Most Entrepreneurs Forced to Crack Open Their Piggy Banks
BY Angus Loten
The vast majority of start-up capital comes from self-financing and friends and family, according to new research.
Entrepreneurs are their own best investors, providing more than 60 percent of the start-up capital required to get their businesses off the ground, according to a new international study.
Surprisingly, the rest comes from family, friends, and neighbors, according to the 2006 Global Entrepreneurship Monitor Finance report, an annual look at the state of entrepreneurship around the world released Monday by Babson College and London Business School. Less than one in 10,000 start-ups rely on classic venture capital, the study found.
Among the 42 nations covered in the study, more than 200 million informal investors provided entrepreneurs with a total of $600 billion to start businesses last year, compared to just $37.3 billion in classic venture capital. On average, the costs of launching a new business came to $65,000.
According to William Bygrave, a Babson professor who wrote the report, the findings show that far too much emphasis is placed on the role of venture capital in creating new businesses, and not enough on informal investors or entrepreneurs themselves.
Less than half of the nations covered in the study had sufficient informal investment to meet the needs of new businesses, researchers found.
"Entrepreneurs must figure on funding about two-thirds of the initial capital needed to launch their ventures," Bygrave said in a statement.
Beyond their own businesses, entrepreneurs the world over were also four times more likely than the general population to invest in other businesses, the study found.
The study also found that the relationship between investors and entrepreneurs has a significant impact on expected return on investment. While close friends and relatives don't expect a big returns, strangers -- from VCs to angels -- expect to cash in.