Principles of Corporate Finance_ 12th Edition

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FINANCE IN PRACTICE

❱ A new way has emerged for entrepreneurs to finance
start-ups. It is known as crowdfunding and uses the Inter-
net to raise money directly from a crowd of individuals.
WobbleWorks is a small toy and robotics firm that
was founded in Boston in 2011 by two entrepreneurs.
The company needed capital to develop the 3Doodler,
a pen that could be used to produce 3-D plastic images.
The company’s solution was to advertise for backers on
Kickstarter, a website for young enterprises that seek to
raise capital from a large number of individuals. Possi-
ble backers were given about a month to decide whether
they wished to support the 3Doodler project and how
much they wished to invest. The concept proved

enormously popular, and the offer was heavily oversub-

scribed, with more than 26,000 individuals pledging a

total of $2.3 million dollars. Many of these pledges were

for less than $25; others were much more substantial.

Crowdfunding may be used by entrepreneurs seek-

ing to raise millions of dollars for a new enterprise, but

often it is a method for individuals to raise a few thou-

sand dollars. In contrast to traditional venture capital

projects, a relatively small proportion of crowdfunded

projects are high-tech; many are for artistic activities

or movie production. The payoff for investors may be

in cash, but many crowdfunded projects simply offer

samples of the product in return for investment.

Every Crowd Has a Silver Lining

◗ FIGURE 15.1

Venture capital

investment in the

United States

Source: Thomson Reuters data

in MoneyTree Report, Q4, 2014,

Pricewaterhouse Coopers,

National Venture Capital

Association.

0

20

40

60

80

100

120

Investment, $ billions

19951996199719981999200020012002200320042005200620072008200920102011201220132014

venture-capital firms, which pool funds from a variety of investors, seek out fledgling com-

panies to invest in, and then work with these companies as they try to grow. In addition,

many large firms act as corporate venturers by providing equity capital to new innovative

companies. For example, over the past 20 years Intel has invested in more than 1,300 firms in

56 countries. In a recent development, young companies have also used the Web to raise the

money from small investors. This development, known as crowdfunding, is described in the

nearby box.

Figure 15.1 shows the changing level of venture capital investment. During the giddy days

of 2000 funds invested more than $100 billion, but since the end of the dot.com boom, venture

capital investment has returned to $20 to $30 billion a year.

Most venture capital funds are organized as limited private partnerships with a fixed life

of about 10 years. Pension funds and other investors are the limited partners. The manage-

ment company, which is the general partner, is responsible for making and overseeing the

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U.S. venture

capital investment