|
Angel Investing
Angel Investing >
Funding Gap
Funding Gap: Capital and Information
Financial theory is predicated on the assumption of efficient capital markets where there exists fully
informed buyers and sellers and low transaction costs. However, for the high growth entrepreneurial firm
efficient markets theory does not apply. Market imperfections, prevalent in the informal seed/early stage
capital market, lead to two types of market inefficiencies, collectively referred to as the funding gap.
The first market inefficiency is a capital gap between the needs of early stage ventures and the suppliers
of early stage capital. High growth ventures need patient, value added equity capital to fuel growth. Under
efficient market conditions capital flows from the suppliers of this capital, angels and venture capital
funds, unimpeded to the demand side, the high tech entrepreneurs. In the United States, the private
equity market does not meet this standard of efficiency, not by a long shot.
The second, and equally important, type of market inefficiency contributing to the funding gap is the
information gap. An efficient market implies an open and timely flow of reliable information concerning
financing sources and investment opportunities. In the informal venture capital market, with the suppliers
of capital seeking a degree of anonymity, often in conflict with the need to maintain quality deal flow,
information flows very inefficiently. An entrepreneur’s search for equity capital is often a time consuming
process, resulting in missed market opportunities and unsuccessful avenues. Likewise, as investors seek
a balance between quality deal flow and the desire to maintain a reasonable degree of anonymity,
promising technologies are often overlooked or prematurely discarded.
This capital and information inefficiency results in two substantial funding gaps in the private equity
market. The first gap occurs primarily in the seed and start-up financing stage (see diagram), and is the
result of both capital and information inefficiencies. As recently as 1998 a new funding gap has emerged
in the United States’ equity markets (Sohl, 1999). This secondary market gap occurs in the early stage of
equity financing and is reflective of the venture capital industry’s progression to larger and later stage
financing. The funding gap is more of a capital gap than the capital/information gap in the seed and startup
stage, and it has been steadily increasing. These larger capital requirements, still considered early
stage deals, have spawned a new hybrid of angel financing - the angel alliance/group.
|
|
