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05/21/14 | Uncategorized

Young Startups Are Getting the Short End of the Venture Capital Stick

Becoming more risk-averse, angels and VCs are focusing on companies that have already moved past the early stages of development.

By Abigail Tracy (Staff Reporter, Inc.)

This story first appeared on Inc.com.

Venture capitalists are spending their money on more established companies rather than young startups, according to data from the first quarter of this year.

According to the latest MoneyTree report — which was put together by the National Venture Capital Association and consulting company PricewaterhouseCoopers — there were only nine seed-stage investments in the Bay Area during the first quarter of this year — a 67 percent drop from the same period a year ago. Later-stage investments were up 17 percent from the year-earlier period, the San Jose Mercury News reported.

With so many companies launching due to lower barriers to entry, VCs are looking to invest in those that already have a solid customer base and a good market share, the Mercury News reported. “There is a lot of money being thrown into companies to scale. It’s turning into a war, and you had better be well funded and well armed,” Jeff Grabow, a venture capital expert at San Jose-based financial services Ernst & Youngtold the outlet.

It is not just VCs who are a bit more risk-averse as of late. In an interview with Inc., David Rose, founder of the New York City-based investment group New York Angels, said that even angels are looking to invest in companies that have proven themselves in the market:

Given the reducing costs of starting a company–you can do it for a few thousand dollars starting online — the bar has been raised an enormous amount. When it took $20 million to get a company started or even $2 million, the only way to start a company was to get the money first, but now the cost of starting a company is so low that the expectation on the part of angels is that you will have already started it. Angels at this point no longer fund ideas. If you just come in with an idea — don’t even try.

…We will look for something — some proof, some traction that you can actually create something that somebody wants. That’s typically where angels come in. They come in after you have the company started with your own money and money from friends and family, after you have some proof of traction or proof of concept, and then we take the first outside risk.”

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