For generations, small businesses have been one of the most important drivers of economic growth in the United States. A company is considered a small business if it has less than 500 employees. According to Gallup.com, there are about 6 million businesses in the United States with one or more employees. Among these, 3.8 million have four or fewer employees and approximately 1 million have five to nine employees. When you consider that just 18,000 U.S. companies have 500 employees or more, it is clear that small businesses really are the backbone of the American economy.
The U.S. Small Business Administration (SBA) says that each year, about 400,000 new businesses are formed in the United States. Most of these are launched as one person ventures operating out of the home. Others are launched through the efforts of multiple co-founders.
For years, the annual number of business startups exceeded the number of businesses closures. However, after the economic collapse of 2008, that situation changed and the annual number of business closures began to outpace the annual number of startups. But according to the Kauffman Foundation http://www.kauffman.org/, that trend is finally reversing. Foundation data shows that the Startup Activity Index rose in 2015, reversing a downward trend and representing the largest year-over-year increase from the past two decades. Data shows that the Rate of New Entrepreneurs in the United States increased about 10 percent, from 280 out of 100,000 adults in the 2014 Startup Activity Index to 310 out of 100,000 adults in the 2015 Index.
While all of this is good news for the U.S. economy, the growth in the entrepreneurial activity and startups, also means increased competition for funding. When many entrepreneurs begin to explore avenues for funding their startup idea, three sources general come to mind: Venture Capital (VC); Angel Investors (“Angels”); and Crowdfunding.
But if you thought these three funding sources are where most U.S. startups get their capital to launch, you would be wrong. In fact, according to information presented in Entrepreneur.com http://www.entrepreneur.com/article/241331, combined, these three represent just a small portion of the funding sources entrepreneurs used to launch their startups last year.
Note: The percentages discussed below overlap and exceed 100% because many startups use a combination of funding sources to launch their startups. For example, an entrepreneur could initially self-fund a startup using funds from his or her savings. Then, as the business grows, the entrepreneur might obtain additional funding from family, crowdfunding, VCs, or Angels.
Data gathered from Entrepreneur.com shows that overall, 82% of startups are self-funded, either through savings, loans, or lines of credit. About 24% of startups launch with funds provided by friends or family.
Only 3% of startups are funded through crowdfunding campaigns. However, as new regulations governing crowdfunding began to take hold, particularly now that equity crowdfunding is allowed, this percentage should steadily increase in the coming years. From 2012 through 2014, crowdfunding increased to $5.1 billion. Since 2009, equity crowdfunding has shown a Compound Annual Growth Rate (CAGR) of 114%. Over the same period, rewards-based crowdfunding has shown a CAGR of 524%.
Based on the amount of media attention it gets, one might assume that Venture Capital is a major funding source for many of the startups launched in the United States each year. In terms of dollar volume, VCs provided a lot of funding for startups in 2014. According to the National Venture Capital Association www.nvca.org, annual Venture Capital investment topped $48 Billion in 2014 (the highest level in more than a decade). However, taking a closer look at the numbers, we see that Venture Capital actually accounts for a tiny percentage of how startups are funded. The NVCA says that the $48 billion funded just 4,356 startups in 2014. With approximately 400,000 new businesses formed in 2014, this means that only about 1 percent of these new ventures were funded with Venture Capital.
In comparison to VCs, Angel Investors fund far more startups and early-stage ventures each year. According to figures reported by the University of New Hampshire, Peter T. Paul College of Business and Economics Center for Venture Research (paulcollege.unh.edu/), in just the first half of 2014, a total of 30,270 entrepreneurial ventures received Angel funding. This represents a 5.9 percent increase from the same period in 2013. Assuming the second half of 2014 figures follow the same trajectory, more than 60,000 startups received funding from Angel Investors last year. This represents approximately 15% of the total number of new businesses launched in 2014.