Published in UT San Diego, July 29, 2013
The term summit is usually used to describe a mountain peak that is higher in elevation than all points adjacent to it.
The San Diego Venture Group held a summit at sea level (Hilton San Diego Bayfront), but the mountain that entrepreneurs still have to scale remains daunting as early-stage venture financing remains challenging. Here are thoughts from some of the participants:
Todd Leonard, executive director, Minnesota Angel Network: “The venture funds that have survived are large and need to put more money into each deal, so this has set the stage for other funding sources to step into earlier funding. In our region in the life science sector, we see more funding from potential corporate partners, family offices, angel networks and funding from outside the U.S.
“We are starting to see a transformation in investing. Angel networks and angel funds are stepping into deals ($1 million to $3 million) that were traditionally done by small venture capitalists. … They are also reaching out to each other to syndicate deals. Recently, Savara Pharmaceuticals announced its successful raising of $16 million from a group of angel funds in Texas.”
Joe Addiego, partner, Alsop Louie Partners, which focuses on software and hardware: “There are several areas where disruptions are taking place or entirely new categories are being built — cloud/SaaS, social/local/mobile, crowd sourcing, and the sharing economy. So we will see a new breed of companies emerging to capitalize in these areas. … Early-stage funding for companies in cloud, mobile, security and other areas has never been better since it is so much cheaper to create a software company that can build meaningful products. What was $10 million in investment is $500,000 now.”
Allison Long Pettine, president, Crescent Ridge Partners, which provides early-stage funding: “Early-stage funding over the next three to five years will remain a challenge because angel investors are not adequately rewarded for the massive risk they take upfront, often before the product is fully vetted or has much, if any, traction. … Early-stage funding for tech companies is slightly more favorable than life sciences because capital goes much further and proof of concept takes much less time. … Seed health-care investors are changing their model as well, forgoing the blockbusters for solid technologies that aren’t as capital intensive and have a shorter exit horizon.”
David Coats, managing director, Correlation Ventures, which co-invests with other venture funds: “The number of financings and dollars in early-stage companies will start increasing toward the end of this period. This will be driven by increasing returns, which will ultimately lead to increased dollars by institutional investors into venture funds and then into startup companies. … Early-stage life science will be more challenging than tech, but the gap will narrow given the attractive realized returns in recent years for life sciences.”
Alyse Killeen, senior associate, Clearstone Global Gaming Fund: “The trend now is to select investors who can provide the network and sector expertise that accelerates growth. Likewise, investors are considering the value they provide beyond capital and the network effect for their portfolio of companies.”
David Titus, president, San Diego Venture Group: “Life science will be relatively flat as the good returns keep investors in the asset class. Tech could be difficult and will probably feel the brunt of any continuing consolidation in the venture industry.”
Patrick Heron, general partner, Frazier Healthcare: “Instead of an A, B and C financing round, you will have a $40 (million)-50 million Series A round. This means that fewer deals will be funded with a ‘valley of death’ for companies coming out of universities and research institutes that don’t have enough preclinical validation to attract venture interest. Angel and corporate investment are stepping in to advance these companies, but there is still a gap. It’s likely that some great ideas won’t get funded because the time horizons are too long. The venture firms are under acute pressure to show returns rapidly.”
When you get done parsing all the words, one thing remains immutable and true. A terrific team with a big idea and a rational pre-money will find financing.