AUSTIN, Texas–It’s understandable, perhaps even inevitable, to walk away from events like South by Southwest with the impression that entrepreneurs must persuade investors to write them a big fat check in order to succeed in today’s start-up world. In many cases, it’s as much about validation as it is the money and with some of the most renowned investors strolling the streets of Austin in search of hot new companies, you could be forgiven for assuming something must be wrong when a new company mentions it’s – gasp – self-funded.
During an event in Austin on Monday, the Kauffman Foundation outlined research dispelling some of the most common myths that distort America’s idea of the #business-building process, tops among them the notion that most successful start-ups raise money from outside investors. Check out the chart below, from a decade-long study the Kansas City-based research and advocacy organization conducted on more than 5,000 new firms.
Kauffman’s researchers discovered that roughly two-thirds of the companies were financed by either personal savings, investments by friends and family or traditional loans. Only one in 10 obtained funding from venture firms or angel investors (individual start-up backers). In fact, credit cards – among the most expensive mechanisms of financing – was used more commonly by start-ups than either angel or venture funding.
“It’s very different than the stereotypical start-up story we hear about,” Arnobio Morelix, one of the group’s economic researchers, said during a presentation.
Now, wait. While that may be true for new companies across the entire economy – including everything from dry cleaners to law firms – it doesn’t capture the importance of outside investors to those fast-growing start-ups we think of in places like Silicon Valley, right? Surely, the businesses that actually take off and grow and create jobs rely much more heavily on well-heeled investors.