Funding For Startups

When talking about funding for startups, I continually find it interesting (and disheartening) that the business community so closely (exclusively?) associates “startups” with Venture Capital. In fact, a young entrepreneur recently told me that a business should not be called a “startup” until they begin searching for venture capital.

The Reality

That was a very naïve comment, and here’s why: According to the Kauffman Foundation, there were over 6.5 new businesses started in the U.S. during 2010. Also, according to PriceWaterhouseCoopers reports, there were 3,277 venture capital deals made during 2010.  Not very good odds.

So, where did the funding for startups come from to start the remainder of the 6.5 million new businesses?

Angel Investors

Certainly some financing came from Angel Investors, but their requirements are not that much different from the VCs. Angels usually precede VCs and get a company started before the VC becomes involved.

The data is elusive, but It appears that (certified) Angel investors may not have made substantially more deals than the VCs did. Even if they made 10 times as many deals as the VCs, that would only account for about one-half of one percent of the total startups for 2010.

Angel investors are actively coming together as “groups” that act on new venture deals as investing partners, just like the Venture Capitalists. The lone wolf angel investor is a dying breed.

Banks

Of course, no bank is going to provide funding for startups (other than, perhaps, a personal loan to the entrepreneur…if they have substantial collateral). There is also no indication that banks will begin more aggressive lending to businesses, especially small businesses, anytime in the foreseeable future.

Banks certainly are not the answer now, or any time soon.

SBA Loans

We need to remember that SBA loans are made by banks, not the government. SBA loans are only partially guaranteed by the government, and I have been told by many bankers that their SBA loans must meet the same borrower requirements as a non-SBA loan. Therefore, in reality, the SBA is not the answer either.

Grants

There is no such thing as a U.S. government grant available for the purpose of starting a for-profit company. There can be local “incentives” like tax postponement, subsidized property or facilities, etc., but finding grant money to start a for-profit business in the U.S. is like finding the Holy Grail.

While many of the economically emerging countries are offering strong incentives to entice American entrepreneurs to start businesses in their country, the U.S. seems paralyzed about doing anything to keep those businesses here, let alone expand our own business community.

Who’s Left?

Well, that still leaves something over 6 million new startup businesses without any realistic form of  outside funding. That means the primary sources of funding for startups available in the U.S. are: (1) the entrepreneur’s personal borrowing capacity, (2) family, and (3) friends.

Unfortunately, for nearly all of the over 6.5 million new U.S. businesses that will start up during 2011, the only investor decision that can be made is which family member or friend to approach first. Very sad.

How did you fund your startup business?

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2 thoughts on “Funding For Startups

  1. My situation was quite different. Thanks to a very smart CPA, we were able to get back most of the taxes paid on the sale of a previous business. We then used those funds, along with a very generous owner carry note from the seller to purchase the new business. This is all fine, now I’m IN the business but working capital cash is non-existent at a time we need it desperately to grow!

    1. Steve – Thanks for the comment. You were fortunate to have tax refunds and a generous seller. Private financing like yours is pretty much all the small business community has left. It appears you found this out when you were looking for growth capital. There will be NO gov’t bailouts. or growth stimulus programs, for small businesses in the U.S.; and the banks certainly are not going to loan much for quite some time. So, why are people surprised that our economy is in the tank?

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