Venture Capital and Angel Investing
Betting on Success
Looking for cash to fund a start-up or growing business? You’re not alone. Last year U.S. entrepreneurs created more than six million new businesses. Statistics predict fewer than 10% of those will survive. That makes it hard for “seed” or early stage companies to attract major venture capital. More often they are funded by angel investors, willing to assume more risk.
Angel investors operate differently from venture capitalists (VC). They typically fund smaller amounts than VCs – averaging about $600,000 last year. They are also willing to invest in smaller, earlier stage companies. The average 2015 venture capital investment – across all stages – ranged from about $10 million to $20 million, according to the National Venture Capital Association. In return for a cash infusion, however, investors usually get significant ownership in the operation.
Amazon.com founder Jeff Bezos is a good example. In 1995 he set up 60 different meetings with prospective investors and venture capitalists before raising his first $1 million and giving up 20% ownership – a significant sacrifice. But the move allowed him access to scarce risk capital and “smart money.” Forbes estimates Bezos’ net worth today at $50 billion.
Colorado saw about $780 million flow to its entrepreneurs last year – mostly to Denver area software technology, biotech and healthcare firms. Colorado Springs entrepreneurs captured a mere $7.48 million.
The Pikes Peak region is home to several promising startups, but unlike large metropolitan VC “magnets” with corporate headquarters, rich R&D funding and key industry clusters to support entrepreneurial activity, they struggle to attract investment. So how do they build a case?
The first step, advises nonprofit Rocky Mountain Innovation Partners CEO and veteran Silicon Valley angel investor Ric Denton, is to identify “market pain” - an unmet significant need in the marketplace. “You also have to have the right people in management, a great concept and a market for your product or service,” he says, adding that most can initially self-fund but ultimately seek outside investment. And most angels and VCs won’t invest unless they see a prototype that customers are lining up for, one that they want to buy – and they’ll expect a piece of the action in return.
That’s a hurdle some veteran Colorado Springs entrepreneurs want to help key local startups and early stage companies to overcome.
President of the Center for Technology, Research & Commercialization (CTRC) – a nonprofit located on downtown’s Catalyst Campus – Frank Backes says investors behind the project, are working to improve a startup’s chances of success. “Our goal is to create a ‘bridge’ aimed at helping cash-limited but growing cyber defense and technology companies. We provide a funding infrastructure to support an enterprise when its own or its angel funding is exhausted – before it qualifies for major venture capital.” Denton’s Rocky Mountain Innovation Partners is a Catalyst Campus anchor tenant and a key member of the program’s brain trust.
So far Catalyst’s strategy is working. The Air Force Research Laboratories in Ohio and New Mexico have agreed to fund early stage cyber technology development at two on-site companies. As an “early adopter,” the AFRL pipeline already pays for work at two of the campus’ startups. Their patented technology, Backes notes, will likely attract major venture capital. And, unlike Bezos, Catalyst’s more self-sufficient companies may not have to sacrifice as much equity to get outside investment. These successful homegrown companies then will help the entire community, generating wealth and creating new jobs. They will also elevate Colorado Springs’ profile for future investment.
“In a sense, the private sector is betting on the come in this community,” Denton says, “but the acid test is execution, and that applies to all who call ourselves entrepreneurs.”