Trend in Entrepreneurial Activity and Funding During Fluctuating Economic Cycles
Global capital markets have been greatly impacted by the current economic climate. This has created significant challenges in startup capital and infusions of capital from Venture Capital funds or other types of angel investment. 2011 was, indeed, a transitional year for small businesses around the world. The primary issue is that it has become clear that credit will remain less available and that many institutions will remain risk-averse. A simple assessment would be that there was a hope that credit would start flowing again and that investment would be less restricted and it has now become ...view middle of the document...
The pendulum of venture capital is unlikely to swing back to the easier access to investment, at least for the near-future, if not for decades. Some of the changes brought on by global pressures such as the collapse of default credit swaps, the bursting of the real estate bubble, and the resultant drying up of credit. Looking at small businesses that are looking for funding in 2011 and 2012, there are no easy solutions on the horizon.
What an Entrepreneurial Startup Should Know
In order to make sense of venture capital, in order to make a venture viable in the current market, it takes more than hope and a few good ideas. Risks need to be minimized and rewards need to be maximized. While one could say that this has always been the case, the primary change has been the thoroughness of the vetting and how these new concerns have become the primary tools for making decisions. Ideas, prototypes, and being able to sustain profitability are still relevant—but the value before investment also has to do with keeping costs to a bare minimum. Early stages of capital often involve venture capitalists becoming majority owners. Further rounds end up being based on what an entrepreneur can really do. It is also more important than ever to understand that selling off a venture is more important than ever. Money dries up, sometimes because investors lose interest, and more and more startups are better suited to be run as something added on to a larger corporation with similar interests. Now only do the stages of venture capital investment move more quickly, the life cycle also moves more quickly and it is important that everything moves rapidly before anyone changes their mind.
Current Economic Cycle
The life cycle of financing can move at many different rates, but a general assessment would be that there needs to be seed money, then startup capital, the financing of working capital to support the first sales, then financing to reach the all-important breakeven point. Early startup financing often looks at current assets, fixed assets, cash flow requirements, and organizational costs. Financing required to launch an IPO is often also considered. No organizations can spend as much as they once did. There used to be an attitude that the economy would have a sudden turnaround and that whoever had the most invested when the turnaround occurred. Now investors want to be more hands-on, have access to more information, and they want to spend less. With less money available, the current economic cycle leads to incubators because there is less money to spend. Investors want to share knowledge or social and emotional capital, open doors instead of open bank accounts.
Venture capitalists have become risk-averse enough that they are most interested in being patient and then providing funds that will effectively time the market. They don’t want to invest until the business can prove that it’s working and that the extra investment will be enough to...