Finding Additional Financing
While beginning to evolve and grow, the postformation technological firm develops increased needs for funding. This chapter examines the subsequent financing of technical companies, including the sources and amounts raised during second and third rounds. It covers the entrepreneurs' search for additional capital and those pathways that are most productive. Additional financing increasingly depends on outside investors and, consequently, entrepreneurs frequently prepare business plans, whose characteristic deficiencies are assessed here. Finally, due to their greater importance for later stage financing, venture capitalists' decision making in funding high-technology firms are evaluated. The decision to go public, the process, and the consequences, are treated in Chapter 8.
Chapter 5 provides a picture of the evolution of technological firms through multiple stages of growth and development, with the attendant changes in capital requirements. It also reviews the various sources of company financing, from personal funds all the way to public stock offerings, and puts into perspective the likely differences in use of these sources during a company's life. As shown, most companies find that their initial funds are insufficient to support their operations and/or their growth during the early years. Typically 60 percent of the companies in the samples raise capital a second time (secondary financing) and about 30 percent obtain funds a third time (tertiary financing). This is in a sense fortunate, since most investors strongly prefer those later stage investment opportunities ( Ruhnka and Young, 1987). Not only does 75 percent of the venture capital money go into second round and later investments ( Venture, 1989), but even informal investors place over 50 percent of their funds in post-start-up situations in both New England and California ( Wetzel, 1983, p. 26; Tynes and Krasner, 1983, p. 351) and slightly less in the Great Lakes region ( Aram, 1989, p. 338).
While the first funding of a company tends to be memorable to its