Who bankrolls high-tech entrepreneurs?

Abstract

Where do new technology-based firms (NTBFs) raise outside equity capital? To answer that question, financial histories were collected from 284 technology-based firms founded in New England between 1975 and 1986. Financial histories included the year of each round of financing, the source, the amount, and the stage of the financing. The 284 firms represented 27% of 1,073 New England NTBFs founded between 1975 and 1986 contained in CorpTech's Corporate Technology Database. One hundred seven (38%) were launched with no outside equity investors. One hundred seventy-seven firms (62%) raised $671 million in 445 rounds of equity financing. Private individuals (excluding the founding management team and their relatives) were the most common source of equity capital, providing 177 rounds of financing for 124 firms. Ninety firms raised equity from venture capital funds in 173 rounds of financing. Fewer than 40 firms raised capital from any other single source (nonfinancial corporations, public stock offerings, and “other”). The sample firms raised $76 million from private individuals, but almost five times that amount, $370 million, from venture capital funds. Public stock offerings accounted for $122 million. For all investors the size of a round of financing tended to increase with the stage of the financing. Overall, a typical round of individual investor financing was under $500,000. A typical round of financing from venture capital funds was between $1 million and $3 million. Public stock offerings typically exceeded $4 million. Seed and start-up financing accounted for 60% of the rounds and 54% of the dollars provided by private individuals as compared to 28% of the rounds and 20% of the dollars provided by venture capital funds. The most significant outcome of this research is the conclusion that private individuals and venture capital funds play complementary rather than competing roles in the financing of NTBFs. This complementary relationship has two dimensions—size and stage. At all stages venture capital funds tend to invest substantially more dollars per round than do private individuals. Second, compared to a significantly higher propensity to invest at the seed and start-up stages than other investors. Private investors appear to have longer exit horizons and less risk aversion. In fact, private individuals provided the seed capital that launched the majority of NTBFs in the sample.