Venture Capital Goes Mainstream

Working capital for startups has come to e-commerce companies from various sources, including family members, cash advances on credit cards, and even life savings.

The bulk of startup money, however, continues to flow from venture capital, which was once the exclusive enclave of well-to-do investors. Today, however, venture capital has become mainstream, with funds being set up by companies ranging from conservative accounting firms to aggressive mutual funds designed to attract small investors.

Big Names with Big Money

Last month, Andersen Consulting unveiled plans for its new venture capital division, which will invest upwards of $1 billion (US$) over five years in Internet businesses. Not to be outdone, some of Andersen’s chief competitors, such as Big 6 accounting firms PriceWaterhouseCoopers and Ernst & Young are moving in the same direction.

Each intends to develop an entire division that will be devoted solely to e-commerce projects.

For those who doubt how pervasive venture capitalists are in the United States, consider just one major city: San Francisco, California. Over the first three quarters of 1999, 439 San Francisco Bay Area-based Internet-related companies received $5.5 billion from venture capital funds.

Also, to illustrate how venture capital can assist an Internet-based company, consider Webvan, an online grocery delivery service that went public in late 1999 after raising $275 million in the third quarter of the year alone.

According to VentureOne Research, a San Francisco company that studies venture capital, the median investment in Internet companies increased to $9 million in the third quarter of 1999, compared with $5 million just one year earlier.

Angels, Moguls and Other Big Spenders

Hundreds of millions of dollars are flowing into e-commerce startups from individual investors with deep pockets, known as “angels.” Some angels see startups as pure portfolio play, while others attest to the importance of allowing e-commerce to fully develop.

Meanwhile, corporate believers in the potential of e-commerce continue to fund concepts in which they believe. For example, Moet Hennessy Louis Vuitton of France invested $66 million in Petopia, a much-publicized online pet products e-tailer.

VC and the Common Man

Still, many observers believe that the most unexpected and inventive aspect of venture capital and e-commerce is the participation of the population at large in the investments.

Last month, venture capital firm Draper Fisher Jurvetson announced a new $500 million fund in conjunction with venturecapital.com, a national venture capital investment management company. The new alliance allows individual investors to buy a stake in selected ventures.

Venture capital, once the clear domain of millionaires and established corporations, is testing the waters of mainstream American investors who want to put their money into Internet-related and e-commerce businesses. The advantage for the small investor is simply the opportunity to get in on the ground floor of emerging growth companies before their initial public offerings.

The Diplomacy of Venture Capital

The marriage of venture capitalists and online startups is perhaps one of the more interesting unions in the history of American commerce. The next wave may see both individuals and organizations spreading their capital to previously untouchable cultures — such as China — thereby allowing the Internet to fulfill its early promise of uniting the world community.