Shortage in early stage funding?

Angel investors and early-stage venture capitalists on which sectors they are optimistic about

The venture capital model isn’t necessarily broken, just changing.  Now a days, companies can be started with less than a million a dollars.  Take a look at clear examples- Facebook, Twitter and even Google, which all started with less than $1 million dollar rounds and have become some of the most widely used services on the Web.  While traditional venture capital investing is clearly down this year, Angel Investors and early stage VC funds remain optimistic due to the very fact that a great idea and company can be built with relatively small investments.

Ron Conway, an Angel Investor who is currently investing in 150 companies, admitted on a panel at the AlwaysOn Summit at Stanford, that he is planning on making 40-50 more investments in the next year.

With less venture capital out there, it’s harder for early stage companies to find funding, and that’s why the angels are benefitting – the entrepreneurs come to them with built ideas.

Joyce Chung, of Garage Tech Ventures – an early stage venture capital fund, which has invested in companies like Kaboodle and Pandora – see this all the time.  Chung explained the companies that come to her fund are a bit further along.  They come to her with actual working products as opposed to a written idea.  

And it seems this has become pretty much a requirement for entrepreneurs looking for investments from Angels.  Rob Hayes of First Round Capital firmly gave advice to entrepreneurs looking for funding, “you shouldn’t be coming to an investor with nothing, come with a working idea.”  Hayes wants to see people who’ve either been working nights and weekends on their product, or have quit their jobs to build their ideas – the passionate ones.

So what sectors should we expect to see the angels and early stage VC funds investing in? 

Ron Conway is looking into real-time data, in which he believes there is, “an explosion ahead of us.”  The real-time data sector involves companies like the rapidly growing Twitter.  Twitter was started with less than $1 million dollars and now has an estimated valuation of $589 million, according to a recent report published by Sharepost.  Currently, real-time data represents 2% of the Web, Conway believes in the next 3 years it will make up 25% of the Web, which will represent a $5 billion dollar opportunity dominated not by one or two companies, but a wide range of companies similar to Twitter.  “The content is created spontaneously and is very relevant to the individual user,” argued Conway.

Rob Hayes is looking for companies, which tap into the “implicit web,” – or the idea that data is locked up in silos on the Web.  His fund recently invested in Mint, an online money management startup.  Initially, Mint received $375 thousand from First Round Capital.  Shortly after, it received $750K worth of angel investments from Conway, Felicis Ventures and First Round Capital once again.  The company has gone on to receive $17.8 million in funding from multiple investors.

Joyce Chung says Garage Tech Ventures is sector agnostic.  She is looking for people with initial products that don’t require more than $5 million to prove a great market.  One example she cited was thermal electronics – basically taking waste heat and converting it into electricity.  Garage Tech Ventures was part of $5 million in total investments towards Kaboodle, (also another company which Conway invested in.)  Kaboodle was acquired by Hearst Corporation in 2007 for $30 million.

Aydin Senjkut, of Felicis Ventures, another panelist, shared he is interested in the combination of  fundamentals and waves.  For example, social gaming, which he shared was of interest to him a few years ago.  Today, like Conway, he is interested in real-time data but not limiting it to Tweets and blurbs across the Web.  His vision, consumer health in real time, genomics data – the notion of realizing the data and making it meaningful and useful in people’s personal lives.