Many venture capital
firms will only seriously evaluate an investment in a start-up company
otherwise unknown to them if the company can prove at least some of its claims
about the technology and/or market potential for its product or services. To
achieve this, or even just to avoid the dilutive effects of receiving funding
before such claims are proven, many start-ups seek to self-finance sweat equity
until they reach a point where they can credibly approach outside capital
providers such as venture capitalists or angel investors. This practice is
called "Bootstrapping".
There has been some
debate since the dot com boom that a "funding gap" has developed
between the friends and family investments typically in the $0 to $250,000
range and the amounts that most VC funds prefer to invest between $1 million to
$2 million. This funding gap may be accentuated by the fact that some
successful VC funds have been drawn to raise ever-larger funds, requiring them
to search for correspondingly larger investment opportunities. This gap is
often filled by sweat equity and seed funding via angel investors as well as equity
investment companies who specialize in investments in startup companies from
the range of $250,000 to $1 million. The National Venture Capital Association
estimates that the latter now invest more than $30 billion a year in the USA in
contrast to the $20 billion a year invested by organized venture capital funds.
Crowd funding is emerging as an
alternative to traditional venture capital. Crowd funding is an approach to
raising the capital required for a new project or enterprise by appealing to
large numbers of ordinary people for small donations. While such an approach
has long precedents in the sphere of charity, it is receiving renewed attention
from entrepreneurs such as independent film makers, now that social media and
online communities make it possible to reach out to a group of potentially
interested supporters at very low cost. Some crowd funding models are also
being applied for startup funding such as those listed at Comparison of crowd
funding services. One of the reasons to look for alternatives to venture
capital is the problem of the traditional VC model. The traditional VCs are
shifting their focus to later-stage investments, and returns on investment of
many VC funds have been low or negative.
In Europe and India,
Media for equity is a partial alternative to venture capital funding. Media for
equity investors are able to supply start-ups with oftentimes significant
advertising campaigns in return for equity.
In industries where
assets can be securitized effectively because they reliably generate future
revenue streams or have a good potential for resale in case of foreclosure,
businesses may more cheaply be able to raise debt to finance their growth. Good
examples would include asset-intensive extractive industries such as mining, or
manufacturing industries. Offshore funding is provided via specialist venture
capital trusts, which seek to utilize securitization in structuring hybrid
multi-market transactions via an SPV (special purpose vehicle): a corporate
entity that is designed solely for the purpose of the financing.
In addition to
traditional venture capital and angel networks, groups have emerged, which
allow groups of small investors or entrepreneurs themselves to compete in a
privatized business plan competition where the group itself serves as the
investor through a democratic process.
Law firms are also
increasingly acting as an intermediary between clients seeking venture capital
and the firms providing it.
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