April 22, 2013 - College of Business Administration Entrepreneurship Director Among “Ask the Experts”
Ask the Experts: Should Small Business Owners Seek Venture Capital Financing?
by Odysseas Papadimitriou on April 22, 2013
The Great Recession has reinvigorated America’s entrepreneurial spirit. As the job market soured during the housing market crisis and ensuing economic swoon, business creation rates soared to record heights. We averaged fewer than 29 new start-ups per 100,000 people each month from 2000 to 2007 – when the unemployment rate averaged 5.0% – and that number rose to 33 start-ups per month from 2008 to 2011 – when joblessness climbed as high as 9.6%, according to data from the Bureau of Labor Statistics as well as the Kauffman Foundation.
When jobs weren’t as abundant, we took it upon ourselves to create our own. That’s certainly admirable, but the fact of the matter is that starting a business is the easy part. What’s hard is not only staying in business, but also growing and becoming profitable. Of all the businesses founded in 2008, only 74.4% survived two years, and even fewer – 62.4% – made it three, according to the Bureau of Labor Statistics.
Whether a company lives or dies depends in large part on how it’s financed. There are a number of financing options available to small business owners, from credit cards and small business loans to friends and venture capitalists. But which is best?
Much depends on the nature of one’s company and the credit landscape, but venture capital financing has become quite sexy in recent years as banks have tightened underwriting standards and the Istagrams of the world have struck gold. But does that necessarily mean it’s wise for small business owners to go after VC money?
To Venture or Not to Venture?
We conducted a little survey of CEOs and professors of entrepreneurship about the pros and cons of dipping one’s small business feet into the venture capitalist pool. And here’s what they had to say on the matter.
We work primarily with student start-ups. These students, like many entrepreneurs utilize “family, friends and fools” for funding in the earliest stage(s) of their venture. This includes their own funds too. The next step is more likely to be an Angel Investor or sources like a Business Incubator or a Business Competition in their area. Once the concept is proven, it is determined to be a high growth-high tech venture and they have initial funding, then the entrepreneur may be poised to seek VC funding.”
- Julie Messing, Instructor and the Director of the Center for Entrepreneurship and Business Innovation at Kent State University
There’s obviously no black or white answer when it comes to how wise it is for small business owners to work with venture capital firms (if there was, this article would have been a lot shorter!). But the prevailing thought seems to be that while VC financing does have its benefits in terms of connections and quick legitimacy, it also has significant drawbacks – such as loss of control and high costs – that outweigh the perks in most cases. Most of the aforementioned experts said they would approach the decision with that mindset if they were to launch a new business today.
Perhaps that’s for the best, considering the current state of the venture capital market. It’s shrinking. In Q1 2011, 49 firms raised $8.1 billion. In Q1 2013, 35 firms raised $4.1. There’s simply less pie to go around these days and a less competitive market to operate in (for start-ups of course, pie futures are optimistic).
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