Dorsey & Whitney Unveils New Survey Revealing Funding Trends and What Startup CEOs Seek in an Investment Partner

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CEOs Explain Desire to Seek Funding from Angels, Early-Stage VC and Super Angels

PALO ALTO, Calif.--(BUSINESS WIRE)-- The Palo Alto office of international law firm Dorsey & Whitney LLP today released findings from its inaugural survey of startup company CEOs regarding fundraising. The “Calling all CEOs: 2010 Fundraising Survey” received a total of 363 respondents over a 4-week period. The survey highlighted a range of primary factors that are driving the decision of selecting investors. It brings into question some previously held views about what CEOs value and underscores the criteria that are increasingly driving investor selection.

The survey findings have been published in a report titled, “The Evolving Investor Landscape: What Really Matters to Startup Entrepreneurs.” A link to the survey report is available for viewing, reprint, and redistribution at: http://www.dorsey.com/files/upload/ceo_survey_report.pdf

Strong Demand for Funding from Angels, Early-Stage VCs & Super Angels

The survey sheds light on the direction that startup CEOs are headed when they raise their first or second round of funding. For those who have previously secured funding, they received it from a combination of individual angels or several angels (59%), friends and family (32%), or from early-stage VC firms (19%). Just over 17% had received funding from a traditional VC firm. When these startup CEOs seek a new or next round of funding, they expect funds to come from individual angels or several angels (68%), early-stage VC firms (39%) or super angel funds (37%). With the availability of more funding choices, startup CEOs plan to seek less funding from friends and family (26%). Seeking funding from traditional VC firms increased marginally to 22% compared to the others in a second round.

While CEOs still find traditional deal terms like valuation, dilution, liquidation preferences and board control as very important elements in completing a deal, the survey illustrated the importance of other criteria. Following are some of the findings:

Significant criteria include (1) the speed at which the deal can get done, and (2) whether the investor understands the startup’s funding requirements and encourages them to not take more or less than what the business requires. Respondents collectively ranked these two factors between “somewhat important” to “very important,” at 91% and 92%, respectively.
While valuation rated important, a full 32% of CEOs said that this factor was only “somewhat important” to “not important.”
Roughly 64% of the respondents are seeking $1 million or less in funding, underscoring the new funding requirements of today’s tech startups.
Another key factor startup CEOs value is that they want to feel that the investor really wanted the deal. Collectively, 87% of respondents weighed this factor as “somewhat important” to “very important.”
Startup CEOs value an investor that has a focus and expertise in their industry. Almost 85% rated this factor as “somewhat important” to “very important.”
48% of respondents ranked prior relationships with an investor as “not important.”
Although traditional VCs have an advantage in their ability to invest in future rounds compared to angels and super angels, 33% of respondents ranked this factor as only “somewhat important.”

Brand, Global Expertise & Geographic Proximity Considered Less Important

The perception of the investor’s brand does not appear to carry the same prestige and value with today’s entrepreneurs. Approximately 75% thought that a tier-one “brand name” VC was only “somewhat important” to “not important.”
Despite U.S. startups eyeing international markets, and presumably valuing investors who can help them break into these emerging markets faster and more successfully, 70% of CEOs rated an investor’s global presence and expertise as “somewhat important” to “not important.” Geographic proximity to the startup company also did not prove to be a critical element, as 74% rated this as only “somewhat important” to “not important.”

“In light of the broad changes unfolding in the investment landscape, we believe these findings are both timely and relevant. There will be several hundred deals funded over the next year, and in this hyper-competitive funding environment, it’s imperative for investors to know what really matters to startup CEOs,” noted Ted Hollifield, Partner at Dorsey & Whitney.

“These survey findings show that there continues to be a strong need for funding at every stage of a company’s lifecycle – with angels and incubators helping ideas turn into products, to traditional VCs who are providing needed funds to scale the business and ready companies for a liquidity event,” added Matt Bartus, Partner at Dorsey & Whitney.

CEO Survey Profile

Forty-two percent of survey respondents were based in the San Francisco Bay Area/Silicon Valley region, with 20% internationally based, and the rest distributed throughout the U.S. All respondents had either raised funds over the past 12 months and/or were planning to raise funds within the next 12 months.

The 363 survey respondents were CEOs, managing directors, or presidents from a range of technology sectors, spanning IT infrastructure, software, gaming, life sciences/biotech, and green tech/energy. However the majority of startups participating in the survey were in the consumer Internet space, cloud computing/SaaS or mobile, 34%, 17% and 13%, respectively.

About Dorsey & Whitney LLP

Clients have relied on Dorsey since 1912 as a valued business partner. With more than 600 lawyers in 19 locations in the United States, Canada, Europe and the Asia-Pacific region, Dorsey provides an integrated, proactive approach to its clients' legal and business needs. Dorsey represents a number of the world's most successful companies from a wide range of industries, including leaders in the technology, life sciences, financial services, and energy sectors, as well as major non-profit and government entities. Its Palo Alto office has a strong focus on technology-based startups and venture capital, and Dorsey is one of only 15 law firms recommended by the National Venture Capital Association. Interested parties may obtain more information by visiting http://www.dorsey.com/.