Measure up: VCs are getting out of the Early stage funding game.

• Author: Haraldsen, Tom
• Position: Focus

Here's a business conundrum is it easier in 2012 to start a new company needing $1 million in funding or $10 million? If you thought cheaper was easier, you'd be incorrect.

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That's the problem facing many entrepreneurs who want to launch a new business concept or product but who need help from investors and/or venture capitalists. Early stage funding is critical for most of those would-be business owners, but unfortunately, many have found that "stage" has already left town.

Until the economic meltdown nearly four years ago, there were plenty of VCs and angel fund investors to fill the void. As the venture capitalists began dropping off--by almost 80 percent from 2000 to 2010--more and more startups were turning to the angels. Today, Utah, like most other states, is faced with much more startup activity than its angels can fund on their own. And curiously, part of the problem is that those startups don't need enough money to make investing worthwhile for venture capitalists.

"It takes a lot of work, so if you have low returns Ion your investments, many VCs just don't want to manage a bunch of $500,000 investments," says John Richards, associate director for the BYU Center for Entrepreneurship and Technology, and managing partner of the UtahAngels Investing Group. "The whole landscape has changed. Costs are cheaper now--there are more open sources for software, lower costs for hardware and the ability to get offshore programming. The costs to get started in business aren't as great as they once were."

Richards says a company might need to raise less than $1 million to get started and may never need to raise more cash beyond that.

"This makes the deployment of a venture capital fund very difficult at the early stages," he says. "This is why venture capitalists are migrating to later and later stages, which makes their deployment tranches of $5 to $20 million much easier."

That reality led 31-year-old engineer Eric Ries to create something he called "The Lean Startup" movement in 2008. He advocates the creation of business prototypes to test market assumptions, uses feedback from customers to refine the development of products or services, and relies on what the movement calls "continuous deployment" of information.

"The lean startup movement says that where companies used to be product focused, they now go with the business hypothesis before anything is made," Richards explains. "Eventually, the...