Thursday, May 16, 2013

The Myth of Venture Capital

Funding a start-up is always a hot topic, unfortunately, all too many prospective business owners believe more than a few myths about financing a start.  Below is a small excerpt from a longer article, Six Myths About Venture Capitalists by Diane Mulcahy, in the current online issue of The Harvard Business Review.

Myth 1: Venture Capital Is the Primary Source of Start-Up Funding
Venture capital financing is the exception, not the norm, among start-ups. Historically, only a tiny percentage (fewer than 1%) of U.S. companies have raised capital from VCs. And the industry is contracting: After peaking in the late 1990s, the number of active VC firms fell from 744 to 526 in the decade 2001–2011, and the amount of venture capital raised was just under $19 billion in 2011, down from $39 billion in 2001, according to the National Venture Capital Association (NVCA).

But less venture capital doesn’t mean less start-up capital. Non-VC sources of financing are growing rapidly and giving entrepreneurs many more choices than in the past.
  • Angel investors—affluent individuals who invest smaller amounts of capital at an earlier stage than VCs do—fund more than 16 times as many companies as VCs do, and their share is growing. In 2011 angels invested more than $22 billion in approximately 65,000 companies, whereas venture capitalists invested about $28 billion in about 3,700 companies. AngelList, an online platform that connects start-ups with angel capital, is one example of the enormous growth in angel financing. Since it launched, in 2010, more than 2,000 companies have raised capital using the platform, and start-ups now raise more than $10 million a month there.
  • Another new source of start-up investment is crowdfunding, whereby entrepreneurs raise small amounts of capital from large numbers of people in exchange for nonequity rewards such as products from the newly funded company. Kickstarter reports that more than 18,000 projects raised nearly $320 million through its platform in 2012—triple the amount raised in 2011. Passage of the JOBS (Jumpstart Our Business Startups) Act last year promises to support even faster growth by allowing crowdfunders to invest in exchange for equity and by expanding the pool of investors who can participate.
Copyright, Harvard Business Review, May 2013

Diane Mulcahy, a former venture capitalist, is the director of private equity for the Ewing Marion Kauffman Foundation, an adjunct lecturer in the entrepreneurship division at Babson College, and an Eisenhower Fellow.

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