Entrepreneurship, Second Edition

9.3. Venture Capital

By far the rarest source of capital for nascent entrepreneurs is venture capital.^[] In fact, nascent companies with venture capital in hand before they open their doors for business are so rare that even in the United States—which has almost two-thirds of the total of classic venture capital^[] in the entire world—far fewer than one in ten thousand new ventures gets its initial financing from venture capitalists. In general, venture capital is invested in companies that are already in business rather than in nascent companies with products or services that are still on paper. For example, out of 3,192 U.S. businesses in which $28.4 billion of venture capital was invested in 2008, only 1,179 received venture capital for the first time, and of those, relatively few were seed-stage companies. From 1970 through 2008, the venture capital industry invested $466 billion in 60,700 companies at all stages of development.^[] It is estimated that over the same period, informal investors provided more than a trillion dollars to more than 10 million nascent and baby businesses. In every nation, there is far more informal investment from the Four Fs than formal investment from venture capitalists (see Figure 9.10).

9.3.1. Classic Venture Capital

While classic venture capitalists finance very few companies, some of the ones that they do finance play a very important—many say a crucial—role in the development of knowledge-based industries, such as biotechnology; medical instruments ...