Obama Bucket Shop act
Yves Smith points us to information on our notions of new business and venture capital:
Amar Bhide, who has written the classic, The Origin and Evolution of New Businesses, has decisively debunked the idea underlying the Obama Bucket Shop act, which is that public stock offering are an important source of funding for new businesses.
The problem is, as Bhide explained, is that academics focus on the easy to study but relatively inconsequential venture capital funded companies which look to IPOs as an exit. Bhide found that only 1% of new and young businesses were funded by venture capital. Similarly, his multi-year study of Inc 500 companies found that a comparatively small portion had VC backing, and even then, many got VCs in at a late stage, not because they needed the money but having the “right” VCs would lead to a much bigger premium when they went public.
Bhide found that most new businesses are based on an insight about an business opportunity that the founders discovered as employees (ie, they saw a market niche that incumbents were ignoring).
These ventures were funded by savings, friends and family, and credit cards.
Similarly, the idea of venture capital or stock promoter funding as some sort of boon for entrepreneurs is wildly overstated. The value added of venture capital is questionable. It produces stock-market type returns with more volatility. A colleague who founded a successful venture capital firm left when it went to do a second round of funding (the junior partners stayed on). He gave a long form, compelling analysis as to why: when you actually went through the numbers, the returns to the entire asset class depended on the returns of a very few firms, and even at them, of a very very few deals
I’m telling you it’s the Wrigth Brothers Syndrome. The symptoms are people believing the economic solution is just the next Wright Brothers around the corner. The signs of the syndrome are people looking for the next Wright Brothers as in a treasure hunt or people believing they can dowse for Wright Brothers if they can just create the proper devinning rod.
What do you expect from a business mentality that thought it could recreate Woodstock?
Umm, hang on a moment.
Evidence of the absence of VC funding for new and small companies (which is what you have above) is not evidence of the undesirability of such funding.
Rather, evidence of the lack of such funding is evidence that perhaps we ought to try changing the system so that it is possible?