VC Money for Start-Ups Continues to Dry Up

September 10, 2004 -- Small business owners looking for investors would do better with their time than to seek venture capital. According to a study by Global Entrepreneurship Monitor, of the $18.2 billion in venture capital invested in 2003, only $304 million was invested in seed- or start-up-stage companies, the lowest level since 1980.

"An emphasis on venture capital is an 'Achilles heel' for entrepreneurs seeking to finance their start-up businesses, diverting vital energies from their companies at a critical time," said Marianne Hudson, executive director of Angel Capital Association, a Kauffman Foundation program. Kauffman Foundation sponsored the GEM study.

While venture capital investment was sparse, informal investors provided the lion's share of funding for small businesses, which amounted to $108 billion in 2003, almost 1 percent of the Gross Domestic Product, according to the study. The capital helped finance 3.5 million startup companies last year.

Many informal investors are families and friends, but a growing number of investors are so-called angels, namely high-net-worth individuals or "cashed-out" entrepreneurs interested in mentoring other business owners.

ACA estimates that up to 90 percent of outside equity capital for start-ups comes from angel investors.

The Center for Venture Research estimated that angels invested $18.1 billion in start-ups last year, up from $15.7 billion in 2002, and that there are between 250,000 and 400,000 angel investors in the country, as well as 1 millionto 5 million potential angels.

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