Looking for Seed Money? Venture Capital May Be the Answer

After playing it safe for the better part of a decade, venture capital firms are beginning to take more chances with start-up companies.

By Matthew Mogul, Associate Editor, The Kiplinger Letter

August 10, 2007

Venture capitalists are warming to fledgling businesses. After the Internet euphoria died suddenly in 2001, VC firms shied away from riskier investments such as untested start-ups, choosing instead to focus on companies with a proven track record. Now, budding entrepreneurs are back in vogue as a small but growing number of firms devote more time and money in hopes of discovering the next Google or wonder-drug maker.

By the end of 2008, look for 5%-6% of all venture capital deals to be at the seed-money level. Seed funding has always made up a relatively small percentage of overall financing, though it hit about 8% in the dot-com boom before plummeting to 3%, according to a Ernst & Young and Dow Jones VentureOne survey.

For better or worse, though, that seed money comes with more hands-on attention. That's especially true if the start-up is a cutting-edge technology company because such businesses tend to have more-complicated operations. The VC firms, often working through so-called incubators, usually want an early say in management issues, strategy and product marketing. They handle everything from back-office operations to brainstorming business development plans to handpicking and putting together management teams. Many also coach and cultivate company executives.

"This is an emerging trend, and we see it as something that will radically transform the entrepreneurial process," says Christine Gulbranson of the Kauffman Foundation. "It provides more opportunities for entrepreneurs and helps in the advancement of innovation."

Venture capital firms leading the hunt for gems-to-be include Arch Venture, Charles River Ventures, Morgenthaler Ventures, MPM Capital and Split Rock Partners. Some incubators to keep an eye on: The Accelerator in Washington state, The Foundry in California, TechStars in Colorado and Y Combinator in California.

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