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Web 2.0... Still? Trends in Early Stage Financing

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It's almost mid-way through 2008 and the investment ideas that VCs are excited about sound awfully reminiscent of those that were hot two, three years ago: digital media, social networking, Web 2.0 companies. In fact, when asking most VCs what sectors they are actively pursuing, the only one that sounds vaguely zeitgeisty is clean/green technology.

While the sectors that VCs are looking at may have remained the same over the past several years, their approach to them has changed. Very little "traditional" VC investing actually takes place anymore, so VCs need to be guaranteed returns of 200% or 300% of their investments in order to make a play. If your company can only offer 20% or 30% returns to an investor, it is better suited for an earlier stage investment from an angel investor or friends and family.

However, angel investors should always expect to get diluted in a valuation or further investment of the company. Some guidelines follow:

  • 20%-30% of a bridge loan should be expected to be given up as a discount to angels

  • With strategic capital, anywhere from 10%-50%, with an average of 20%-30% can be given up

Also, VCs anticipate company valuations to come down in line with the recent credit crunch, with an expectation that deal valuations will drop as credit markets tighten. Based on the current market environment, cash is king.

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Graeme Thickins says

Emily, I think you need to clarify what you mean by this...it isn't clear: <> thanks, Graeme
Posted at 4:51 pm
Gary Ginter says

Ms. Burg, you said VCs are seeking to be guaranteed 200% - 300% ROI. I assume this is over several years an What number of years did you have in mind when you suggested a target ROI of 200-300%? 5 years? 7 years? By "guaranteed" I assume that what is meant is a markedly improved deal, one with a higher than previously expected (in past VC deals) degree of success. In the minds of VCs with whom you are interacting, what changes in recommended business plan approach are appearing to be favored as being changes that hold the best promise of achieving a higher probability of success? That is, what changes in one's pitch to such potential funders are implied by the more stringent requirements that are deemed to increase the probability of a deal's success?
Posted at 3:06 pm

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