Financing Entrepreneurial Ventures William D. Bygrave Babson College GEM2004 Conference London Business School January 20, 2005 Copyright © 2005 Babson College & London Business School

Sources of startup financing Entrepreneurs themselves Informal investors Venture capitalists

Prevalence Rate of Informal Investors, Adults years old

Amount of Informal Investment as a Percent of GDP

R 2 is the proportion of the variation that is explained by the trend line. An R 2 of.7785 indicates that 77.85% of the variation in annual amount per informal investor is explained by GDP per capita.

Self-Funding by Entrepreneurs Entrepreneurs themselves provide 65.8% of the capital for their new ventures. Total capital needed to start a new venture is $53,673. Entrepreneurs provide $35,317. External informal investors provide $18,356.

R 2 is the proportion of the variation that is explained by the trend line. An R 2 of indicates that 85.71% of the variation in startup funding is explained by GDP per capita.

R 2 is the proportion of the variation that is explained by the trend line. An R 2 of indicates that 85.71% of the variation in startup funding is explained by GDP per capita.

Classic Venture Capital as Percent of GDP

Amount of Classic Venture Capital USA and Other GEM nations

Number of Companies Receiving Classic Venture Capital

Classic Venture Capital Invested per Company

Classic Venture Capital Invested in High-Technology Sectors

81% 83% 73% Classic Venture Capital Invested in High-Technology Sectors 19% 17% 27%

67% 33% Number of High-Technology Companies Receiving All Stages of Venture Capital in G7 Nations

Trend in Domestic Investment of Classic Venture Capital USA 82% USA 83% USA 77% USA 70% Venture Capital Investment (1,000) USA 66%

Trend in Domestic Investment of Classic Venture Capital in G7 Nations USA 85% USA 86% USA 82% USA 75% Venture Capital Investment ($1,000) USA 74%

Implications & Recommendations Self-financing and informal investment are far and away the most important sources of startup financing. If self-financing and informal investment dried up, entrepreneurship would wither and die. On the other hand, if classic venture capital dried up, entrepreneurship in general would continue to flourish. Classic venture capital is primarily an accelerant in the commercialization of new products and services. It seldom funds revolutionary research.

Get your initial financing from yourselves, family, friends, work colleagues, and strangers (4Fs). Don’t even think about classic venture capital at the seed-stage. The odds on raising venture capital for a seed-stage company are worse than the odds on becoming a professional athlete! Entrepreneurs:

Policy Makers: Give entrepreneurs and informal investors a tax break and other incentives. Let classic venture capital take care of itself. Just treat classic venture capital as an asset class from the point of view of investors and pension funds.

Educators & Trainers: Pay much, much more attention to self-funding and informal investment as sources of startup capital. Pay much less attention to classic venture capital as a source of startup capital. Put much less emphasis on business plans and business plan competitions that target venture capital.

Researchers Conduct far fewer studies of classic venture capital and public stock markets as sources of financing for entrepreneurs. Conduct far more studies of funding by informal investors and self-funding by entrepreneurs themselves.

Founding and Supporting Institutions Babson College and London Business School