Researchers Alicia Robb of the University of California at Santa Cruz and David Robinson of Duke University recently released a paper that analyzed data from the Kauffman Firm Survey, a study of the way that 5,000 new businesses founded in 2004 were financed. You can access the paper at The Capital Structure Decisions of New Firms. (PDF)
While the paper is written for academics, interested practitioners can skip over the theory and the mathematical model and just look at the facts that come out of the study.
Here is a list of the ones that I think are most interesting:
- Revenues: Approximately 17 percent of the businesses have more than $100,000 in revenue in their first year.
- Profit: 24.5 percent have more than $25,000 worth of profit in their first year of operation.
- Owner equity: The average amount of owner equity in these businesses is $27,365.
- Owner debt: Only about 25 percent of owners take on personal debt to finance their businesses, and those that do mostly borrow on their credit cards, averaging $3200 in credit card debt per new business.
- Outside financing: seven times as many businesses get outside debt as outside equity.
- Friends and family: Only 5 percent of the sample gets equity from friends or family.
I find it interesting that a small portion of firms have much better financial performance than others even in their first year of operation. Also interesting is the fact that founders don’t really put that much money into their businesses to get them started. Another fascinating fact is that the founders don’t really take on much personal debt, but get a lot of outside debt financing. Finally, it’s interesting that so few companies get outside equity, particularly from friends and family, who are often thought of as an important source of money for new businesses.
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About the Author: Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool’s Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By; Finding Fertile Ground: Identifying Extraordinary Opportunities for New Ventures; Technology Strategy for Managers and Entrepreneurs; and From Ice Cream to the Internet: Using Franchising to Drive the Growth and Profits of Your Company.
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Chris
I have to agree with all of your observations here of the facts as quite interesting. As a matter of fact, each and every one you listed was a bit of a surprise to me. Especially the fact that some 17% have more than $100k in revenue the first year. That’s quite surprising to me as is the fact that there is so little personal debt.
Hi Scott,
Terrific info here. Thank you. Do you know if they will continue the study so we might see if market conditions drive some of the numbers? Or do you think it would remain fairly constant?
I think I may be like most entrepreneurs and these sorts of figures motivate me — in contrast to the typical “4 out of 5 businesses fail” kind of data.
How many new businesses were started in 2004? Did the study share that? Thanks. I’ll go look at the study now that I’ve asked you all these questions… 🙂 and then see if it fits in the Research section here.
TJ
Susan Kishner
Well said
Brian
Looking at the report, I think it’s a bit confusing/misleading when the authors state that “Only about 1/4 of firms have some form of owner personal debt.” For some reason, they don’t appear to classify a personal bank loan to the “respondent” (who I assume is the owner) as “owner debt.” I would also think that a lot of the “Outsider Debt” is personally guaranteed by the owner, which would seem to make it pretty equivalent to owner debt.
Interesting report. Note that the average investment totals $78,000 from the various forms of financing – so not nothing, even for a services business.
For industry reports (available free) check out http://www.strategyiseverywhere.com/industry/
I’m surprised. I certainly thought that the financing and debt numbers/percentages would have been much higher. Interesting reading and I do hope they continue to track these trends. Wonder if there are any significant differences regionally/globally.
As 86% of these businesses are service industry businesses. The numbers make sense.
The generalizations are deceiving for any other style of business.
Martin Lindeskog
Interesting report. Is this a new trend?
Interesting stats. I would have assumed that more than 25% finance their businesses with personal debt. More shocking is that they only acquire around $3000 in credit card debt. I had always assumed that business owners who used their credit cards would rack them up to at least $10,000 or more. That statistic doesn’t include business credit cards right?
ravi
As 86% of these businesses are service industry businesses. The numbers make sense.
The generalizations are deceiving for any other style of business.