James Quigley took the stage at the Capital Connection venture capital conference last week with a direct plea to the investors in the room: His Reston-based company, Canvas, needs $4 million to continue building out its mobile marketplace for business apps.
Founded in late 2008, the company has taken on a small amount of funding from investors, including Motorola, to prove there is demand for its service converting business forms, such as invoices or surveys, into mobile apps .
“It’s easier in that we have a story now,” Quigley said of trying to raise money. “Now I can pitch the idea and the implementation. It’s not just the idea.”
But Canvas, like many similarly positioned companies, sits at a difficult spot in the continuum of venture capital. It is seeking too much money for seed-stage investors to bite, but not quite enough to appeal to many large, institutional investors.
“There’s a desert you have to walk through,” Quigley said.
That “desert” is the relative dearth of money available for companies that have demonstrated initial traction in their market, but need another dose of capital to fully prove the business has longevity.
Some industry veterans, including Azure Capital General Partner Cameron Lester, describe it as the barbell effect. There is a lot of activity and investment focused on firms in early and late stages, or the ends of the barbell, but fewer deals getting done in the middle.
“In the middle, [investors] may not have as good of an equity position. They still may need more money later on and you still have to be patient,” said Elana Fine, associate director of the University of Maryland’s Dingman Center for Entrepreneurship.
“It’s the economics of it more so than the quality of the deal,” she added. “It’s a hard place to be.”
Indeed, the rise of angel investors has made it easier for companies in their very early stages — often just an ambitious entrepreneur with a rough prototype — to raise capital. Those investors often strike a plethora of tiny deals in hopes that a few pan out.
Meanwhile, the economic downturn forced some venture capital firms to shutter and prompted others to invest larger sums of money later in the company’s lifecycle. Just last week, Revolution Growth poured $25 million in Dulles-based Echo360, a software company that captures college lectures on video.
But for the right companies, deals still get done. In the Washington region, investment firms such as Revolution Ventures, Grotech Ventures and Core Capital have invested in the middle ground.
“Who has the best business model that’s not yet proven and how do we prove it?” said Mark Levine, managing director of Core Capital. “That’s what we have to sort through here as investors.”
For those companies that can bridge the gap, the valuations on the other side could be lucrative, Levine said. Investors are having to put forth more money to secure a stake in those companies before they’re acquired or go public, he said.