I have first-hand experience of raising capital; pounding the pavement and listening to people tell you that something you have put your heart and soul into doesn’t really interest them: sorry. Then, just when it seems you are about to give up , when you have spoken to every investor – twice – you suddenly stumble across someone who is actually willing to invest.
In the current economic climate it seems this process is even more arduous as people are less willing than usual to part with their hard-earned cash. When it comes to venture capital, the conventional wisdom has been that if you want money the Americans are pretty much giving it away. Finding investment in Europe, however, while far from impossible, isn’t exactly easy either (particularly in Italy). Take for example the Italian startup wunderkind, Mashape, an API marketplace for cloud-based services: they spoke with every VC and investor in Italy – all without success. And then (miraculously) after just 19 days in the USA they found funding in San Francisco.
According to Marco Palladino, one of the founders of Mashape (along with Augusto Marietti and Michele Zonca) it’s entirely cultural. He told TechCrunch: ‘in Italy, the investor community is smaller and has less money than in Silicon Valley. Therefore, they don’t want to take a risk by investing in a new and innovative model – they want to invest in something proven and secure. Thus, they fund models that already exist, which ends up slowing down local innovation as a consequence’.
However, you can find venture capital if you’re in the right industry. A recent report states that there has been a 37 per cent increase in investments in the US this quarter. Not surprisingly companies in the mobile sector have been the main beneficiaries, including seed funding for startups. In fact, 22 per cent of all deals have been at the seed stage this quarter.
Even though the Italian investments market still trails its main European counterparts it has been growing and an increasing number of opportunities are available. In the past three years, 183 startups have received financing, according to a survey by “Startup Numbers”. The combined investment capacity of the funds for 2012-13 is about 320 million euros, aimed at supporting around 160 new businesses. The average lead time between the issuing of the business plan and the actual investment is about 6 months. Some firms can manage it in 3 months, while others need up to 10 months. The average share of capital controlled by investors is 30%.
There is also growing interest in the Italian startup sector, attracting not only homegrown VC funds, but also foreign money. Government support in the form of a Task Force to propose new laws more favourable to startups has also helped to spur optimism, as we reported on NetworkMilan recently.
However, while the traditional funding route for startups remains hard just about everywhere there is a new trend in the form of online funding networks. Depending on which site they use a startup can raise whatever amount they need to get their business off the ground. Whether you’re a one-man-band with a brilliant idea, or a small company seeking further development funds, this seems to be where most people are getting angel funding. Kickstarter is the one most people have heard about, creating a community for people with money to invest: anything from $10 up to $1 million, as was the case for Nano Wristbands (which convert an iPod Nano into a watch).
I also came across Payable.com as well, which takes a slightly different approach. You share your idea on the site, which then gets funded by the ‘investor/s’. Payable’s own developers step in to get you up and running and the software is sold via their online store, which is how the investors make their money back. One disadvantage with this model is that you don’t own the IP.
And there’s Kabbage.com, which, according to its website can ‘provide working capital to online sellers to help their business grow in less than 10 minutes‘.
I like the idea of startups funding startups. It makes sense; they understand the risks involved and are generally more in tune with the way entrepreneurs think. And it is these companies that have been the driving force behind the growth in seed investment, as I mentioned above.
Certainly, the times they are a-changin’ for the investment sector. I personally do not believe you can say one location or market is better or worse than any other, especially since the dire economic outlook affects everyone equally (at least in the West, still languishing in recession). (According to an article in the Wall Street Journal, U.S. government spending relative to GDP is 36%, which is very close to that of Spain. And the US debt-to-GDP ratio is 103% whereas Spain’s is 68%.)
But while times remain tough, the growing diversity of funding sources for startups is one of the factors helping to get new high-tech businesses through these tough times.
By Danielle Dalkie, Social Media / PR Consultant and Co-founder of mobile payments startup Waspit.