There's no sugarcoating it: Raising money for your startup won't get much easier in 2010, since the capital market for early-stage investments is still reeling from the effects of the recession.
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But there is still money out there and there are better (and worse) ways to pursue it. Here's how to make the best of the leading trends for 2010:
Remember: Angels didn't stop investing--they're just writing smaller checks. There will always be high-net-worth individuals and former entrepreneurs who like to invest in startups, and next year should be no different. But as long as the stock market remains rocky and liquidating stock to make investments remains painful, angels will be investing less. As an entrepreneur, you should plan to get a smaller portion of your money from angel investors, or approach more investors per round.
Pay more attention to "sidecar" venture funds. As venture capital firms struggle, deep-pocketed angel groups, clubs and associations will move up the food chain by creating their own managed funds--the so-called "sidecar" venture funds. These funds make sense for both angels and entrepreneurs: Angels get to keep their best deals funded, without having to rely on the ebb and flow of large VC firms. And entrepreneurs see a greater return on their investment of time pitching and building relationships with angel clubs, because clubs can provide access to more funds later on. Angel clubs are spreading nationwide; check out the Angel Capital Association Web site at angelcapitalassociation.org to find them.
Businesses with a social impact will have an edge. Not long ago, entrepreneurs who wanted to solve a social problem formed nonprofits and raised money from foundations, or they formed businesses and raised money from private investment firms. Now, smart social entrepreneurs and a new class of funders in areas such as clean tech, education and economic development are designing collaborations that benefit from tax incentives, facilitate government subsidies for early adopters and leverage the social motivations of angel investors. Examples include angel groups such as Investors Circle, socially driven investors such as Omidyar Network, Calvert and Gray Matters Capital, advocacy-driven innovation funders such as CFSI in Chicago, and double bottom-line investment funds. Expect this trend to continue in 2010, and if your business makes a meaningful social impact, don't hide it.
Don't expect to land VC. The venture capital industry endured a shock in 2008 and '09 that will slow the creation of new funds. But top VC funds will continue to invest and small funds within industry-specific niches will benefit from the lack of competition. Entrepreneurs with scalable business plans should look at VC as just one of many funding options.
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Asheesh Advani is the founder of Circle Lending and Virgin Money USA, and the author of Investors in Your Backyard