Most MIT-related companies are started with funds from the founder's personal savings or by re-investing cash flow, as shown in Chart 15 below.
There is generally little difference in the funding pattern across industries or regions of the country. There are, however, a few interesting exceptions to this pattern. Informal investors--"angels"--play a significant role in starting up electronics, chemicals, and energy companies. Strategic partners are important to electronics, machinery, and chemical firms. Venture capitalists are important to electronics and biotech firms, and DARPA (the Defense Advanced Research Projects Agency) was important to chemicals and materials firms. Commercial banks played a significant role with machinery, aerospace, other manufacturing, and finance companies. In none of these cases, however, were these alternate sources more important than cash flow and founder's savings.
Commercial banks were more important funding sources for older companies. For example, Analog Devices was started in 1965 with $100,000 from the two founders and a promise from BankBoston to lend the new company $1 for every $1 of profit earned. Three years later, the company went public; it never needed venture capital.
With venture capital more readily available than it was a few years ago, firms started today are more likely to use venture capital and less likely to use commercial banks for initial funding. Also, there's a higher software and lower hardware content to startups today; this reduces the collateral against which banks can lend.
Cambridge Savings Bank played an interesting role in the start-up of Teradyne. While it did not provide start-up funds to the company itself, it went out of its way to provide mortgage loans and housing information to key staff the company brought to Boston.
Although venture capital was not a major source of funding for smaller firms, it was important for companies with 50 or more employees, and was even more significant for companies with 500 or more workers. This suggests that venture capitalists are good at picking winners or that venture capital is often a necessary tool for a company to become large (or both).
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