Academic journal article Journal of Business and Entrepreneurship

The Impact of the Internet on Entrepreurial Financing

Academic journal article Journal of Business and Entrepreneurship

The Impact of the Internet on Entrepreurial Financing

Article excerpt

ABSTRACT

Dynamic changes of the venture capital and private equity market have opened up opportunities for entrepreneurial financing from the seed financing to the exit stage by Internet. In particular, we examine Internet matchmakers, internet venture capital, and Internet investment banking in order to understand a growing trend of Internet financial intermediaries that admit entrepreneurs as well as ordinary investors from the seed financing to the exit stage of IPO. All three models take advantage of the rise in the use of the Internet among users locally as well as globally. Just as the Internet and e-commerce are revolutionizing the purchasing of goods and how companies are doing business, we scrutinize the impact of the Internet usage on entrepreneurial financing. The important question is whether this trend of using the Internet in entrepreneurial financing will sustain and take off or become an interesting but unimportant niche.

INTRODUCTION

The venture capital and private equity market was the fastest growing market for corporate finance from 1980 through the 1990's. Gompers and Lerner (2000) and Lerner (2000) has reported that the pool of private equity funds, including leveraged buyout funds and mezzanine investments, grew from $5 billion in 1980 to over $ 175 billion in 1999. Venture capitalists invested $35.6 billion, disbursing it in 4006 rounds of funding for young companies in 1999. More recently, McGee (2001) reports that in 2000, venture capital investment totaled more than $103 billion in a record of 5,380 companies up from $59.4 billion invested in 3,967 companies in 1999.

However, the private entrepreneurial financing process is still notoriously dependent on person-to-person networking in the traditional venture capital world. Each year, venture capitalists are bombarded with thousands of business plans. They rely on their own network of attorneys, accountants, colleagues and others to bring in referrals. Not surprisingly, a majority of deals are triggered by these referrals. This becomes an essential part of the process, which serves as a kind of instantscreening device that helps venture capitalists weed through the many proposals they receive. While business plans from strangers get read and even funded by venture capitalists, such cases are very rare. Thus, there are growing demands to seek a more efficient method of matching companies with funding sources. For one thing, the process of fundraising can be an excruciating ordeal for entrepreneurs, despite the huge amounts of money chasing after too few good ideas. Another problem is the frustration faced by many venture capitalists. They receive and review business plans from thousands of entrepreneurs or companies, many of which lack critical information or don't meet the fund's investment criteria.

In this paper, we aim to examine the role of these Internet financial intermediaries (IFI), such as, Internet matchmaker, Internet venture capital, and Internet investment banking in order to understand the impact of the Internet on entrepreneurial financing. In particular, in the first model we examine companies like Vcapital.com and Nvst.com who facilitate early and compatible relationships between entrepreneurs and the financial community. We shall call them the Internet matchmakers (IM). In addition to screening business plans, companies get advice from key members in the entrepreneur and financial community. In the second model, we examine the role played by companies such as Garage.com and OffRoad Capital. They represent a growing trend of filtered financial service companies who engage in and foster relationships among their investor members and approved partners. Also, since they themselves are investors with the company there is an added incentive to ensure success. We shall call them Internet Venture Capitalists (IVC). Lastly, we examine companies like Wit Capital group and W.R Hambrecht. They represent the latest trend in investment banking namely the online Internet public offering. …

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