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Chapter 7. How Some VCs and Bankers Led ... > Having to Go to the Venture Firms

Having to Go to the Venture Firms

In the United States, entrepreneurs have limited sources of capital. They may finance a new company themselves, but since most have little wealth, this can usually be done only on a shoestring. The result is that most start-ups are funded by entrepreneurs for only a short time, which carries the company only a short distance. More capital can be obtained from friends or acquaintances, or even wealthy individuals, so-called “angels.” But again, most entrepreneurs cannot obtain sufficient funding from these sources. A major source of funds available for many business purposes is ordinarily closed to early-stage start-ups: banks.

Investment banks rarely invest in start-ups, and then only in very large ones created by people they know well. Commercial banks rarely provide loans because start-ups usually don't meet their loan criteria, which often base the amount to be loaned on the volume of sales of the company in the previous years. For most early-stage companies, there were no sales or only insignificant amounts—so there can be no loan. This is true even when an entrepreneur, or a friend or acquaintance, agrees to co-sign a note with the company, and thereby take responsibility for the loan.


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