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.
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?
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.
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.
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.
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.
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?