Some Successful Start-Ups Are Bucking the Trend of Venture Capital Funding

Janet Morrissey reported in today’s New York Times that, “The business world is filled with starry-eyed entrepreneurs who hope that the blessings of angel investors and venture capitalists will transform their start-up dreams into companies with billion-dollar valuations.

But some successful start-ups have been bucking the trend by growing and expanding without taking a dime from major outside equity investors.”

The Times article indicated that, “Those who buck the odds by ‘bootstrapping’ their own enterprises are rare, experts say.

“‘It’s a huge anomaly,’ said Mark Walsh, head of innovation and investment at the Small Business Administration. He estimated that as few as one in 50 brick-and-mortar companies and one in 10 online companies could build their businesses into $50 million or $100 million enterprises on their own.

But taking venture capital can be risky. In their haste to get financing, start-up founders often fail to read the fine print and later discover that they have signed away huge shares of the profits. In some cases, founders may be removed by the board of their own companies by the time the businesses are rapidly growing or plan to go public. For these reasons, some founders opt to take debt capital from banks and investors instead of giving away equity.”

Ms. Morrissey pointed out that, “Dana Ehrlich also self-financed his business school idea into a multimillion-dollar company. In 2004, Mr. Ehrlich came up with the idea for a grass-fed, organic beef importing business, Verde Farms, while visiting the grasslands of Argentina.

“So, he wrote a business plan around importing such beef from Uruguay, New Zealand and Australia for his M.B.A. thesis at Dartmouth’s Tuck School of Business in 2005.

Though very popular now, organic food was a concept met with much skepticism at the time.”

Today’s article added that, “In 2006, Mr. Ehrlich tried to find angel investors, but refused to accept the terms. ‘They wanted between 10 percent and 20 percent equity for a six-month loan,’ he said.

“So he used $100,000 from savings and student loans to secure debt financing. It was a tough slog in those early years, and Mr. Ehrlich nearly decided to shut down in 2008. But everything changed in early 2009, when he signed on two national retailers, Wegmans and Costco.”

Recall that that The Wall Street Journal recently featured an article that highlighted alternative funding sources for some tech entrepreneurs other than traditional venture capital.

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