I’ve been chatting with Sam Sethi of Techcrunch UK a fair bit lately about the alleged “equity gap”.
To me it’s a myth but one that’s easily explained by three things
– some people have stupid ideas/ventures and so can’t find people to back them
– many entrepreneurs don’t know any investors or where to find them. Consequently they link this with there being no money available. I agree the market is presently poor at bringing together buyers & sellers with the consequence search costs are high. Likewise price formation is haphazard & inconsistent. Doesn’t mean the money isn’t there though.
– the price for funds is often unappealing to entrepreneurs and I think this is the real issue.
If I said “I find it impossible to get a luxury car, there aren’t any” you’d think I was mad, because of course there are lots available. “Ah yes, but they all cost £75k+, there’s none for £1”.
In my experience the equity gap is actually a valuation gap. “I want £1m in exchange for 20% of my company”. When the answer comes back that the investor expects 45%, the entrepreneur claims there’s no money available!
So let’s not persist the lie any longer.