Michigan Pre-Seed Capital Fund, managed by business accelerator Ann Arbor SPARK, is ranked among the Top 100 VC Firms in 2008 by Entrepreneur Magazine. SPARK’s programs are designed to “igniting innovation” and building a cutting-edge community in Ann Arbor, with a mission to stimulating the economic development of innovative businesses in the region.
To gain a better understanding of why angels are continuing to drive activity and investments in a slumping global market where venture capitalists (VCs) have tightened their purse strings, Venture Hype talked with Skip Simms – Managing Director, Business Acceleration/Manager, MI Pre-Seed Capital Fund.
* Edited interview
VH: What do you feel is the biggest contributor to the significant decline in VC investing?
SS: The economy. It’s a natural chain reaction. For VCs to make an investment, they have to believe the company they invest in can go public or can be sold in a few years to a private equity firm or another company. Private equity firms today are looking for fire sales, which is opposite to the intent of VCs.
Companies can’t get bank financing and are holding cash to make sure they get through this period. The public markets have no appetite for risky investments. Without a high degree of confidence for an exit in a few years, a VC isn’t interested in making new investments.
VC firms themselves are having trouble raising more money for another fund. They have to make the commitments to their current funds last longer. As a result, VC firms are also holding cash for their current portfolio of investments. They know it’s very likely their companies will need more cash, which they won’t be able to find from other investors.
VH: Why are angels gathering more traction in deals?
SS: Angels are making more investments because more people are becoming angels. Investors who’ve made investments for years are now like VCs — they’re being pickier about what they invest in and they, too, are holding on to their cash a little tighter. What’s interesting is that there are more people interested in partnering with other angels.
VH: What trends have you noticed emerging in angel investing?
SS: Angel groups are becoming more popular as there’s comfort in groups. They’re still taking longer to make decisions.
VH: What do you believe are the next promising opportunities?
SS: IT is coming back strong. Software as a Service (SaaS), social networking, medical records software, and communication applications are being created daily. The challenge is to decide which ones are really ‘breakthrough’ ideas.
Alternative or clean energy is still of high interest, but it’s waning as people realize how far away we really are in commercializing these great ideas.
VH: Anything else you’d like to add?
SS: Until the government gets out of the investment business and allows the free enterprise system to work again, the government will be where we have to look for investment first, even at the very early stage of product development and commercialization. Without a restored free enterprise, we’ll continue to move toward a socialistic society and nurture a culture of entitlement versus risk taking that offers great rewards for the risk takers.
* VH: Special thanks to Greg George of GTI Advisors for recommending Skip.
* For series, references are published in the last installment of the series.