Innovation Diary: Why one company has chosen crowdfunding over venture capitalists
Source: City A.M.
HOW CAN you decide on the best method of financing your business’s growth? The Harvard academic Paul Gompers, in his prescient The Rise and Fall of Venture Capital (first published in 1994), explained the close interplay between the most suitable type of investment and the model of the firm concerned.
Bank loans will be useful for those with “substantial tangible assets”, and which lack “significant ex ante uncertainty”. Angel investment isn’t well-geared towards firms that require substantial sums of money, as the angel market can suffer from poor information sharing “and the amount of invested capital tends to be small”. Companies that attract venture capital, meanwhile, are special. They “have few tangible assets to pledge as collateral and produce operating losses for many years.” The rewards for investors on exit, however, can be big.