One of the pervasive questions that communities ask is, “How do we get venture capital investors to come to our town?” Perhaps a better way to look at the problem is to better define the desired outcome, “How do you increase venture capital investment in my community?” and the short answer is “Investment capital begins at home.”
The venture capital industry has shrunk by nearly two-thirds over the past five years. This radical market correction has forced the surviving investment funds to be more focused in their portfolio strategies. Strategies range from regional and industry-sector focus to moving further down the risk curve in favor of more mature companies. This is bad news for a community that does not yet have a thriving investment community. The focus of the remaining venture capital firms will likely be the traditional centers of entrepreneurial startups, as there does not appear to be a resurgence of new firms looking outside of these areas.
So if the goal is to increase venture investment in an underserved community the best strategy is a homegrown one, namely mobilize your angels. Angel investors are individuals who have the financial means to invest in other’s activities. As individuals they can invest in a few opportunities but as an organized network their ability to invest increases exponentially. And with investment the entrepreneur’s ability to take advantage of other financing expands. For instance, one of the new trends in government grants is to require some sort of matching investment from the company. Angel investment can help solve this circular capital conundrum as it can potentially provide the base funding to pursue larger capital raises through debt and other equity sources.
Angels can help in other ways too. Their experience, their contacts, their counsel, their industry knowledge can all play an important part in the success of new startups.
So why don’t more people join or form angel networks? The overwhelming answer is “Nobody asked.” Will yours be a community that asks?