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08 Dec

Who is going to take the risk?

According to the yearly PitchBook, VCs’ investments in seed- and early-stage start-ups dramatically dropped. The decrease regards to the number of projects backed as well as the total amount invested globally.

Even if angel investing has risen during the last years, a gap seems to occur in institutional financing of the start-up industry. Receiving funding from a financial intermediary, as a VC, constitutes a prestigious and official form of investment for a start-up, which could also lead to the next stage of funding.

And the question is who is going to fill the gap? Who is going to take the risk? Taking into account, as an indicator, what is going on in the US, the most financially developed country in the world, the answer is that seed- and early-stage financing is going to be covered at a policy level.

The US Goverment is going to invest $130bn in total every year via National Council of Entrepreneurship and Tech Transfers, a collaboration with S&P 500; $37b in federally funded R&D at universities and $93bn in federally funded R&D at federal labs in order to help new start-ups to emerge.

So, the riskiest part of the investment, that one in the beginning, is going to be covered from the public. In the next rounds, VCs will have some indication for the funded projects and they will carefully invest in the companies with the highest potential and performance making money from the valuations in the meantime. In this model, the public decreases the risk in the beginning of the project and invests again at the end of the road, in the company’s IPO, at the highest valuation.

Let’s see how this model works. In any case, we doubt about its fairness.

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