financing with already a million users for a product,” he said.
However, the need for a startup to become more aggressive with early customer engagement and market validation to shorten its time to market is only half of the story. The other is that this process has also become easier for many startups in recent years.
The power of the new normal
Social and new media channels have collapsed traditional enterprise sales models. The rise of cloud computing, open source and commoditized development platforms have made it far easier to bring a software service or product to market compared to 10 or even five years ago.
“Those companies that are founded today are often able to compete with the ones founded five years ago with a lot fewer dollars and a lot more agility,” said John Stokes, managing partner of Montreal Start Up. “The tech market has evolved much more quickly than the venture market.”
Even for hardware plays, greater capital efficiencies can now be found thanks to fire sales of equipment and intellectual property by companies claimed by the downturn, the outsourcing of low-cost components, and the shifting partition between hardware and software that reduces development and manufacturing costs.
But all these advantages will pay off only if the startup is focused on the right starting point – that potential customer it hopes will ultimately buy the product or service it wants to develop.
“Great companies constantly test the market, for validation and feedback,” said Weissman “When I look at a new company, I ask where did the product come from? Did it come as a result of a market demand?”
Early market engagement is vital and with the rise of Web 2.0 and new media channels, it has become easier than ever. It is vital to ensuring a product or service in development is responding to a clear market need with the features, functionality and price points that will drive market uptake and allow it to be competitive. And it is the best defense against a shortage of available risk capital.
In our next installment, we will explore how to find exploitable technology and the market engagement that is required to determine if it is in fact worth exploiting.