Remember that last couple of times the bubble burst in the start-up world? Back in 2000 and then again around 2008, things went south and the venture money dried up for many. Those two periods of drought came at a time when the Internet and the digital landscape surrounding it were immature and still looking for a foundation that could withstand economic uncertainty.
Now that it’s 2016, we’re hearing conversations about how the venture money is drying up again, but this time it’s different. It’s not completely gone. The money is no longer going to the storytellers and the dreamers. It’s going to the businesspeople and those with a proven concept.
For years we’ve seen VCs put millions and millions of dollars into businesses that were nothing more than a team with a dream. In some cases those bore out positive results, but in most cases it didn’t. These days the money is more conservative; in order to raise capital, you must have a real business with a proven concept and a revenue stream that’s replicable. The same goes for the angel investors who in the past 15 years came to the rescue when traditional VC money dried up. These folks are also more focused on true business rather than wispy ideas and intangible metrics.
All the angel investors I know are tired of hearing the “same ole pitch,” so to speak: the endless introductions to entrepreneurs who profess to have the next big thing. Instead, they’re narrowly focused on entrepreneurs who have strong business acumen and are proving a concept with real revenue and positive performance results.
The Internet has proven to be a strong driver of business, as well as a means of connecting the global community on shared topics of interest. Platforms like Facebook and Google are the lifeline for both people and businesses to stay connected, and they’re leading the global economy in terms of revenue potential. Digital has disrupted core businesses, and brands like Uber, Amazon and Airbnb are having a dramatic impact on the real world, creating sharing economies, and more.
These are all unique business ideas, and the “me-too” business models don’t have much of a place in investor portfolios. Young upstarts looking to challenge these “established” Internet brands find their pitches falling on deaf ears.
What’s interesting are segments of the market applying these models to new areas or categories. These concepts are where the money is headed: proven ideas applied to a new market that can provide proof of the model and some proof of performance.
It’s also interesting to see where some of the larger, more established companies are getting their funding. Some of the companies who are out on their series B and C, or even series D raises are having to work harder and give up more of their company to get hold of that money. Latter-stage investors are likely looking for growth with profitability more than simply growth. Investors want an event horizon for their money, and it has to be in the foreseeable future.
There are of course exceptions to the rule, but this does seem to be the prevailing point of view from people I’ve spoken to and from what I’ve read.
It will be interesting to watch the landscape over the next 12 months. An election cycle can set off lots of political turmoil, not that we can imagine more than we already have. Turmoil breeds uncertainty, which creates an environment less likely to write checks to entrepreneurs. Will the rest of 2016 be stable as we head toward 2017? I guess that remains to be seen.