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VCs Want in on Your Hot New Company

and VCs want in on your hot new company.

Armed with fresh funds to invest, a growing number of VCs are hoping for a hit with earlier-stage companies. According to the third-quarter 2006 MoneyTree report, a quarterly study from PricewaterhouseCoopers and the National Venture Capital Association based on data from Thomson Financial, early stage investing was on the rise, with 35 percent of all VC deals going to seed or early stage deals, compared to 31 percent the previous quarter. Funding for expansion-stage companies, meanwhile, fell 10 percent. "We've seen a few firms looking at more early stage opportunities, realizing that [those] are the riskiest but have generated the highest return," says Christopher Meldrum, managing director of seed-stage firm Golden Pine Ventures in Durham, North Carolina.

But research shows that VCs are placing smaller bets on these young companies. Says NVCA president Mark Heesen, "Investors are telling early stage entrepreneurs that they're [getting] fewer dollars to be used over a longer period of time. Those entrepreneurs have to be much more disciplined in [how they] spend that money."

Likewise, the bar remains high for companies seeking venture capital in the first place. "One thing we did, because we knew the bar would be high coming out of the dotcom hangover, was to do a superthorough job of our homework," says Daniel Neal, 48, CEO and founder of Kajeet, a mobile phone service company for tweens that raised $27 million in its first round of financing in January 2006. "An executive I admire once said to me, 'Doing a startup is like having a final exam every day,' and I truly believe that."

This story appears in the February 2007 issue of Entrepreneur. Subscribe »