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.