The myth is that Venture Capital VC is the primary source of startup funding, how ever figures show that VC financing is the exception not the norm, among start ups. Historically only a tiny percentage fewer that 1% of US companies have raised capital from VCs. Non VC sources of financing are growing rapidly and giving entrepreneurs many more choices than in the past. Angel investors, or wealthy individuals, who invest smaller amounts of capital at an earlier stage than VCs do – fund more than 16 times as many companies, and their share is growing. Number of VC firms fell from 744 to 526 in the decade 2001-2011.
In 2011 the capital raised was $19 billion, down from $39 billion in 2001, according to National Venture Capital Association NVCA, cited in HBR.org pp 81, May 2013. Today, alternative sources of funding is crowdfunding where by entrepreneurs raise small amounts of capital from large number of people in exchange of products or other rewards. Passage of the JOBS (jump-start our business startups) Act last year promises to support even faster growth by allowing crowdfunders to invest in exchange for equity and by expanding the pool of investors who can participate.
Kickstarter reports that more than 18000 projects raised nearly $320 million through its platform in 2012, which is three times more than the previous year. Kickstarter Website receives 9.9 million visits per month globally, which is no doubt a contributing factor as to why so many of its projects get funding.
Angel shares in startups have shown growth of $ 22 billion in 65000 companies in 2011 – while in the same year, VCs invested in 3700 companies. AngelList online platform that connects startups with angel capital is one example.
Five deciding factors that hamper growth of startups are as follows:
1) high cost of getting the first customer and the product wrong
2) long technology development cycles
3)limited number of people with an appetite for the risks inherent in founding or working at a startup
4) structure of the venture capital industry, in which a small number of firms each needed to invest big sums in a handful of startups to have a chance at significant returns
5) the concentration of real expertise in how to build startups (Silicon Valley in US)
Source: Harvard business Review hbr.org, May 2013