High Cost of Venture Capital and Investment Strategy Startups Should Follow

Mustafa Şeref Akin ()
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Mustafa Şeref Akin: Erzincan Binali Yıldırım Üniversitesi, İktisadi ve İdari Bilimler Fakültesi, Erzincan, Türkiye

Istanbul Journal of Economics-Istanbul Iktisat Dergisi, 2020, vol. 70, issue 1, 229-245

Abstract: In this article, the mathematical expansion of the share that the venture capital investors should receive to meet their expectations is shown. After the initial phase has been overcome, the entrepreneurs’ acquaintances around them are insufficient in meeting the capital requirement. For this reason, founders sell some of their resources to other investors who expect a return on investment. In this sense, the support of venture capitalists is critical during the growth phase of the startup. The most crucial dilemma here is how much financing and how many shares will be given. Due to the organizational structure of venture capital and the low success rate in start-ups, it is a costly capital. Expectation rates of investors are not much above the general market ones. The factors that make venture capital so costly are the long waiting period of 5-10 years, and the chances of start-up success being between 10-20%. As a result, the discount rates are well above 50%. Entrepreneurs are disappointed when they give too many shares for little capital. Under these circumstances, the most accurate strategy a start-up can follow is to provide as much financing as needed rather than to negotiate tightly with venture capitalists.

Keywords: Venture capital; Startup; Cash to cash; Hurdle rate (search for similar items in EconPapers)
JEL-codes: G24 M13 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:ist:journl:v:70:y:2020:i:1:p:229-245

DOI: 10.26650/ISTJECON2020-0010

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