Check, Please!

So, you’re an entrepreneur with a great idea?

Too bad your inspiration arrived in the worst economy since the Great Depression, complete with a meltdown of the venture capital industry.

What’s left on the charred landscape?

1. Traditional Venture Capital

In Q1 2010, the Pricewaterhouse Coopers Shaking the Money Tree survey reported that investing had returned to 2003 levels, which basically equals “limping along.”

Don’t expect too many of the mid-tier funds to raise new money; as Don Hall of Arcturus Capital reminded me, depressed valuations in almost every asset class mean that many limited partners may still be overweighted in growth companies and thus are not looking for places to put fresh cash.

Large investors may simply prefer large companies in emerging markets instead of emerging companies in large markets to generate the high-risk/high-reward element of the portfolio.

2. Super-Angel Funds

Even as their demise continues to be forecast, so-called super-angel or super-seed funds have grown in popularity and blogability; see Chris Yeh’s excellent commentary comparing super-angels with traditional VCs.

It may be possible to get a company off the ground with a few hundred thousand dollars from your closest friends, but these early stage companies still take about 10 years to mature; for instance, Green Dot, funded by Southern California’s Tech Coast Angels 11 years ago, recently had its IPO.

Even though this means that the company was funded in the last boom, it didn’t stop TCA from promptly announcing its own sidecar fund. The current buyout environment has helped a few of these Last Boom holdouts, finally providing liquidity events to funds starved for good news. So super-angel funds can payoff, if you can cross the valley between booms and get to the other side — and if you have a software company with a novel business model that can grow under constrained capital.

3. Corporate Venture Capital

Large companies ride the waves too, investing almost 16 percent of total venture dollars in 2000, compared with 7 percent in 2009.

However, the economic realities of large corporations make it difficult for a venture-sized “home run” to make a substantial dent in the financial statements, and thus these groups typically do not work as successfully (see Fred Wilson’s 2008 blog entry for a nice analysis), especially with a less appealing incentive structure.

It doesn’t help that these companies are unwilling to write tiny checks to get innovations off the ground, so this is no place to go for startup capital either, especially if you try to penetrate the main organization.

One interesting result discussed recently by researchers David Benson and Rosemarie Ziedonis is that corporate venture capital groups housed as separate business units report better results than those programs housed inside the main organization. Net net: Corporate venture capital is best for manufacturing companies needing larger capital infusions that cannot be met with angel-sized bites, but ideally if they are operated as independent business units.

4. University Funds

Earlier this summer, I commented on the trend of universities forming venture funds to commercialize their own technologies. Any move to have players “eating their own dog food” benefits the entire environment.

However, these funds are typically similar in size to super-angel funds and thus cannot provide substantial growth capital — and furthermore, they will only draw from their own pool of innovations.

5. Regional Government Venture Funds

In May, New York City announced that it was initiating a venture fund, and the Texas Emerging Technology Fund made three new investments just this week. This is a good effort to jump-start local economies, but like corporate venture arms, the limited incentive structure may make it difficult to attract the best talent.

So what to do? Software companies and others with low capital requirements can go to superangels. University inventors can beseech their home institutions to provide seed funding, while others lucky enough to live in areas with limited entrepreneurial funding can knock on the mayor’s door.

Inventors with major manufacturing improvements can go to corporate partners — if they survive long enough to create a decently sized deal. And even though the larger venture capital firms are always available to clean up the messes made by startups, no one gets boatloads of seed capital anymore — especially not anyone with a technology that will eventually require large capital expenditures.