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Six myths about venture capital

Posted by: Christina Hernandez Sherwood on July 25, 2013

Fact: Venture capital is the exception -- not the norm -- as a funding source for startups.

Fact: More VC-backed new companies fail than succeed.

Fact: Since 1999, VC funds have barely broken even.

In a piece for the Harvard Business Review, Kauffman's director of private equity Diane Mulcahy debunked six VC myths to empower founders when negotiating for funding. Here are three of them:

Myth 1: Venture capital is the primary source of startup funding

Historically, less than 1 percent of U.S. companies have raised capital from VCs, and the VC industry is contracting. But less venture capital does not mean less startup capital since non-VC sources of funding, such as angel capital, are growing.

Myth 2: VCs take a big risk when they invest in your company

VCs take risks with investors' money, not their own. The typical VC commits only 1 percent of partner capital to a fund while investors commit the remaining 99 percent. The VC revenue model that generates guaranteed and cumulative management fees regardless of investment performance insulates VC partner personal compensation from the risk of poor returns.

Myth 3: Most VCs offer valuable advice and mentoring

VCs differ in how much effort they put into these nonmonetary resources, and the quality of advice and mentoring from VCs can vary widely, so founders who want more than capital from their investors should conduct a thorough due diligence on a VC firm they are considering.

Read Mulcahy's other myths here.

Weekly Wisdom from Kauffman is a regular feature on eMed highlighting insightful research from the Kauffman Foundation. Do you have a favorite Kauffman research insight that could help life science entrepreneurs? Send it to mailto:emededitor@kauffman.org.

Category:  Creation  Tags:  wisdom, entrepreneur, venture capital

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