I strongly believe that investors invest in people before they invest in a business plan or an idea. But I continue to learn that there are a host of other factors, maybe not even related to an entrepreneur or a business, that could keep a startup from getting the funding it needs. You may not have control over many of these, but it helps to know, for planning purposes, what is really happening.
Obviously, a key factor is always the state of the economy and the mood of the venture capital community. The good news is that both of these are looking up these days. According to the Silicon Valley Venture Capitalist Confidence Index®, for the First Quarter 2014, the Q1 increase marks seven consecutive quarters of positive sentiment among Silicon Valley venture capitalists.
On the other hand, venture capital doesn’t get smoothly spread across the geographic and demographic landscape, and the number of active firms has dropped sharply. An older but still relevant study published by CB Insights, the Venture Capital Human Capital Report, summarizes a variety of characteristics for private early-stage Internet ventures funded in the US. The significant findings include the following:
- Founders need to live in the right place. No surprises here. California (Silicon Valley), New York (NYC) and Massachusetts (Boston) are the places to be in the US for venture capital attention. Almost 80 percent of the funding handed out in the US consistently comes from these three locations.
- Whites and Asians lead the race. 87 percent of funded founders are white, while the US population is 77 percent More notably, the second largest group receiving funding was Asians, at 12 percent, despite comprising only four percent of the population.
- All-Asian founding teams raise the largest rounds. Asian teams in California raised median funding rounds of $4.4M, significantly higher than the $3M raised by mixed or all-white founding teams. In other locations, the trend was more equal, even somewhat reversed in New York and Boston.
- Wunderkinds don’t have the magic touch. The average age of founding teams getting funded is in the Gen-X 35 to 44 age range. However, the highest median funding did go to those in age range 26 to 34 years old. Amazingly, no founding teams in the Gen-Y 18 to 25 year range received any funding in California.
- Experience does count. Fully 39 percent of founders funded were formerly CEOs or had founded prior companies. Other common previous roles were executives in sales, marketing and product management, all suggesting that VCs back experience.
- More founders generally means more money. Overall, the majority of companies have two or more founders, but over a third are led by one founder. More founders do not necessarily lead to larger funding rounds, but the highest median funding generally goes to companies that have two or more founders.
- Going solo works better on the East Coast. Co-founder companies are the norm in California, but 40 to 50 percent of the startups in New York and Massachusetts have only one founder. In New York, these solo efforts even raised more money, with a median of $4M.
If you don’t live in these corridors, don’t assume that you can simply incorporate in the state or email your proposals there and be considered a local. At minimum, you need to get an introduction from a local player, or better yet, set up a local office and network there. Investing is all about people-to-people relationships.
If you are from outside the US, especially Asia, experts tell me that the focus is even more on relationships. George Wang, founder and chairman of the Beijing-based Chinese Professional Network (CPN), recommends that anyone from the West wanting to get involved in Chinese start-ups slow down the pace and “Spend six months and get to know the place and the people.”
If you need funding, focus first on the human side of venture capital before you rush to pitch your plan. The evidence confirms that, from a funding perspective, a successful startup is more about the right people being in the right place at the right time, versus the technology or solution.
Image credit: CC by Dave Catchpole
