If you’ve put your faith in what I call the “Myth of the Shark Tank,” you might be surprised at where most start-ups get the cash they need to start.
“During an event in Austin on Monday, the Kauffman Foundation outlined research dispelling some of the most common myths that distort America’s idea of the business-building process, tops among them the notion that most successful start-ups raise money from outside investors,” writes the Washington Post’s J.D. Harrison.
“Kauffman’s researchers discovered that roughly two-thirds of the companies were financed by either personal savings, investments by friends and family or traditional loans. Only one in 10 obtained funding from venture firms or angel investors (individual start-up backers). In fact, credit cards—among the most expensive mechanisms of financing—was used more commonly by start-ups than either angel or venture funding.”
Here are the top seven categories the decade-long research identified from the 5,000+ entrepreneurs interviewed by the Kaufman Foundation:
- Banks and Other Loans—34.9 percent
- Personal Savings—30 percent
- Friends and Family—6.3 percent
- Credit Cards—6.2 percent
- Angel Investors—5.8 percent
- Venture Capital—4.4 percent
- Government Related—2 percent
Popular culture would have us believe that outside investment from private individuals like angels or other equity investors are the only paths to a healthy and thriving company—this research by the Kaufman Foundation suggests that view couldn’t be further from the truth. Bootstrapping and loans for small business remain the ways most small business owners finance their fledgling companies.
This research validates some things I’ve felt for a long time:
- An entrepreneur’s ability, or inability, to find equity financing for his or her start-up is not a validation of whether or not they have a good business idea.
- While not a very sexy way to get a business off the ground, bootstrapping a start-up is still one of the most popular ways to get a business up and running.
- For those who can qualify, a small business loan of some kind is still a very effective way to capitalize a small business.
- In the ever-changing world of small business lending, it’s more important than ever before that business owners educate themselves on all the financing options available to their business.
“It’s a sexy story when a 20-year old raises $2 million for a new company, and that’s what we hear about,” says Arnobio Morelix, one of the Kaufman researchers. “Those stories are important, but they aren’t really representative of the process most start-ups go through.”
For more information about startup financing, visit the startup financing section of Businessloans.com
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