Fred Wilson has a great post on his A VC blog covering the differences between Angels and VCs, and who entrepreneurs should turn to for funding.
His first point comes as a big surprise to many: VCs don't like to invest in companies unless they have a product in market that shows customer traction. Key quote:
"I believe entrepreneurs should seek angel money when their product is not yet complete, is not in the market and thus they cannot demonstrate real market traction to investors ... Some VC firms will invest at this stage but I am not sure its entirely appropriate for VCs to invest at this stage."
VCs, of course, used to invest in raw start-ups. The first 3 companies I worked for (one I co-founded) were funded at the business plan stage by VCs. And even as recently as 5-10 years ago, VCs regularly invested in pre-market stage companies.
This is a big change and one that a lot of VCs still will not admit to. Check out VC websites, many still encourage pre-market companies to look to them for capital. Kudos to Wilson for telling it like it is.
So where should early stage entrepreneurs go for funding? Wilson suggests Angels and seed funds, which he refers to as "Institutional Angels."
This shift to Angels and seed funds for early stage funding is well known in the venture industry. But based on our work, much less known to entrepreneurs. So if you are looking for early stage funding, make sure to read Wilson's post and blog before attempting to reach out to traditional VCs.
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