Entrepreneurs starting companies usually worry a lot about getting the money they need -- and much less about where that money comes from. But the source of start-up capital -- not just the amount -- may affect a company's growth rate later, at least among high-growth companies. That's one conclusion of a survey of 328 fast-growing small to midsize businesses conducted by Coopers & Lybrand.
Coopers & Lybrand examined the sources that the high-growth businesses had used for their primary means of start-up financing -- and then observed the companies' later growth patterns. Not surprisingly, the vast majority of the companies -- 73% -- were at first primarily funded by the owners and their families, with small percentages of respondents relying mostly on banks, investors, or strategic partners. (Like most people starting businesses, many of these entrepreneurs got money from a number of sources, raising a median of $82,300. For this study, they were asked to identify the number one source.)
What Coopers & Lybrand discovered was that a company's later growth rate was related to its primary initial-funding source. For example, the few companies that had managed to get bank funding as start-ups later became the strongest growth companies, with revenues 76% higher than the average -- even though they hadn't had exceptionally large amounts of start-up capital. Businesses that attracted outside investors at start-up did begin life with much more capital, with a median investment of $270,000, more than three times the norm. And they also grew somewhat more than average: at the time of the study, investor-backed companies had revenues 30% higher than those of the typical company in the sample. But companies that used strategic alliances with customers or suppliers as their primary source of funding lagged: they started off with about $20,000 less than average, and they ended up with revenues 22% lower. -- Martha E. Mangelsdorf
Primary Source of Start-up Financing
(by % of companies responding)
Owners, family, and friends 73%
Outside investors 13%
Alliances with other businesses 6%