What difference does a hundred thou in seed capital make? The answer may surprise you.
OK, you have just $5,000 to launch your company. You're worried that your meager start-up funds will stunt your company's growth forever, condemning you to a life of begging for money. You begin to imagine one breakfast with bankers after another. But before you let your worst fears take over, relax.
We want to let you in on a secret: it doesn't really matter how much you start with. Whether it's $5,000 or $50,000 matters less than things like your ability to manage a growing operation. When it comes to the Inc 500, start-up capital is not the leading predictor of success. Get this: companies that were started with less than $1,000 were about as likely to be profitable as those that were started with more than $100,000.
What's more, the companies that were launched with $10,000 or less achieved almost as rapid a median growth rate as those that were loaded with start-up capital -- which we defined as any money raised before the company's first sale, including funding from personal assets such as savings, credit cards, 401(k) plans, and so forth.
29 % of the Inc 500 CEOs surveyed plan to seek funds this year.
But maybe start-ups that began with little seed capital were simply more consumed with the money hunt later? Not so. The 61% of companies that pursued follow-on financing were almost equally split between those that had started with $20,000 or less and those that had more.
However, in terms of absolute size, start-up funds did seem to play a role. Companies with seed capital of $100,000 or more on average employed 150 people and generated nearly $21 million in sales in 2001. Entrepreneurs who couldn't scrape together a thousand bucks at start-up were, predictably, running far smaller shops -- 56 employees and $13 million in sales on average.
As you might expect, companies that were started with more than $100,000 could afford to add employees at a faster clip than everyone else -- more than twice as fast as companies begun with less than $1,000, for example. From 1997 through 2001, the companies with the most start-up capital experienced employee growth of 614%, which translates into hiring a new person every week or two. So money talks when it comes to hiring -- but it's all relative. Even the "less than $1,000" group saw their employee numbers balloon by 300%.
Seed Cash Stash
Percentage of Inc 500 CEOs surveyed who launched their company with seed capital (including personal assets) of
Less than $1,000
$1,000 to $10,000
$10,001 to $20,000
$20,001 to $50,000
$50,001 to $100,000
More than $100,000
If you can hire people faster, you should make sales faster, right? Well, yes, but not by all that much. From 1997 through 2001, the median growth rate for companies that had less than $1,000 in seed capital was 846%, compared with 953% for companies that were started with more than $100,000.
Average growth rates tell a more dramatic tale; here the best-financed companies at start-up pulled far ahead, expanding sales by 2,074% in five years, nearly 60% faster than the "less than $1,000" set and 82% faster than the "$20,000 or less" group as a whole. But of course, it takes only a few companies like our #1 company, the Outsource Group (which had a growth rate of 54,330%), to throw off the average.
The real kicker is profits. Although a majority of Inc 500 companies reported that they were profitable in 2001, the companies that started with the most seed capital were less likely to be. Only 65% of the companies that started with more than $100,000 were in the black in 2001, compared with 83% of those businesses that were launched with $1,000 to $10,000.
So if you worry that your little company is doomed by poverty, don't. We can't promise that you'll be spared the nocturnal tossing and turning over payroll or the bankers' breakfasts, but our findings prove one thing clearly: You can still make it big. Money doesn't make the world go 'round.
Does seed funding affect long-term profitability or growth rate?