This article examines the capital market for early stage ventures. The status of the current market and improvements offered by the Small Corporate Offering Registration (SCOR) process is presented. It is argued that information is the critical component needed to develop an effective capital market for early stage investment. This information must come from a healthy base of effectively screened investment opportunities and from the education of an enlarged pool of investors to allow them to understand the unique risks and opportunities posed by these investments. In addition, recent developments in the market such as the Pacific Stock Exchange registration process and SCOR Market Maker are examined in light of these requirements. The article closes with some conclusions and recommendations about the future of a viable early stage marketplace and suggests that the SCOR process may lead to a much broader and more efficient market, but only if the necessary market mechanisms are implemented effectively.
EARLY STAGE VENTURE CAPITAL AND SCOR: NEEDS, NEW DEVELOPMENTS, AND CONCERNS
The entrepreneurial phase of a firm is often considered to include the time between the generation of the original business idea and the point at which the business offers publicly traded securities (Amit, Glosten & Muller , 1993). This categorization has been utilized because issuing public securities has been such a difficult source of funding for early stage companies. The public sale of securities provides a clear cut indication that an early stage company has progressed to another level. Entrepreneurs have difficulty raising money for early stage growth companies because there is no organized market for early stage companies to sell their stocks. In large part, this problem is due to the difficulties imposed by registration restrictions.
This article will examine the market for early stage capital which includes the seed and startup stages. The Small Corporate Offering Registration process will be discussed, as well as recent developments in the market such as the SCOR Market Maker. Ultimately, these developments may lead to a broader and more efficient market, and a significant increase in early stage capital. The article concludes with some thoughts and cautions about the future of a viable early stage marketplace.
LIMITATIONS OF EARLY STAGE VENTURE CAPITAL FUNDING
While there are a number of options for raising seed and start-up capital, many of the sources are difficult for most early stage ventures to reach. The use of debt capital, for example, is severely restricted for early stage companies due to the lack of a stable financial history and the lack of appropriate collateral. Therefore, equity capital tends to be the primary funding vehicle for most early stage companies. Unfortunately, equity capital can also be very difficult for early stage companies to utilize.
The issuance of stock is an often mentioned option for venture capital. A company with a stock listed on an exchange has many advantages when seeking capital such as a ready source of buyers, issuers, and sellers, issuance support, increased liquidity, and publicity through analyst reports and recommendations. However, access to public stock offerings is typically a much more limited option for either early stage or even smaller later stage companies than commonly assumed. Table 1 shows the requirements for listing on the various stock exchanges across the U.S. With minimum asset requirements of $2 million or more, it is clear that the exchanges are weighted towards the capital requirements of larger companies. In fact due to the high registration costs, few initial public offerings (IPOs) are less than $3 million Gain, 1994). Initial fees for an IPO start at about $200,000, and when commissions and other costs are considered, registration fees for small offerings have been found to be 22% of the total offering by Putter (1987) and 17% for stock IPOs with gross proceeds of 4 million or less by Jain (1994). …