Start Up Funding - Lessons From Success

A study of 328 fast growing manufacturing and service companies conducted a few years ago found that most of them started without the help of outside capital. Almost three quarters of these highly successful companies, it turns out, were started with the founder’s own money perhaps with help from family and friends. Only 13% were able to attract investors, 8% used bank loans, and another 8% relied on supplier or customer alliances.

Another survey of 500 fastest growing U.S. companies of any kind conducted by Inc. magazine showed essentially the same general breakdown: almost 80% used personal savings, about 15% used bank loans, 13% family contributions, 12% employees or partners money, 9% came from friends, 6.3% was venture capital, 4% money mortgaged property, and less than 1% used government guaranteed loans. (None of them, you'll note used grant money. Despite that idiot on TV advertising FREE MONEY, it just isn't there except for specialized projects.)

So, how much did these successful, fast growing companies start with?

$1000 or less 13.0%

$1000-$5000 12.6%

$5000-$10,000 8.3%

$10,000-$25,000 13.3%

$25,000-$50,000 12.0%

$50,000-$100,000 15.6%

$100,000-$500,000 17.8%

$500,000-$1,000,000 2.8%

$1,000,000-$2,000,000 1.3%

$2,000,000-$5,000,000 1.3%

$5,000,000 and more 1.1%

So over a quarter of the Inc. 500 companies started with $5,000 or less, and more than half started with less than $50,000. The point is, you don’t need megabucks to start a company, not even a fast growing one.

However, a Coopers & Lybrand study found that growth companies that did receive money from outside investors typically started with three times more money and went on to produce 30% more revenue. But does that mean that if you want to make more money you should go after a bank loan to start? Not really. What you're looking at is probably more cause than effect: better grounded firms are more likely to qualify for a bank loan at start-up, and thus they're likely to make more money in the long run.

Although most company founders used their own money for start-up, of course, they probably would have preferred to use someone else’s. But the problem is most start-ups are unable to attract lenders or investors. But, as companies grow and prove their ability to generate cash flow and operate successfully, their financing options change—typically within two to three years.

If you're good at what you do, within a couple of years you'll get the money you need. The Coopers & Lybrand study, in fact, showed that on average by the 28th month in business two out of three surveyed companies were funded primarily by outside sources such as banks, venture capital, and alliances. Significantly, those companies that received funding from investors two to three years after start-up raised nearly five times more money than those receiving bank financing, and today they’re producing, on average, 30% higher revenues than their surveyed peers.

In short, the best way to be successful is to dig deep, use your own money to get started, prove the concept, and then go after money to grow.



Start Up Funding - Lessons From Success - To learn more about this author, visit Kate Lister's Website.

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