Earlier this month we had an ArcticEvening about startup financing and investments. The event was a success and a lot of topics were covered in general, but one area that could have been discussed more is the venture capital market at large and how it is changing – or is it?
Many blogs and online media sources, especially, have mentioned that during times of economic hardship innovation tends to flourish as talented people are laid off, or otherwise take the bait for entrepreneurship. Furthermore, large corporations that usually dominate the markets cut down on investments in order to cut down on expenses to keep the companies solvent and this gives excellent possibilities for startups to take market share.
However, one area that I haven’t seen all that much innovation globally just yet is the financial market. With its long traditions and means of doing business it is natural that it takes time to shift gears and renew itself. However, the venture capital market is usually the most dynamic part of the financial market and thus could be expected to drive the change in the industry. What do you think – does the venture capital market need some innovative means of doing business in the future? Cast your vote on the right hand side with the poll.
TechCrunch wrote yesterday that Sequoia Capital has given Y Combinator the Seal of Approval. In short, this means that Y Combinator is able to do investments with Sequoia’s money. The initial fund is $2 million and investments will be made with $5000 + $5000/founder. Y Combinator has so far invested into a whopping 118 startups. Naturally these are very early stage and the money will be the primary boost to take the idea to the next level. With this model, Y Combinator is able to increase its investment activity from about 40 startups a year to 60 startups a year.
We have something like this in the Nordics as well. At least in Finland VeraVenture usually leverages private investments to catalyze the otherwise small investment markets. Furthermore Tekes, the Finnish funding agency for technology and innovation, leverages on startups R&D costs among other expenses. Naturally, these sort of activities grow the runway for the startup and further widen the potential for startups. Another question is, that was partially answered in the Helsinki ArcticEvening, that are state run organisations the correct organisations for this sort of activity as their main focus is on a national level.
There are some weak signals going around that perhaps this economic downturn will have an effect on the early stage investment market as well. Many funds have gathered a lot of investment potential, the previous we wrote about was Index Ventures with its €350M. The less spoken truth is that venture capital companies are like any other businesses, they too have obligations to meet. The funds that have been pumped full of capital to invest have certain targets and investment requirements and venture capitalists usually have to abide by these to these to their clients.
With growing pressure on the venture capitalists, they too have to innovate to reach those targets. So, my educated analysis after all this is that we will see new ways the early stage investment market will work in the near future. Sequoia’s and Y Combinator’s deal is just one more signal confirming this.
Image by twenty_questions.