TRADITIONAL FUNDING SOURCES
BANKS. ANGEL INVESTORS. VENTURE CAPITAL.
Banks. Emerging growth companies have difficulty getting creative financing from banks because they are heavily regulated, are subject to rigid credit committees, and bank executives are generally uncomfortable lending to emerging growth businesses. The one group historically familiar with the sector, “venture banks”, are now focused almost exclusively on “top-tier” venture-backed companies. So if an entrepreneur has yet to raise equity capital, it is difficult to obtain debt financing without providing hard collateral (ie. real estate, stock/bonds, etc.). Finally, many of these venture banks have migrated towards later-stage and public companies as their balance sheets have grown, often ignoring the emerging growth segment which traditionally seeks $3 million or less in debt financing. |
| Angel Investors. This financing source plays an integral role in the development and overall viability of the emerging growth market. Approximately 50,000 tech and life sciences companies get capitalized by angels in a normal year. Still, entrepreneurs face the unique challenges of locating these investors and navigating inconsistent due diligence processes. With many angels investing as groups today, (i.e. Keiretsu Forum, Sand Hill Angels, etc) it has become a bit easier to find these high net worth backers. However, there is no consistent systematic process followed for investment, which often results in financing rounds taking a great deal of time to close. |
Venture Capital. As is the case with angel investors, venture equity often plays a critical role in the success of early stage companies. Not only do quality venture firms offer capital, but they can provide valuable guidance to management, introductions to partners and customers, and provide other resources that increase the probability of a young company’s success. What they cannot do is move swiftly to an investment decision. The velocity of fundings for most partners is low; perhaps less than a half dozen per year for a typical fund. There are many reasons this is the case, but in general, the venture investment process requires a thorough analysis of the team, market, product/service, financial and business models, and many other factors that make the venture due diligence process slow.
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