New Survey Revealing What Startup CEOs Seek in an Investor
The Palo Alto office of international law firm Dorsey & Whitney LLP, which specializes in working with tech-based startups, released results of a survey conducted of startup founders and CEOs about the criteria they use to select investors when fundraising.
While there’s been a lot of buzz in blogs and press about the different types of investors and the purported competition of Angels vs. Super Angels vs. VCs, this perspective has largely focused on how investors define themselves. The new Dorsey survey sheds light on what matters to entrepreneurs and gives them a voice to explain their decisions behind selecting an investor.
The “Calling all CEOs: 2010 Fundraising Survey” received a total of 363 respondents over a 4-week period. The survey highlighted a range of primary factors that are driving the decision of selecting investors. It brings into question some previously held views about what CEOs value and underscores the criteria that are increasingly driving investor selection.
The survey findings have been published in a report titled, “The Evolving Investor Landscape: What Really Matters to Startup Entrepreneurs.” A link to the survey report is available for viewing, reprint, and redistribution at: http://www.dorsey.com/files/upload/ceo_survey_report.pdf.
Strong Demand for Funding from Angels, Early-Stage VCs & Super Angels
The survey sheds light on the direction that startup CEOs are headed when they raise their first or second round of funding.
For those who have previously secured funding, they received it from a combination of individual angels or several angels (59%), friends and family (32%), or from early-stage VC firms (19%). Just over 17% had received funding from a traditional VC firm. When these startup CEOs seek a new or next round of funding, they expect funds to come from individual angels or several angels (68%), early-stage VC firms (39%) or super angel funds (37%). With the availability of more funding choices, startup CEOs plan to seek less funding from friends and family (26%). Seeking funding from traditional VC firms increased marginally to 22% compared to the others in a second round.
Speed, Understanding, Desire and Industry Expertise rated as Important
While CEOs still find traditional deal terms like valuation, dilution, liquidation preferences and board control as very important elements in completing a deal, the survey illustrated the importance of other criteria, such as (1) the speed at which the deal can get done, and (2) whether the investor understands the startup’s funding requirements and encourages them to not take more or less than what the business requires.
Respondents collectively ranked these two factors between “somewhat important” to “very important,” at 91% and 92%, respectively. While valuation rated important, a full 32% of CEOs said that this factor was only “somewhat important” to “not important.”
Roughly 64% of the respondents are seeking $1 million or less in funding, underscoring the new funding requirements of today’s tech startups.
Another key factor startup CEOs value is that they want to feel that the investor really wanted the deal. Collectively, 87% of respondents weighed this factor as “somewhat important” to “very important.”
Startup CEOs value an investor that has a focus and expertise in their industry. Almost 85% rated this factor as “somewhat important” to “very important.”
48% of respondents ranked prior relationships with an investor as “not important.”
Although traditional VCs have an advantage in their ability to invest in future rounds compared to angels and super angels, 33% of respondents ranked this factor as only “somewhat important.”
Brand, Global Expertise & Geographic Proximity Considered Less Important
The perception of the investor’s brand does not appear to carry the same prestige and value with today’s entrepreneurs. Approximately 75% thought that a tier-one “brand name” VC was only “somewhat important” to “not important.”
Despite U.S.startups eyeing international markets, and presumably valuing investors who can help them break into these emerging markets faster and more successfully, 70% of CEOs rated an investor’s global presence and expertise as “somewhat important” to “not important.” Geographic proximity to the startup company also did not prove to be a critical element, as 74% rated this as only “somewhat important” to “not important.”
“In light of the broad changes unfolding in the investment landscape, we believe these findings are both timely and relevant. There will be several hundred deals funded over the next year, and in this hyper-competitive funding environment, it’s imperative for investors to know what really matters to startup CEOs,” noted Ted Hollifield, Partner at Dorsey & Whitney.
“These survey findings show that there continues to be a strong need for funding at every stage of a company’s lifecycle – with angels and incubators helping ideas turn into products, to traditional VCs who are providing needed funds to scale the business and ready companies for a liquidity event,” added Matt Bartus, Partner at Dorsey & Whitney.
CEO Survey Profile
Forty-two percent of survey respondents were based in the San Francisco Bay Area/Silicon Valley region, with 20% internationally based, and the rest distributed throughout the U.S.All respondents had either raised funds over the past 12 months and/or were planning to raise funds within the next 12 months.
The 363 survey respondents were CEOs, managing directors, or presidents from a range of technology sectors, spanning IT infrastructure, software, gaming, life sciences/biotech, and green tech/energy. However the majority of startups participating in the survey were in the consumer Internet space, cloud computing/SaaS or mobile, 34%, 17% and 13%, respectively.
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