The decline in New England venture deals is significantly worse than the drop experienced nationally. The value of VC investments in the U.S. dropped 12.4% during the 2nd quarter compared compared to the same period last year.

This news comes on the heels of my post last week, which reported on the growing pessimism from VCs nationally.  It doesn’t look good…

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This dearth of IPOs and successful exits has some dire consequences for startups. Where there’s no exit, VCs are forced to invest any new money into their current portfolio of companies to keep them going, rather than invest them in new ventures. This is consistent with an earlier post where I reported that VC activity was down during the first quarter of 2008.

If you are just starting up and looking for money, then you should consider approaching angel investors. As previously posted, angel investors appear to be taking up the investing slack.

If you are a startup that has money in the bank, consider yourself lucky. But with the current market conditions, its time to tighten the belt just a bit and perhaps conserve your cash. Hold off on any big purchases; after all, maybe the team can do without those brand new notebooks until next year. You never know how long it will be before VCs’ purse strings will loosen up….

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I couldn’t agree more. As an consultant who conducts due diligence on startups for early-stage investors, I am often struck at how many entrepreneurs approach investors with me-too ideas for startups with basically the same business model, market entry approach, etc.

If the business you are copying is wildly successful (hence the reason for copying it), what makes you think your startup can unseat it as the market leader? If the business you are copying is languishing, then why in the world would you have the same exact business model and marketing strategy?

As you are honing the business plan for your startup idea, take care not to fall into the trap of looking just at the obvious. Think outside the box and think what it could be if you do the opposite!

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MHT quoted Janice DiPietro of Tatum LLC, a CFO services firm, as saying that the IPO costs vary from company to company depending on the strength of the company’s management team, its record-keeping history, and the size of its market share and customer base.

Of these three, I think the biggest factor is the record-keeping. With the advent of the Sarbanes-Oxley Act of 2002, companies are subject to more rigorous financing reporting requirements than ever before.

Many startups often make the mistake of not taking SOX compliance seriously. As a result, when the time does come (as in the case of an IPO or an acquisition), there is a scramble to get everything in order and in compliance. And this is what costs money — accountants and lawyers don’t come cheap.

In consulting with startups, I am always surprised when I hear about a startup that isn’t paying attention to SOX. Seeing that SOX compliance is required for a successful exit event (an IPO or just about any form of acquisition), why wouldn’t a startup be paying attention to it? Don’t these startups (and their investors) believe they will eventually reach one of these exit scenarios?

If you are a startup, get your house in order to comply with SOX. If you are an investor, demand that your portfolio companies have a plan to address SOX compliance.

Unless, of course, you’re not thinking of a successful exit. <g>

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About halfway through the event, Don Dodge, a serial entrepreneur, angel investor, and member of Microsoft’s emerging business team, gave a short talk on the value of networking in the fundraising process.

Don confirmed what I said in a previous post, i.e., with the potential of being inundated with business plans coming through mail and email, investors must necessarily have some way to filter which new startup they will look at in detail. And that filter is usually a warm introduction to the startup (by a colleague or friend), or positive personal contact with someone at the startup. Hence the need to not only network, but to be prepared with an elevator pitch to catch their attention.

In his closing remarks, he said something that struck a chord with the entrepreneurs in the room. He asked everyone in the room to think about their stock portfolio and think about why they invested in those particular companies, out of thousands of others. That is, why did you invest in just 1% to 5% of the market?

VC and Angel investors are no different — out of the entire universe of businesses that they see, they invest in perhaps just 1% to 5% of the ideas which they think will make them money, whether because of technological superiority, market leadership, or a belief that it is the next big thing.

As you are going around seeking funding, you need to make sure you can position your company as one of the top 5% of startups.

So, are you in the top 5%?

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It is interesting to note, however, that Angel investors appear to be more optimistic as I mentioned in a post in early April. In the Angel Confidence Report survey released by the Angel Capital Association (ACA), 55 percent of the respondents said the number and total dollars invested will increase this year, while 32 percent expected it to be the same as 2007.

