Raising Capital

Seeking Startup Capital? Ask Your Family and Friends.

Recent studies reveal the most popular ways in which entrepreneurs are financing their new businesses.
Seeking Startup Capital? Ask Your Family and Friends.
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Say goodbye to your hopes of securing venture capital. New data confirms that most startups turn to family and friends for financial backing.

A recent report by the Kauffman Foundation highlights financing trends among today’s startups. Based on data from the Annual Survey of Entrepreneurs, which sampled approximately 290,000 businesses across the U.S., the report reveals the primary sources of startup capital, as well as how access and cost of capital impact a business’s profitability.

Nearly 64 percent of U.S. entrepreneurs say they rely on personal and family savings as their primary source of startup capital. The other two top sources for startup capital are business loans from banks (17.9 percent) and personal credit cards (10.3 percent). Less than 1 percent of respondents report VC investment as their number-one startup capital source.

Related: 5 Insights Into Venture Capital Entrepreneurs Need to Know Now

This comes as no surprise. Research by CB Insights and Pitchbook shows that the likelihood of closing an early-stage round is decreasing. As VCs are funding fewer, select startups with larger sums of capital, small businesses have no choice but to seek other options.

While personal and family savings are the primary source of startup capital across all U.S. demographics, the Kauffman report goes further to examine how specific ethnic groups rely on various financing sources. A larger proportion of Asian-owned businesses rely on personal and family funds than any other demographic. To the contrary, a greater percentage of white entrepreneurs rely on business loans from banks than any other group, and a greater percentage of black entrepreneurs rely on personal credit cards than any other group.

After launching, the majority of startups surveyed claim they didn’t seek additional funds -- but that doesn’t mean they didn’t need them. Many avoided further financing because they did not want to accrue debt and thought their business would not be approved by lenders. Of these businesses who avoided subsequent funding, whites and American Indians were more likely to have debt worries, while native Hawaiians and blacks were most deterred by anticipated rejection from lenders.

Related: VC Funding Is a Pipe Dream, as Investors Pour Money Into Fewer Companies

In a country that prides itself on equality, the report uncovers statistics about how much inequality persists in business today. Minorities are disproportionately hurt by the cost and lack of access to capital -- 16 percent of minority-owned businesses say that profits are negatively impacted by these issues, while only 10 percent of non-minority-owned businesses say this. In particular, black entrepreneurs are almost three times as likely as whites to have profits hurt by lack of access to capital.

However, alternate funding sources have gained momentum in recent years. In 2015, angel investments reached a high of $20 billion, which likely can be attributed to websites that match investors with startups, such as AngelList and Gust.com, according to another Kauffman study, “Changing Capital: Emerging Trends in Entrepreneurial Finance.” Crowdfunding sites such as Kickstarter and Indiegogo have also been major resources for entrepreneurs.

Edition: December 2016

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