UPDATED 09:07 EDT / MAY 06 2011

Venture Capital Funding Lopsided

It certainly comes as no surprise that consumer oriented start ups currently enjoy easier access to funding than has been available for the past few years due to the success and high profile of companies such as Facebook, Twitter, and Groupon, for example. Investors are piling into fast-growing consumer oriented websites like Facebook as well as makers of smartphone software, social-networking games and other consumer services.

However, there is a growing disparity between the funding available for these companies when compared to start ups that are focused on businesses and business products, where the funding is much more muted. The disparity is stark. According to an item in today’s Wall Street Journal (wsj.com), in the first three months of this year, venture-capital investment in consumer tech companies nearly tripled to $874 million from $310 million a year earlier. Meanwhile, investments in tech firms with business products rose at a slower rate to $2.3 billion from $1.9 billion a year earlier, according to research firm VentureSource. The overall pool of money raised by such companies is larger than that raised by their consumer-oriented counterparts because business-focused firms, which range from makers of networking gear to designers of computer chips, often require greater investments to get their ventures off the ground.

The shift away from business-oriented technology start-ups has been gathering steam over the past few years. Venture investment into such companies was $11.9 billion in 2010, down 35% from $18.4 billion in 2006, according to VentureSource. The overall number of financing rounds these companies received also dropped 18% to 1,261 during that time. At the same time, investments in start-ups targeting consumers surged. Funding for these companies more than tripled to $4.8 billion in 2010 from 2006, and the number of financing rounds rose 68% to 374, according to VentureSource.

Building a successful company that sells to businesses is also tougher than building a consumer Web start-up, investors said, accounting at least partially for the current discrepancies in the funding environment. Funding requirements and cash burn rates for consumer oriented start ups are considerably lower than they are for young companies developing products for business use. Whereas $100,000 might be enough for a developer to bring a game for Apple Inc.’s iPhone to market, at a business-focused firm, that amount “will only buy you a month,” said Kent Bennett, a vice president at venture-capital firm Bessemer Venture Partners, which is still investing in these companies.


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