Factors affecting equity capital acquisition: The demand side

Abstract This article summarizes a study of 318 private entrepreneurs who have sought equity capital in amounts of $100,000 or more. These individuals are normally considered prime clients of venture capitalists. Entrepreneurs' success in acquiring funding is related to four general variable categories: (1) characteristics of the entrepreneurs including education, experience, and age; (2) characteristics of the enterprise including stage, industry type, and location (e.g., rural or urban); (3) characteristics of the request including amount, business plan, and prospective capital source; and (4) sources of advice including technology, preparation of the business plan, and places to seek funding. The study is unique because it includes many entrepreneurs who were unsuccessful in acquiring capital, thereby reducing the survey bias. In fact, only 59% of those surveyed actually acquired funding. This article provides specific insights into businesses seeking capital. For example, the entrepreneurs who are most successful in acquiring funding are those who are prepared to surrender a larger percentage of equity and who are very aggressive in going directly to a number of potential equity providers at an early stage. Contrary to common belief, older and more experienced entrepreneurs seem to have more difficulty acquiring financing. Likewise, entrepreneurs attempting to start businesses in rural areas are more apt to have difficulty acquiring equity capital in amounts of $100,000 or more. Entrepreneurs may experience difficulty in acquiring equity capital for certain business types in specific capital markets. Firms in the health/medical technology and communication fields, for example, have much more success acquiring funding in Minnesota and Wisconsin than those in electronics and factory automation. It is vital that the entrepreneur get to the proper source of capital, wherever it is to be found, as quickly as possible. This study also indicates that private investors not identified as formal venture capitalists are the primary source of financial assistance. The study revealed that the quality of advice provided to entrepreneurs may need improvement. Entrepreneurs who fail to seek assistance are less successful in acquiring equity capital. It is less clear where good advice is to be found. Attorneys appear to offer positive advice regarding marketing and referrals to non-venture capital sources. Bankers, in contrast, are more frequently associated with advice that fails to secure capital. Public agencies and university-related organizations are, in some cases, also associated with a failure to acquire capital. It may be that the weakest cases ultimately find their way to these sources of consultation. The article provides a number of specific public policy recommendations for those governments interested in improving equity capital market efficiency. For example, as entrepreneurs seeking equity capital in small amounts seem to have difficulty, public governments might choose to facilitate the movement of equity capital in smaller amounts by bundling several small requests together and then selling them to interested investors. The public might choose to improve information linkages between entrepreneurs and capitalists by educating intermediaries such as accountants, attorneys, and bankers regarding sources of equity capital or by developing publicly supported linkage networks to whom entrepreneurs might turn. Special information programs on sources of equity capital might also be instituted in rural areas or with specific groups experiencing capital access problems. Private equity capital markets are not apt to serve adequately certain types of businesses. There may be some need for providing direct capital subsidization to firms that are expanding or to those with growth potential that, for some reason, are unattractive to private capitalists (e.g., the entrepreneurs are older, the expected growth rate is slow). These businesses may have the potential of making a substantial contribution to a regional economy but lack the short-term, high-growth impact that attracts venture capitalists.