Entrepreneurship is Back, Now They Just Need Some Capital

Feb 6, 2013

If you are a technology startup focused on consumers, congratulations. You probably have venture capitalists, angel investors, and crowdfunders beating on your door to try to give you money.

But if you’re a startup in a capital-intensive industry such as biotechnology, manufacturing and energy, well, good luck getting the funding you need. And that’s a real problem, according to a diverse panel of startup experts speaking at the Kauffman Foundation’s State of Entrepreneurship event.

“We have too much capital flowing into consumer tech and not enough patient capital going to manufacturing, biotech, and energy,” said Alan Patricof, founder and managing director of Greycroft Partners, a venture capital firm based in New York and Los Angeles. “The venture capital community is just not responding to those needs.”

The good news is: there is a lot of opportunity to invest. “Entrepreneurship is back on a roll,” said Jeff Fagnan, a partner in the technology group of Atlas Venture and a founding investor in a variety of companies, including AngelList.

Fagnan credited Facebook’s Mark Zuckerberg for making entrepreneurship cool in dorm rooms across college campuses, but there are a number of other factors at play. For one thing, starting a company just doesn’t cost as much as it used to, particularly in the technology sector. Fagnan said $1 million can get you as far as $10 million would a few years ago.

Also, successful entrepreneurs tend to “pay it forward,” by becoming angel investors and giving their time and expertise to startups. That mentorship is crucial to early-stage companies, Patricof said.

Tom McDonnell, the new president and CEO of the Kansas City-based Kauffman Foundation, isn't convinced that the capital crunch has eased, arguing that getting capital into the hands of the next startup remains one of the most significant hurdles facing new and young companies. Bank finance has yet to recover from the recession, there is uncertainty over the long-term effects of the Dodd-Frank bill, and there’s been a massive downturn in initial public offerings, McDonnell noted.

In his address, McDonnell offered policy recommendations to increase financing of entrepreneurial ventures that are featured in a paper on the same topic. Key recommendations include:

  • Crowdfunding: The Securities and Exchange Commission should approve rules under the JOBS Act that encourage experimentation without excessive regulation.
  • IPOs: Greater use of auctions, such as the Dutch auction used by Google, rather than the more common practice of setting a specific price for new stock offerings.
  • Bank Debt: Introduce more flexibility into the regulatory process – such as providing the Federal Reserve, Comptroller of the Currency and Federal Deposit Insurance Corporation the authority to make judgment calls at the local level.
  • Regulation: Allow shareholders of companies the right to vote whether Sarbanes-Oxley accounting rules are necessary.
  • Venture Capital: Create longer-term venture funds that include significant “skin-in-the-game” investment from general partners, so their interests are aligned with limited partner investors over a reasonable time horizon.

Downloadable video of the address and panel discussion, which was webcast, compliments of Bloomberg TV, from the National Press Club in Washington, will be posted at http://www.kauffman.org/financegrowth.
 

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