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Survey: Innovation in industry: Easy way out
Nicholas Valery. The Economist. London: Feb 20, 1999.Vol.350, Iss. 8107; pg. S22, 2 pgs
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Startups, Entrepreneurs, Market strategy, Venture capital companies, Trends, Innovations
9520 Small businesses, 9190 US, 8130 Investment services, 5400 Research & development, 7000 Marketing
The Economist. London: Feb 20, 1999. Vol. 350, Iss. 8107; pg. S22, 2 pgs
ProQuest document ID: 39186421
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Abstract (Document Summary)
Entrepreneurs hawking good ideas around have never had it so good. For the past five years, venture capitalists, business angels, institutional investors, even private companies and wealthy individuals have been falling over themselves to stuff money into promising little entrepreneurial startups. The average investment made by venture-capital firms in America has doubled from $3.5 million to 1992 to more than $7 million today. However, venture capitalists have to find a way to get out when a new firm can stand on its own feet. Over the past year or so, venture-capital firms' exit strategy has changed. More and more entrepreneurs are starting enterprises with the express purpose of being bought out in due course. Full Text (1151 words)
Copyright Economist Newspaper Group, Incorporated Feb 20, 1999 [Headnote]
Start-up firms have discovered a new exit strategy
ENTREPRENEURS hawking good ideas around have never had it so good. For the past five years, venture capitalists, business angels, institutional investors, even private companies and wealthy individuals have been falling over themselves to stuff money into promising little entrepreneurial startups. The average investment made by venture-capital firms in America has doubled from $3.5m in 1992 to more than $7m today. The total amount of venture capital (in seed money plus primary and secondary financings) that start-ups have been able to raise has gone from an average of $9.5m seven years ago to around $24m today. And the boom has not been confined to the United States: American venture capitalists have been scouring the world for bright young firms to invest in.
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The traditional route for individuals wanting to commercialise a pet idea has been to form a company and work on their venture in the evenings and at weekends until a working prototype has been produced. One or two of the group might then quit their day jobs and work on the venture full time, while others stay with their employers to help pay the bills. After mortgaging their homes, sending spouses out to work and at last getting a few contracts (or letters of intent) from major customers, the would-be entrepreneurs take their business plan to a venture-capital firm. If the proposal gets past the door (and most do not), they are shocked to learn how much of their fledgling firm they will have to hand over just to get up and running. For perhaps $250,ooo of start-up money, venture capitalists typically demand a third of the equity, which has earned them the tag of "vulture capitalists".
That is unfair. Venture capitalists take risks that few other financial institutions would touch, and need to be rewarded accordingly. The Small...