It turns out that the myth of the entrepreneur who raises her first round of funding from friends and family isn’t actually true. In fact, 75 percent of aspiring U.S. entrepreneurs rely on external debt sources, as opposed to capital from family and friends.
A team at the Kauffman Foundation reported on the first funding decisions that startup founders make. The data came from the Kauffman Firm Survey, which tracks business characteristics, cash flow, and owner demographics for over 5000 new firms, to identify from whom firms choose to raise capital and how that decision impacts the long-term growth of the firm.
Below are four key facts about early startup activity in the U.S:
- Owner equity and outside debt, such as credit cards, credit lines and bank loans, accounted for 75 percent of startup capital for the firms’ first three years. Insider debt from family and friends was not nearly as common.
- In fact, owner debt and insider equity were the least common sources of capital in new firms.
- It hardly comes as a surprise that credit score was linked with startup capital. Firms with high credit scores, tend to begin with significantly more startup capital than firms with low credit scores. ($136,000 as opposed to $50,000, on average.)
- Low-risk high-tech firms had substantially more startup capital than the average new firm. A comparison of all firms compared with high-tech firms can be seen in the table below.
To read more on the Kauffman Foundation’s report on the capital decisions made by new firms, please click here. To read more research on data collected by the Kauffman Foundation completed by the National Bureau of Economic Research, please click here.
Contributed by Emily Luepker.