What is the funding chasm you ask? Let me tell you an all too familiar story …
An enthusiastic young entrepreneur has a brainstorm for the new new thing and launches his startup “Newgle”. Being pretty persuasive, he easily convinces friends and family to put up some cash to get Newgle off the ground – the first $50,000 is quickly secured.
Within a few months our CEO realizes that Newgle needs some marketing, patent work, product development, legal work, etc. etc. etc., and that means Newgle needs more money. Being pretty persuasive, he finds angel investors who can invest the $250,000 to get Newgle to a product protype.
Six months later, as the prototype is nearing completion, the Newgle CEO has a plan for building his business that requires $1.5M in new funding to cover another 12 months of operations and actually get to market.
Newgle is now in the funding chasm. While the angel investors may still be supportive, they cannot step up to a $1.5M number and are increasingly uncomfortable being the only money behind the company. Most venture capital firms are managing funds that are $100M – $1B in size, so the $1.5M that Newgle needs doesn’t allow them to put enough money to work (they don’t want to manage 50+ portfolio companies). In addition, Newgle hasn’t yet started generating revenue, so there is no chance of self-funding.
So the VCs wait, the angels are nervous, and Newgle’s progress is stalled. Newgle becomes No-gle and the angels and first investors soon lose all their money – they have all fallen into the funding chasm.
Stay tuned for a follow-up post on how you, the angel investor, can identify firms that might fall into the funding chasm before you write your check.
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