Sources of capital: Pros, cons, and comparisons;

              Sources of Capital;
Pros, cons,
and
comparisons /
V\6k
by DAVID M. FREDERICKS/Parfne/;
Financial Services Center; New York
The second most important
objective of a high-tech
entrepreneur is to raise
capital. Perhaps he needs funds to
develop a disk drive idea into a
marketable concept. Perhaps he is
looking for R<S»D money to build
a prototype medical device. Or,
maybe he makes environmental
testing equipment and needs to
finance a move into overseas
markets.
Seed capital. Start-up money.
Funds to fuel expansion. Whatever
the need or product, all these
people share one thing in
common: they need capital to
underwrite their dreams.
How much money is being
raised to finance high-tech
businesses? No one really knows
the answer. But the total pool of
capital raised from just one
source—venture capital funds-reached
$7.5 billion last year,
which is nearly triple the total
invested in these funds as of 1977.
According to Stanley E. Pratt,
publisher and editor of Venture
Capital Journal—a magazine that
has been tracking the venture
capital industry for more than
two decades—the pool grew by
about $1.6 billion in 1982, well
above the $1.3 billion increase in
1981 and miles ahead of the
paltry $39 million raised five
years before.
And remember, this is but one
source. Add in the capital raised
through initial offerings of public
stock, bank loans, private place­ments,
Small Business Investment
Companies, and the like, and the
total pool could well add up to
tens of billions of dollars.
Venture Capital
Despite the glamour attached to
the name, venture capital is
probably as old as commerce
itself. Earlier in our own century,
the great venture capitalists were
the families that controlled
private fortunes—the Rockefellers,
Whitneys, and Astors—people
who were able to take big risks
on tosses of the economic dice.
In our own day, venture capital
is very much a creature of the tax
laws. When the capital gains tax
was raised from 25 percent to 49
percent in 1969, much venture
capital simply evaporated. A
decade later, the capital gains tax
was rolled back to 28 percent,
and interest revived. The annual
amount of venture capital invested
nearly doubled in a year—from
$550 million in 1978 to about $1
billion in 1979. The tax rate
reduction in 1981, from 28 percent
to 20 percent, further spurred
growth.
Another factor in venture
capital's growth is the Small
Business Investment Act of 1980.
This act makes it considerably
easier for venture capital firms to
raise public financing, since they
can sell up to $5 million in secur­ities
without having to meet SEC