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Will Startups Ditch Traditional Venture Capital Funding in Favor of Alternative Financing Options? One Survey Says No

Much of the startup financing chatter over the last few months has revolved around the passage of the JOBS Act, and its impact on startup financing in the US. With the passage of the JOBS Act came crowdfunding, an innovative way to raise capital for businesses. Many believe that crowdfunding will become the most popular financing strategy—a movement away from the traditional venture capital firms. However, a recent survey may change this belief.

A recent update to a 2010 survey conducted by law firm Dorsey & Whitney polled more than 300 startup executives about how they plan to fund their business. Here are some of the reasons why startup CEOs may continue to seek traditional venture capital financing.

Survey Highlights

A Rise of New Firms
One of the reasons why startups are continuing to look to traditional venture capital firms may be the rise of new firms. Firms such as Adreessen Horowitz, Google Ventures, Sequoia Capital, and Kleiner Perkins Caufield Byers were among the most-desired investment partners according to the survey.

More Capital Circulating
According to the data, there appears to be an increase in the amount of money circulating both in metropolitan and rural areas—over 36 percent of startups based in metro areas and nearly 34 percent of startups based in rural areas reported they had completed a round of financing in the past year, up approximately seven percent since the 2010 survey.

Optimistic Outlook
Nearly 30 percent of the CEOs reported that they expect to raise between $1 million and $5 million during the coming year. This number is up from 23 percent from the 2010 survey.

Don’t Read Too Much Into This Survey

While this survey is interesting because it points out that many think venture capital has a bright future, the results aren’t altogether surprising, and the survey itself may be a bit premature.

Expertise and Experience
For a certain class of companies, venture capital will still be appealing. Venture capital firms offer a much larger chunk of cash—VC deals are almost without exception in excess of $1 million. Also, venture capital funding can be a status symbol. VCs also provide expertise and experience, with many becoming a valuable partner to startups.

VC Funding Isn’t for Every Business
VC firms tend to only invest in companies that have really high cielings, i.e. VCs need their investments to have the chance of a substantial ROI, ten times their investment in some cases. Therefore, for businesses that are looking for less cash or fall into the ‘slow and steady’ type business, VC funding isn’t even an option. Since VC funding isn’t an option to these businesses, it’s difficult to compare these businesses with startups that seek VC funding.

The Waiting Game
Until the final regulations are drafted by the SEC, it’s unclear how exactly the crowdfunding process will operate. What is clear is that there will be a new way to raise financing for startup companies. According to the Dorsey & Whitney survey, the impact of crowdfunding may be less than many expect. Whether or not crowdfunding becomes the preferred financing platform should be clearer as details emerge about the final SEC regulations.

Since the final SEC regulations aren’t available yet, it seems premature to discuss the affect of crowdfunding on traditional VC funding. Until crowdfunding is a legal way to raise capital, we won’t know whether or not it will surpass traditional funding as the most popular financing option. You can be sure we’ll update you as the details emerge.

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