Sources of Seed Funding
The Kauffman Foundation recently released a report in their ongoing longitudinal study of new business creation.
The study is chock full of interesting information. Some of the most interesting to me revolved around startup funding. Lots of entrepreneurs approach ATDC because they are seeking funding. We spend a lot of time educating folks on on the technology startup funding process works.
While it is worthy of more lengthy discussion, funding can generally be broken into three stages. Seed, angel and venture capital. While not all companies go through all three stages, they all do go through a seed stage.
In the Kauffman study, about 25% of the businesses had used debt financing. The leading source of such financing? Credit card debt.
Additionally about 80% of the companies in the study had equity investment in their first year of operation. The vast, vast majority of the equity investment was from the founders themselves. Just 9.6% used external equity financing. And the leading source of that financing. Parents. VC were involved in just .6% of financings in the first year of a company.
The point. To get your startup to the point where you can gain external equity financing from angels or VCs you are going to have to self fund the enterprise for a period of time. Typically speaking, angels and VCs do not fund raw concepts. Even when you hear of a large initial round for a company like ClearLeap, in the background the founders have funded the company to get it to that stage.
Here is the Kauffman Firm Survey in full if you care to read it.
This is true, entrepreneurs' seed money or first outside round of funding comes from friends and family and balance sheet money. Private Equity investing has long been the wealth creation strategy for the early stage companies. They recognize this type of invesment is high risk, but the rewards are not only substantial fiancially, they are great for the warm fuzzy of helping a young company succeed. The biggest challange angel investors have with becoming active, even when they readily can afford it, is the uncertainty of the process. Our membership in The Network of Business Angels & Investors (NBAI) had grown because we provide a fun environment for investors to collaborate, learn & prosper. Formed in 1994 the members have invested in over 50 companies (10 in just the last couple of years) with investments valued at ove $34M. We have a blog that we share a lot of insights on, http://www.myvirtualangelworld.com NBAI is a headline sponsor for the upcoming Southeast Private Equity Conference in April because they recognize the need to take the success they have experienced of late and showcase it to the world and really show the momentum that is building for early stage companies in the Southeast. It will be an exciting and momentous event. Visit http://www.sePrivateEquity.org to find out how a company gets into the expo, gets considered for the Innovative Company Showcase, and how an investor eager to meet the HOT companies that will make thier markets in 2008 and 2009 can register to attend.