Monday, October 25, 2010

What is the role of public policy for funding entrepreneurs?

I’m at the annual Quebec City Conference where I’m attending the Public Policy Forum on Venture Capital and Innovation. I understand that last year’s conference concerned itself with what to do about the turmoil experienced throughout the financial sector. A year later, “the returns [of venture capital] are disappointing even against reasonable benchmarks” as understatedly observed by Prof. Thomas Hellmann of the University of British Columbia who is one of the conference organizers and speakers.

Against this backdrop where the venture capital industry appears to be shrinking, the spotlight was shone on the critical role of angel investors as important financiers of new businesses. A recent BC Angel Study confirms previous data that show angel investors bring not only capital to companies but also credibility, contacts and networks as well as their deep understanding of specific market segments gleaned from their own entrepreneurial experiences.

Angel investing is here to stay. Businesses have always benefited from personal monies. Most businesses become going concerns just from the investments they get from their own circle of friends and families - and only from the angel investors when that extra funding boost is required to lift the business to the next level.

The prominence of angel investors and venture capital (VC) firms is a fairly recent phenomenon as the role of technology became more central to the entrepreneurs' business models. After all, funding drug development from a university spin-out or developing an enterprise software business was obviously beyond the investing capabilities of most entrepreneurs' networks of friends and family.

No matter what the state of the economy, it is unlikely that angel investors - or any investor type - will disappear from the financing ecosystem entirely. Friends and family - and the occasional angel investor - will continue to be the first sources of funding for the entrepreneur. As technologies become less expensive and less central to the success of the underlying business models, there is less need for the entrepreneur to tap into larger investment sources such as offered by the VC firms. We're already witnessing this in social media applications. However, we will always have a need for the deep pockets of angel investors - and even deeper pockets of VC firms - for businesses that require such investments to grow and succeed.

The deliberations at the QCC are focusing on what role public policy should play to ameliorate the venture capital industry. I believe the role of governments should be minimal as to allow the market forces determine the financing models that will best serve the investment needs of early stage companies.





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  2. I see the Angel, Super A, VC space as a series of relay hand-offs. To work efficiently, there needs to be liquidity at stages that are aligned with expectations. You hear a variety of stories at every level about "getting stuck waiting to exhale" which is bad for raising capital on the company side and for the investor VC's. At the top of the food chain is the IPO, which for the past few years has been resurrecting itself. These events unlock a lot of capital that might (or might not) come back to the VC or Angel space. Great article on second markets: http://www.businessweek.com/magazine/content/11_18/b4226070179043.htm

    It's all about liquidity.

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