A recent study published in the Journal of International Financial Markets, Institutions and Money co-authored by Douglas Cumming, professor of finance and the Ontario Research Chair at the Schulich School of Business, found that small businesses benefit more from venture capital funding than they do from traditional bank loans.
The study compared venture capital data with bank loan data from 1995-2011 for each U.S. state and found there to be a strong link between venture capital investment and the growth rate of startups. For instance, VC investment is most significant for businesses with 5-19 employees and is not nearly as robust for firms with 0-4 or 20-99 employees.
In many ways, these findings speak to the importance of finding a mentor in the early stages of starting a business. With a VC in the mix, there is opportunity for value-added propositions (industry experience, access to networks, additional strategic partnerships) that a traditional bank loan cannot provide.
A VC-backed company tells a story that the entrepreneur has done their research and cozied up to at least one (or several) of the major players in the ecosystem. Perhaps they’ve traveled to meet face-to-face with the VC. In any case, VC funding is more difficult to obtain than a traditional bank loan, and VC-backed entrepreneurs have risen to the challenge.
VCs are also notorious for actively seeking innovative companies and snatching up better business opportunities than a traditional bank might. As a result, VCs end up partnering with promising startups more likely to experience higher growth, while more conservative businesses might turn to traditional bank loans for funding.
Obtaining funding is a key step in scaling up a business. Meanwhile, bank loans remain the most common form of funding for Canadian SMEs. So what can be done for Canadian SMEs to better obtain VC funding? For the full study, visit here – http://www.sciencedirect.com/science/article/pii/S1042443115001183