The amount of money committed to venture funds peaked in 2007 before the financial crisis. Since then, we have seen a steady decline in the total amount of capital that limited partners are willing to put into funds. The only bright spot is funds that are focused on investments in Asia and the rest of the world, outside North America and Europe.
When looking at the stage of investment, we see that only 5% of the investments are early/seed stage and the amount of money committed is significantly less than this. No surprises there, as with early-stage deals we frequently see less than $1 million invested. Most of the capital is going to “bolt-on” financings where the VC firm will put more money into a portfolio company to drive toward a successful exit.
Currently, most of the attention in the early-stage financing arena is going toward crowd funding. While the SEC is still several months away from issuing the enabling regulations for the recently passed JOBS act, several financings have already gone through.
Circle Up is exclusively dedicated to consumer products companies. Its website features many early or even very early-stage businesses. For example, Episencial, a company that makes natural skincare products for babies, has raised $200,000. According to an article on Circle Up’s website, Episencial raised the capital in just 14 days from 18 accredited investors.
On July 2 The Wall Street Journal featured an article on Pebble Tech, a company that makes a watch, which connects to a Smartphone. So far it has raised an astonishing $10 million from close to 70,000 people! These “investors” have each paid the company to deliver them a watch later this fall. The company is now under pressure to produce and deliver watches that can display apps and notify wearers of incoming messages on social media.
These examples illustrate two models of crowd funding. Circle Up is for accredited investors who are willing to commit several thousand or tens of thousands of dollars. In exchange, the investor receives equity in the company and relies upon the company to use the capital infusion to follow the business plan and build value. Pebble Tech, which used Kickstarter to help them with funding, is employing a reward-based model by reaching out to individuals who were prepared to spend a modest $115 and receive a watch in exchange.
According to the industry association, Crowdsourcing.org, there were 450 crowd funding sites operating at the end of 2011. The majority of them are in North America and they have raised $1.5 billion. Equity-based or lending-based funding models are growing fastest and, as one would expect, are raising the largest amount of money. We’ll follow the development of these with great interest.