After a Rocky Year for Tech Start-Ups, Investors Grow Pickier

Call it the Facebook effect. Until recently, investors had been all too eager to pour millions into any Web start-up with rapid growth, regardless of whether it made money or even had plans to do so down the road. But after Facebook’s rocky initial public offering and flameouts at Zynga and Groupon, venture capitalists are entering a picky phase.

“Earlier, entrepreneurs didn’t need a real monetization strategy,” said Brian O’Malley, an early investor at Battery Ventures. “They could punt on revenue indefinitely because their investment dollars were their revenue. They could fund their start-ups with funding versus customers.”
No longer favored are e-commerce start-ups, which face logistical hurdles and require a lot of money. The celebrated shift to smartphones, once welcomed with an outpouring of investments, is now making some investors nervous as monetization proves harder for mobile devices than it did for the Web.
Investors have also grown weary of start-ups and applications that rely entirely on Facebook, Twitter and LinkedIn for customers, now that those companies are focused on their own bottom lines. And Silicon Valley is discovering that while it may be easier than ever to start a company, it is harder than ever to build an enduring business.
Younger start-ups are beginning to feel the pinch. CB Insights, a research firm, analyzed 4,056 initial, or seed, investments made in tech start-ups in the United States since 2009. It found that more than 1,000 start-ups that attracted seed financing from angel investors — wealthy investors who put in money from their own pockets — will find themselves orphaned this year when venture capitalists reject their requests for more money. As a result, $1 billion in angel investments will evaporate.
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