At the Web 2.0 Summit a few weeks ago, I sat in on a small panel called Incubator2.0. It consisted of an all star alley/valley line-up: Josh Kopelman, Paul Graham, Jeff Clavier, and it was moderated by Dave Mcclure.
The underlying theme of the talk was that these guys are all betting on the early early. Not the "early stage" that your "bulge bracket" VC lists on their site, but actual early stage deals. Less than a million, ideas on napkin, barely a powerpoint, etc
For these the investors, the numbers also make more sense. Get in early, get in with your friends through syndication, have room for your company to grow, and have the flexibility to take a $15million exit, rather than pushing for the IPO or the billion dollar acquisition.
I've been seeing this theme reflected in the angel community as well. And frankly, its why we targeted the angel investors first at Angelsoft. Its a more exciting space, and theres plenty of room upstream for your investment to find success. I'm even seeing individual angel investors break off from their investment networks to do even earlier stage deals on their own.
I also want to point out that the guys on the Incubator2.0 panel heavily invested syndication. They almost always do deals with each other, and are always shopping deals around. Now not everyone has the connections that these guys have, but throug Angelsoft we're connectin Angel investors from all across the world, and they're syndicating to get larger deals done (or here)!
So there you have it, go early or go home. Lots of people are feeling this trend, and they're even predicting a lot of "culling" at the high end of the markets. Money will dry up as the big funds can't meet their numbers, and the model breaks down. Even the MBAs are going back to the drawing board with Adeo Ressi.
At the earliest stages, you can get your hands dirty, find deals before the rest of the private equity world, and you can get in cheap. This is where the real funding gap is, so there's lots of people looking for money to get over the hump.