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Start-Ups Saying No Thanks to Venture Capital

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13 Jan. 2019. Yesterday, we reported on 2018 being a banner year for venture capital, with $99.5 billion invested in start-up enterprises, the largest annual total since the dot-com era. But according to the New York Times, there’s a small and vocal movement of entrepreneurs looking for other ways to raise money.

The story is based on interviews with entrepreneurs finding other ways to fund their start-ups, and leaders of groups of similar like-minded business founders. While the writer Erin Griffith talked to some tech entrepreneurs, the question remains whether there are realistic alternatives to venture capital for science-based start-ups.

The main objection to the venture-capital model among these business founders is the demands levied by venture investors on new companies. Venture investors typically look for fast growth, often with an unrelenting focus on the bottom line. When companies are founded for more than financial returns — such as meeting community needs — exponential growth is not needed or even desired. In most cases, venture investors expect an exit in the foreseeable future, the term for a big financial payback event, such as acquisition or initial public offering, or IPO, of stock.

Griffith quotes Mara Zepeda, an organizer of the group Zebras Unite with start-up founders, investors, and foundations as members who advocate for more ethical industry practices including more gender and racial diversity. “The tool of venture capital is so specific to a tiny, tiny fraction of companies,” Zepeda tells Griffith. “We can’t let ourselves be fooled into thinking that’s the story of the future of American entrepreneurship.”

Josh Kopelman, a venture investor at First Round Capital, tells Griffith that venture investments are not for every start-up. “Big problems have occurred when you have founders who have unwillingly or unknowingly signed on for an outcome they didn’t know they were signing on for,” says Kopelman. “I sell jet fuel,” he adds, “and some people don’t want to build a jet.” First Round Capital conducts an annual survey of start-up entrepreneurs with findings that support Kopelman’s comments.

Science start-ups are different, sort of

New enterprises commercializing research have an advantage over other start-ups, including many tech companies, namely their valuable intellectual property. Scientific start-ups usually license the rights to develop their founders’ discoveries from the institutions where they work, a practice encouraged in the U.S. by the Bayh-Dole Act of 1980. That law gives to universities and other research institutions the intellectual property of their researchers, if initially funded by the taxpayers.

The start-ups then can license the technology developed further by their companies to larger enterprises, such as pharmaceutical companies. As shown in the links below, since August 2018 some of those licensing deals eclipse the financial returns of many tech IPOs or acquisitions, although the payouts often depend on meeting designated developmental and regulatory milestones over time.

Another option, one probably similar to the way many tech start-ups operate, is begin offering services that generate revenues to at least supplement investments. In 2014, Science & Enterprise reported on a panel at that year’s annual meeting of American Association for the Advancement of Science, with several companies using joint ventures and research collaborations to fund their operations, as well as outside investors.

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