The Golden Egg

What Lies Ahead

What will finance look like five, 10 or 20 years hence?

After years of unprecedented growth, a chastened VC community is ready for some housecleaning. John Freeman, the Helzel Professor of Entrepreneurship and Innovation at the University of California, Berkeley, notes that returns for VCs have returned to the 30 percent per year range common in the early 1990s rather than the 100 percent returns of the bubble years. "There are lots of limited partners that got into venture funding because of the astronomical returns," he says. "Next time around, some of them will be reluctant to invest again." He sees fewer VC firms investing less money 10 years from now. Other experts aren't as pessimistic, but still predict a flat industry for a while.

Still, no growth isn't necessarily as bad as it sounds because the plateau is set at such a high level. Entrepreneurs will continue do well with venture capital. "A higher percentage [of entrepreneurs] understand the game, which will lead to a higher success rate," says Freeman.

The dearth of entrepreneurs getting VC funding in the past may have had more to do with the entrepreneurs than the VCs. "To get VC funding, you have to ask for it," says Edmunds. When more entrepreneurs have success with VC funding, will more of them be willing to develop the high-growth-rate businesses that VCs demand and seek it out?

In the future, entrepreneurs will benefit from an ever-growing pool of angel investors as an increasing number of Americans meet the Securities and Exchange Commission's definition of an accredited investor: $1 million in net worth and an annual income of $200,000. Today, 4.6 million Americans have a net worth of $1 million. Ten years from now, some demographers project that number will grow to 20 million. As the population of multimillionaires expands, so will the number of angels. Even if some angels got gun-shy during the pullback from the boom years, the long-term trends favor more investors willing to fund your business. Associate professor of finance Chris Leach at University of Colorado, Boulder, notes that these individuals will continue to cluster in various geographic regions and do deals locally.

Angels will not be funding mom and pop operations in the future. They've begun to emulate the VC community. "Angels are much more inclined to do larger deals," says Leach. "The ability of the angels to meet together and talk about deals in which they have expertise has made them more comfortable in syndicating their deals."

Percentage of small-business owners in 2000 who used the following to finance their capital needs in the preceding 12 months.
Credit Cards 50
Commercial bank loan 43
Leasing 24
Vendor credit 23
Asset-based/inventory as collateral 20
Personal or home equity bank loan 19
Angel investors 19
Private loan 18
SBA-guaranteed loan 6
Selling/pledging accounts receivable 3
Private placement of stock 2
Venture capital 2
Public issuance of stock 1
Other 1
SOURCE: Arthur Andersen/National Small Business United

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This article was originally published in the May 2002 print edition of Entrepreneur with the headline: The Golden Egg.

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