Shopping for Startup Capital Outside of Silicon Valley
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While it's still true that the bulk of venture capital dollars go to startups in San Francisco and Silicon Valley, over the past decade a number of other metropolitan areas have begun to make a dent in the tally of investments.
The San Francisco-Oakland area and San Jose-Sunnyvale area landed the atop a list of the top 20 locations for venture capital investment, with both California regions responsible for generating 40 percent of all the venture capital deals in 2012, according to Atlantic editor Richard Florida.
Rounding out the top 10 were Boston, New York, Los Angeles, San Diego, Seattle, Austin, Chicago and Washington, D.C., accounting for 38 percent of all the venture capital dollars invested, just 2 percent behind San Francisco and the Silicon Valley's share.
Yet, in addition to traditional venture capital funding, entrepreneurs can also turn to seed investors to help them fund their companies. Health care, mobile and internet startups claimed nearly 80 percent of angel group dollars in 2013 according to the Halo Report 2013. Of particular interest is the fact that 15 of the top 20 most active seed funds are not based in the Bay Area but are in states in the Northeast (New York, Massachusetts and Connecticut) as well as Western cities like Las Vegas, Los Angeles and Seattle.
Here are six tips for entrepreneurs on the hunt to raise funds for their startups:
1. Start networking locally. Be sure to use LinkedIn as a power tool for networking. Who are the angel investors and or venture capitalists in the startup's home community. Determine how to be introduced to them. Which alumni groups operate in the area and are suitable for networking with?
Many college or alumni groups have started entrepreneurial groups that are helping startups through mentoring and perhaps offering seed funding such as my organization, UCLA VC Fund. It is crucial to find and build relationships in a network that will provide a personal referral to potential investors.
2. Research crowdfunding opportunities. Several online resources are now available such as AngelList, which has extensive listings and ratings of angel investors. For project funding also check out crowdfunding sites such as Kickstarter and Indiegogo.
3. Check out other investor hot beds. Explore cities such as New York, Seattle, Los Angeles, Salt Lake City and Boulder, Colo. A good place to start the research is CB Insights' list of the "150 most active seed investors of 2013." But, be sure that it's possible to tap into those cities through a tie through the startup’s location, customers, founders or other early investors or advisors.
4. Focus on cities where people are interested in the industry. Have a biotech startup? Be sure to research venture capital firms in Boston or Los Angeles and scratch Washington, D.C., off the list. For a media-tech company, try Los Angeles or New York City. A little business sector research can go a long way.
5. Learn as much as possible about a targeted investment firm. Investment firms are ultimately a collection of individuals, so get to know the organization and also the partners themselves. What is their background? Which partner has the most relevant expertise for the startup's underlying business sector? What is the success rate for the firm's prior investments? Does the firm have similar or conflicting investments?
Remember a venture firm will most likely request a seat on the startup's board of directors as a condition of investment. This person will spend a lot of time with the startup. Be just as careful in selecting the firm and individual partner as when selecting friends or a mate.
6. Understand what kind of funding is needed. Have a financial plan so it's clear the amount of money needed from an investor. This will also help to set expectations about what can be achieved by the company and in what time frame. So entrepreneurs just starting out with a partner and a great idea are best off looking for angel funding. But those with a fleshed-out business plan and product could be on the road to raising the first venture capital Series A round.