Historically, few investors outside a select group in the tech hubs of Silicon Valley, Boston and New York have had access to high quality early-stage deals. However, changes in the early-stage market have reduced barriers to entry and broadened access to a wider investor base. As a result, the number of early-stage investors has risen significantly over the past few years. While a portion of this hockey stick growth is likely attributable to a rise in self-reported funding rounds, evidence does suggests that a larger number of accredited individuals, accelerators, and venture capital firms are getting in the game.
Moreover, early-stage deals are no longer concentrated and leaders today only capture a small portion of the overall deal flow.
Coupled with lower barriers to entry, motivation to invest in early-stage deals is strong.
Potential for high, uncorrelated returns: Successful startups take time to grow and their performance often is only loosely correlated with traditional investments like stocks and bonds. For example, two engineers building out their PhD theses usually don’t care (or know) what’s happening to the Dow and a crash in real estate is unlikely to derail their plans. That said, early-stage investing is highly speculative and should only be done by investors who can bear the risks.
Support Innovation. Startups create a disproportionate share of new jobs and bring to market products and services that improve lives. Many investors fund companies that are pursuing objectives that align with their interests, such as improving energy efficiency or expanding access to medical care.
Learn, mentor, and network. Early-stage investing is a learning experience and seeing what entrepreneurs are working on is a way to peer into the future. In addition, early-stage investors may provide introductions, mentor their portfolio companies, and expand their network through meeting with entrepreneurs and other early-stage investors.
Data source: CrunchBase, July 2014. For more information, see Methodology in Data-Driven Insights.