For as long as I can remember, I believed that the amount of capital in a startup community was driven exclusively by the quality of the local startups. Want more capital? Build better startups. Now, I believe I was wrong and more capital results in more startups.
Many years ago when we tried to raise money for Pardot, we thought we’d checked all the boxes. Great market. Great customer base. Great growth rate. Yet, capital was still incredibly hard to come by. I didn’t feel our difficulty raising capital was a function of local capital as we pitched investors from Boston to Silicon Valley. Our difficulty was because we didn’t do an amazing job convincing investors we’d build a big business. Regardless of our fundraising challenges, our community had limited capital and we looked nationally.
Fast forward to today and our community is brimming with capital and startups. Seed stage investors have raised over $100M, which is an enormous amount when the check sizes are often $250,000. Coupled with all the investors, there’s a commensurate number of pre-accelerators, accelerators, university initiatives, and scale up programs. Startups are everywhere.
Investors have to put capital to work in order to earn their fees and profits (ideally!) from their own investors. If there’s more seed stage capital now, which there is, it translates into more startups raising that type of capital — the money has to go somewhere.
But where are the new startups coming from?
A few ideas:
- Science Projects – A couple developers put something together on nights and weekends to demonstrate a prototype. Before, they’d have to have some traction to raise money. Now, it’s a less of an issue and science projects are getting funded.
- Spin Outs – A team within a startup identified an unrelated issue and started building a solution. After a few conversations, they decide to spin it out as a new startup and raise capital.
- Bridges – A young startup is making progress, but not enough to raise a big new round. Instead, investors do a bridge round in an effort to keep things going with an eye towards hitting a meaningful milestone.
- Less Tech – Before, most startups were software/Internet businesses. Now, more have a tech component but aren’t primarily tech, and are raising money from tech investors.
- Startup Programs – Accelerators and other community programs are achieving their intended function by helping startups raise money at higher rates.
Put simply, investors take more risks now. More ideas and “projects” are getting funded. More programs are prepping startups to raise money, and succeeding in their efforts. It’s a great time to be an entrepreneur and the capital is flowing.
More capital does equal more startups. The money has to go somewhere.