The U.S. entrepreneurial finance market has undergone dramatic changes over the last two decades. Capital raised by privately-held venture capital (VC)-backed startups grew from $28.9 billion in 2002 to $118.2 billion in 2019 (in real 2012 dollars). At the same time, the number of annual IPOs in the U.S. has declined from an average of 436 from 1991 through 2000 to an average of 113 from 2001 through 2020. In Private or Public Equity? The Evolving Entrepreneurial Finance Landscape, we review the changes in the entrepreneurial finance market and provide a framework to analyze their causes and consequences.
We begin by describing the regulatory differences between publicly-listed and private firms, and how these regulatory differences translate into differences in the financing and informational frictions the firms face. Next, we explore how several regulatory, technological, and competitive changes affecting both startups and their investors have altered the costs and benefits of going public over the last two decades. These changes have impacted both early-stage and late-stage startups, leading to shifts in both the supply and demand for private and public equity capital.
At the early-stage level, technological innovations such as cloud computing in 2006 have decreased startups’ financing needs, particularly during the initial, experimental stage of the entrepreneurial process. At the same time, the emergence of incubators and of new online platforms that help connect investors to startups—alongside the regulatory changes that have facilitated them—have contributed to a marked increase in the fundraising options available to early-stage startups. We show that a key consequence of these changes is that entrepreneurs raising their first round of venture capital now retain 30 percent more equity in their firm and are more likely to control their board of directors than their earlier counterparts.
