Finance is crucial to the growth of any start-up, and the glamor surrounding entrepreneurship has seen no end of new ways for funds to find their way to entrepreneurs.  What was traditionally the domain of VCs and angel investors has seen governments, corporate venture funds, university incubators and even the crowd muscle in.

A recent paper set out to explore which of these funding routes provides start-ups with the best chances of success.

The best way to finance a start-up

The researchers examined 200 medical start-ups in the US over a 22 year period.  They kept tabs on the success of each start-up by measuring the number of patents they produced, and their FDA success-rate.

Interestingly, it emerged that the start-ups that received VC backing outperformed those who raised money via other sources.

The authors suggest a number of possible reasons for this.  Firstly, they contend that VCs are generally driven by more realistic and motivating milestones than other backers.

What’s more, they also tend to adopt a much closer relationship with the start-up, and typically have a more day to day involvement in its running, certainly in comparison to other sources of support.

Lastly, VCs are usually successful business people in their own right, so come with a great deal of expertise that they can lend to the start-up to help it to grow and flourish.

Lessons for the rest

Corporate venture capital funds, by contrast, were found to struggle due to the internal complexities they bring to the table, both in terms of the human resources they can offer and the often complex strategic objectives.

Likewise, government support was also found to be of poor quality, with a general desire to treat start-ups equally resulting in passive mentoring and a one size fits all approach to the distribution of resources.

The involvement, and interest, of groups such as universities, corporations and governments in the innovation and entrepreneurship process is certainly to be welcomed, and hopefully this study will help guide their efforts in a more fruitful way.

It highlights the fragile nature of life as a start-up, and the significant support required to grow and succeed.  It isn’t simply a case of picking a good venture to back, which all sources seemed to be good at, but providing those ventures with the right backing to help them thrive.

So, if you’re a start-up looking for support, it seems to pay-off to look at sources that will provide you with the business support required to grow as well as the financial support.  Likewise, if you’re a group looking to support start-ups, it would appear that a more hands-on approach could really pay dividends.