But this isn’t the case where Angels are seeing a better class of startup companies than VCs. More than anything else, the disparity may have more to do with the different investment horizons of these two groups of investors.

While more Angels are now pursuing later stage deals (as Dr. Jeff Cornwall of The Entrepreneurial Mind points out), most Angel investors still invest in seed and early-stage companies — the ACA Angel Confidence Report reports that angels expect to invest in seed and startup companies (81%) and early-stage firms (85%). As early-stage investors in startups, Angels have a decidedly longer-term investment horizon than VCs and would need to be more patient and optimistic about their prospects.

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TCN and NEVN are two of the area’s preeminent organizations for providing a community for bringing together entrepreneurs and investors, and have put together the event: “Networking for Startups: Why a Good Pitch Deck is No Substitute for Good Conversation” to bring together entrepreneurs and the Boston area’s leading angel and venture firms for an evening of wine, food, and networking.

If you haven’t figured it out yet, despite appearances to the contrary, you can’t simply send a business plan to an investor in the hopes that they will read it. You really need either a warm introduction or a personal connection to an investor or a firm before they will even consider looking at your business plan.

Short of knowing someone on the inside, your best bet to getting to know an investor is meeting them! An event like this one is an instant meeting place — so sign up, hone your elevator pitch and show up and start networking. If you are an entrepreneur looking for an audience, this is a MUST event.

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(In the interest of fair disclosure, I should mention that I am on the board of TCN.)

It’s not simply a matter of identifying the target market, you need to be able to articulate who the buyer is, why they will buy your product or service, and how you expect the market to grow.

A few years ago, an entrepreneur was pitching an idea for a startup to an investor client — a device to allow older generation mobile phones to have speaker phone capability. The idea was that this would appeal to many business phone users that wanted speaker phone capability on their cell phones.

During this period of time, speakerphone-capable cell phones were just then beginning to be introduced to the market, so at first blush, there would seem to be a ready market for this product idea.

But there’s a disconnect here: the target market they were trying to sell to, i.e., the business cell phone users that need speaker phone capability — are generally the high-powered successful business person that has no qualms upgrading to newer phone models. So, the question remains: who will buy it?

The other thing to note is that by its very nature, a “retrofit” market is a declining market — there will be buyers as long as there are old phones to retrofit, but as users start to upgrade to newer phones, the market eventually dries up. So while there is a market initially, it’s not a growing market.

Asking investors for money is hard enough. If your primary target market is a question mark and your overall market is shrinking, it will be impossible to convince any investor to bite on your story.

In the end, the entrepreneur ended up using a combination of SBA loans and bank loans to fund the company. I don’t know what this says about the SBA or banks, but I guess it is a good thing that these institutions have different metrics for making their decisions.

But you have to wonder, did they ask the question: Who Will Buy It?

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These changes are viewed favorably by VC firms, as it would mean additional funding vehicle for some of their portfolio companies. VCs also believe a portion of SBIR funding should go to entities that have a better chance of actually introducing new technology to market (i.e., venture-backed startups), rather than simply individuals or firms that just conduct basic research.

Not surprisingly, these changes are opposed by small businesses and research firms who rely almost exclusively on the SBIR for funding. They are particularly concerned that with the larger grant amounts, fewer SBIR grants would be available to them.

In my opinion, it is exactly this competition that will make for a better SBIR program. From a market efficiency standpoint, it will ensure that the best ideas get funding.

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While this figure is modest compared to the overall ad spend, they signal a growing comfort level on the part of advertisers to put some money into this medium. And that is significant — many advertisers have previously very been wary about a medium that gives its readers the ability to provide feedback and otherwise generate content about their brand without their direct control.

This positive trend in the blog ad market is welcome news during these recessionary times. Investors don’t like to miss out on a promising market, so you can bet they will be putting some money to work in this sector while it is still in its early days. Keep your eye out for startups targeting the blog ad market to come out of stealth mode in the coming months.

In the next three years, MHT projects the total ad revenue from blogs, podcasts, and RSS feeds to reach $1.1B. That’s certainly a big enough prize for investors to bet on.

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