November 30, 1999 in ATDC News

Sources of Seed Funding

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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.

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