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Venture Financing |
by Vadim Kotelnikov, Founder, The first-ever BUSINESS e-COACH for Innovative Leaders, 1000ventures.com
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The Iceberg Principle
The Iceberg of Opportunities' Principle, which our Business e-Coach is to help you reverse, illustrates a tremendous potential for bridging the equity gap - the gap between venture capital (VC) sough by start-up firms and VC available with prospective investors, but not used. To illustrate:
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from the VC receiver side, only 6 out of 1000 innovative ideas get funded by venture investors on an average. The main reason for rejection: first-time entrepreneurs might have great ideas but lack skills for converting these ideas into a successful business. To venture capitalists, "ideas are a dime a dozen: only execution skills count".
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from the VC supplier side, in 2000 in the US, business angels - early stage private investors - put US$ 40 billion behind 50,000 deals. However, the size of the angel market could potentially become 10 to 20 times larger. It is estimated that only 7% of potential business angels in US invest in start-up ventures. The remaining 93% are virgin angels who would like to invest but don't do it for a number of reasons, which include lack of proposals matching their investment criteria, lack of quality business proposals, lack of trust in the entrepreneur or management team, lack of experience in valuating and pricing deals, and lack of experience in due diligence and monitoring.
Many see a problem in this huge equity gap. We see an opportunity here. Let's work together to bridge it!
Understanding the Venture Financing Chain
Technology ventures demand an unbroken financing chain, from pre-seed capital to stock market. The financing chain is no stronger than its weakest link (see slide show).
High-tech start-ups usually go through multiple funding rounds. Equity financing conventionally follows the below trajectory:
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founders, friends & family (the "3Fs", sometimes spelled out as "founders, friends & fools"), or bootstrapping phase
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venture capital (VC), and
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initial public offering (IPO) or mergers & acquisitions (M&A)
Bootstrapping is a means of financing a small firm through highly creative acquisition and use of resources without raising equity from traditional sources or borrowing money from a bank. It is characterized by high reliance on any internally generated retained earnings, credit cards, second mortgages, and customer advances, to name but a few sources.
Bootstrapping is the most likely source of initial equity for more than 90% of technology based firms. It offers many advantages for entrepreneurs and is probably the best method to get an entrepreneurial firm operating and well positioned to seek equity capital from outside investors at a later time. The entrepreneurs should learn bootstrapping options and practice bootstrapping strategies to be able to bridge successfully the equity gap... More
Business angels (see slide show) are a source of pre-revenue seed funding and management guidance for start-ups. Business angels are wealthy individual investors - usually, people who have made their own money as entrepreneurs. Better equipped and more flexible than banks and most capital funds to assess the potential of very young business, they contribute not only equity but also much needed business expertise, offering company hands-on support and advice. Angels bridge the gap between the personal savings of entrepreneurs and the 'early stage' or 'second round' financing which venture capitalists are able to offer.
To ensure seamless integration of financing through the life cycle of a company, good relations between business angels and VC communities are essential... More
Venture investing is a process by which investors fund early stage, more risk-oriented ventures. Being a principal funding source, venture capital can not finance innovation on its own. Too many VC funds remain unwilling to invest in high-tech start-ups (see slide show) in the early stage, often because they lack the investment appraisal capacity to act as the "first investor". To be fully effective, venture capital must form part of an unbroken investment chain, from seed capital to stock market.
To target and pursue the appropriate professional venture capital providers, it is a must for the venture capital seeker to understand their investment strategy and preferences...More
Corporations are a major - and rapidly growing - source of funds for new ventures. In today's new entrepreneurial economy, the real shareholder value is created by companies whose corporate strategies include well-developed venture strategies. Partnership between small innovative firms and large corporation is mutually beneficial. While entrepreneurial companies can identify technology and market opportunities and move faster to capitalize on them, they can achieve enormous leverage through technology and distribution agreements with large global corporations.
According to Venture Economics and the National Venture Capital Association, in United States in 1994, only 2% of venture capital investments was corporate venture capital, but in 2000, corporate venture capital accounted for 17%, nearly $20 billion. In four years, from 1996 through the end of 1999, the number of companies that were investing in outside ideas increased elevenfold, from 30 to 330. During the same period, corporate venture capital spending rose from $100 million to $ 17 billion annually.
By 2000, spinouts, a new form of creating and financing a high-tech company has become more popular. This novel approach has a number of advantages over a merger or acquisition and it plays an increasingly high role for high-tech companies... More
Banks are businesses too. They have stockholders to whom they must report and they are highly regulated by federal and state agencies...More
Stock markets for high growth companies stimulate venture capital activity by offering an 'exit route' of flotation. They offer a means for venture capital funds to realize a return on investment in new companies. Compared with other exit routes, typically an Initial Public Offering (IPO) realizes the greatest return on investment.
The role of mergers and acquisitions (see slide show) had evolved as a strategy tool for fast-track technology-led companies. Any pure technology company looking to get funded that views an acquisition strategy as a likely outcome, ideally needs to position itself to fill a future technology need that more than one major company is likely to fight for.
When weighing your options, be sober about your company's commercial prospects. Early success with a single application or product lines does not translate into long-term viability in the face of well-capitalized, entrenched competitors with strong customer relationships. Therefore, the short-term technologic advantage realized by start-ups may be best exploited by seeking a merger partner... More
