Startup Funding Enters Its Next Phase: a Ten-Year Evolution

Startup Funding Enters Its Next Phase a Ten-Year Evolution

In the past decade, the development of a broad variety of funding avenues has transformed opportunities for startup funding. Aspiring entrepreneurs now have more options than ever; here are some of the best.

Increased VC Funding

According to the National Venture Capital Association (NVCA) and Thomas Reuters, $8.9 billion in new commitments across a sampling of 58 U.S funds indicate a substantial increase in crowdfunding -- more than double the same period in 2013.

It’s the strongest quarter since the fourth quarter of 2007 ​when $10.4 billion was raised.

To illustrate the difference over a 15-year span, in the fourth quarter of 2000 there were just 37 funds that raised a total of $2.6 billion. The amount of money available for new business clearly promises an almost unprecedented level of financing opportunities.

Greater Angel Deals

Similar to the growth in VC funding, the number of angel investor deals and their total dollar amounts show revolutionary change since 2004, certainly in terms of availability. According to DataHero, angel deals were minimal in 2004 but have risen steadily since, with the largest amounts so far occurring in 2012. Though a drop-off occurred in 2013, it may have been attributable to the emergence of new types of start-up funding sources.

In RockThePost’s 2013 Investor Trends Survey, angel investors were “not only responsible for funding over 67,000 startup ventures annually, but their capital also contributed to job growth by helping to finance 274,800 new jobs in 2012, according to the Angel Market Analysis by the Center for Venture Research at the University of New Hampshire.

On the contrary, venture capital firms only invest in 1,000 new companies per year.”

The same survey found that angel investors have actually contributed about five times less capital to startups than VCs, but the average angel investment has grown from $70,690 in 2011 to $85,435 in 2012, according to the Center for Venture Research.

The survey also noted that individual angel investments in startups grew by 36 percent from 2008 to 2012, while venture capital investments dropped by eight percent.

An Imminent Return to Mass IPOs

According to one Business Insider article, these alternative platforms for start-up funding are also leading to delayed IPOs, which is entirely different from ten years ago, when companies were going public and riding the wave of inflated valuations. Since that article in 2011, however, it has been reported that 2014 saw the most IPOs since 2000, and 2015 is shaping up to record even more.

According to Inc, CB Insights reported that nearly 600 technology startups with a minimum value of $100 million were ready to pull the IPO trigger after collectively raising more than $64 billion in financing. Of these 600, 21 have pre-IPO valuations of $1 billion or more after receiving funding from sources like hedge funds, venture capitalists, and institutional investors.

The Rise of the Startup

Another indicator of increased funding is the rising number of new entrepreneurs, which reflects previous periods of greater funding, including 2001 and 2009, as reported by the Kauffman Index. According to data published in 2015, the Kauffman Index showed the strongest years for new entrepreneurs as 2001, 2009, and 2014 into 2015.

During this time, there appeared to be a stronger concentration of new entrepreneurs developing and launching startups that are somewhat guided by economic changes. For example, entrepreneur John Rampton noticed that around 12% of all working Americans were freelancers, so he launched an online invoicing company called Due to make it easier for such people to get paid. Similarly, Upwork has grown rapidly and now owns what used to be Elance.com as well as oDesk.com, combining the two into one massive freelance marketplace.

According to the 2015 Kauffman report, this number will continue to rise and more companies will emerge.

The majority of these will be bootstrapped by a variety of entrepreneurs.

Global Growth and Foreign Direct Investment

A report from EY on global venture capital insights illustrates another significant change in start-up funding. There’s now a greater opportunity to access funding on a larger scale from countries like China that are interested in participating in direct foreign investment in U.S. tech startups.

For example, the Organization for International Investment’s 2014 report noted that “In 2013 alone, international firms invested $236 billion in the U.S. economy, a 35 percent increase from 2012. Last year was the third best year for inward direct investment over the past decade.”

Factors Behind the Changing Startup Funding Landscape

In an attempt to explain why the startup funding landscape has changed so much between 2003 and 2013, a RockThePost survey theorized: “It could be due to the increased visibility of tech companies, dense investor communities in startup hubs such as Silicon Valley that encourage individuals to fund businesses that are less expensive to build, or because more investors are looking for the next big hit. It is likely also due to macro conditions of the changing investment landscape and investors’ attitudes towards investing in a new financial climate.”

These investors are now turning to alternative investments more than in the past, and cutting out stockbrokers and financial advisors in favor of direct investing tools via online platforms. This includes a shift for entrepreneurs, as well, who are seeking alternative funding sources and options that didn’t exist in the past.

These new sources include crowdfunding marketplaces like Dreamfunded, and Our Crowd, as well as peer-to-peer marketplaces, accelerators, super-angels, and late-stage private equity. The data storage company, Hostt, states there’s been an 8% growth (over any other period) in the number of websites in the past 18 months.

According to the RockThePost survey, investor portfolios average 15% more alternative investments than 10 years ago, with the majority of these alternative investments found in real estate and angel investments in startups. For investors who previously had experience with startups through venture capital funds or angel investments, “their share of angel investments increased from 10% to 13% of their overall investment portfolio over the past 10 years,” and their investment in mutual funds decreased by the same percentage.

Final Thoughts

It’s difficult to know which came first: the increased investment money or the crowd of entrepreneurs with viable ideas and innovative, disruptive technologies. Though the last ten years have witnessed an ebb and flow of investors and entrepreneurs, the real changes have been in technology, investment vehicles, and funding options – as well as a shift in mindset, the role investors play, and a focus on creating sustainable businesses.