What every entrepreneur should know about financing right now

Over the past few years, we have seen an explosion of start-up activity as the traditional barriers to entry have come down. The ability to raise money no longer determines one’s fate. With lowered costs to build and run websites, acquire and retain users, virtually anybody can pick up coding and start a tech company.

At the same time, funding opportunities have expanded for early-stage start-ups. More money is flowing in from a new crop of angels, newly wealthy from a number of tech IPOs. AngelList makes it easier for founders to reach angels and there are hundreds of accelerators and incubators to choose from. On top of all this, crowdfunding has now become a viable funding option for many start-ups, particularly those hardware projects that have had a tough time getting funding from the VC circles.

But this boom landscape might change soon.

While the top of the funnel has grown with all the angel and early-stage activity, the bottom of the funnel is still roughly the same size (about 10-20 billion dollar companies/year). We have all heard about the Series A crunch in the Valley (there might actually be up to 2000 companies in the Series A pipeline right now), and perhaps there’s a Series B crunch now too.

Additionally, we need to watch out for two developments on the horizon. First, there will be a consolidation in the accelerator space, with the net effect of reducing the number of available spaces for start-ups. And, we should expect angel activity to drop as new angels discover that returns from their seed investments aren’t so easy to come by.

Any entrepreneur trying to navigate the financing landscape should be aware of the over-abundance of angel money compared with subsequent rounds. You need to assess early on if your business is venture-fundable. Is your opportunity at least $100M? If not, revenue from your customers will be your best source of financing. That’s okay: many great companies have been built by bootstrapping.

There’s a lot of “easy” early-stage money floating around right now, but don’t get fooled into taking seed money if you don’t have a viable path for later rounds. It will just be leading you down the wrong track.

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