When the economy crashed, many venture capitalists and angel investors stalled investments and held capital “close to the vest”. This abrupt halt on funding forced many promising and innovative start-ups to put their business ventures on ice or close up shop completely.
While some individuals and companies lost a lot of money during the crash, others moved their money to the sidelines, waiting for the right time to get back into the game. In 2009, some brave investors cautiously dipped their toes back into the water. However, 2010 is definitely the year when more investors will see that the water is just fine, jump in, and make a big splash, creating a wave of new and innovative start-ups.
The big difference between the funding for a pre-crash and post-crash start-up is that investors will demand smarter use of their investments. Software-based start-ups will need to focus on quickly putting a minimum viable product into the hands of their intended users so that they can prove out their business model and secure additional rounds of funding.
No longer will investors allow start-ups to use their funds for building an endless amount of software features that are neither useful nor in demand.
Prove Your Model
If your business idea revolves around selling certain products, prove that your products can sell before you build a fancy e-commerce app with tons of bells and whistles that you think will give you a competitive advantage. If your business idea revolves around building a niche social networking site, prove that you can get members to sign up before you build extra features that you think will make your site stickier.
Focus on releasing a simple set of core features so that you can learn how users will adopt and use them before you introduce new and improved features.
The crash may have stifled the progress of a lot of innovative start-ups, but it didn’t make them go away. Sitting on the sidelines, chained to the ground like a pack of salivating attack dogs, are some of the most creative entrepreneurs, waiting to be unleashed. All they need are the right investors.
We’re already seeing glimpses of big and small investment pops. From Yelp landing $25 million from Elevation Partners to Posterous landing $4.4 million from Red Point and Trinity Ventures, the tides are turning, and hope is on the horizon for many more great start-ups to finally get the funding they deserve so they can turn their ideas into the next great business.