Entrepreneurs finance 57 percent of funding needs themselves, according to 2015 U.S. Global Entrepreneurship Monitor (GEM)
Options for funding entrepreneurial ventures are increasing in the U.S., particularly with the growth of crowdfunding and the prevalence of informal investors, but entrepreneurs still depend on bootstrapping and support from family and friends to finance startups—this according to the Global Entrepreneurship Monitor (GEM) 2015 U.S. Report (pdf) issued by Babson College and Baruch College.
Costs of launching a startup
In 2015, entrepreneurs needed a median level of $17,500 to start their businesses and financed 57 percent of funding needs themselves.
Women reported needing half as much funding to start companies as men — $10,000 and $20,000 respectively — suggesting that women felt they could accomplish what they needed with fewer resources, or that they simply have fewer resources to apply to their businesses.
“Globalization, changes in technology, and social awareness have provided an impetus to develop capital flows from diverse sources,” said Babson College Professor of Entrepreneurship Donna Kelley, the GEM Report’s lead author. “Startup activity benefits from widespread recognition of the role entrepreneurship plays in increasing employment and improving the economic health of the nation.”
The basic facts around startups costs
- Entrepreneurs needed a median level of $17,500 to start their businesses, up from $15,000 three years prior.
- In 2015, entrepreneurs financed 57 percent of their funding needs themselves.
- Women reported needing half as much funding to start companies as men, $10,000 and $20,000 respectively.
- Necessity entrepreneurs, motivated by the need to find work, required an average of $22,000. Opportunity entrepreneurs needed an average of $15,000.
- The most popular external funding source for all entrepreneurs came from banks, with 36 percent stating they used bank financing to start their business.
- Government sources also play an important role in business starts, providing to 22 percent of all entrepreneurs, and serving as the most popular source for those focused on social ventures.
- Crowdfunding, a still-emerging source, contributed to the financial needs of 12 percent of entrepreneurs.
Funding your startup with a bank loan?
Beyond personal sources, the most popular funding source for entrepreneurs came from banks, at 36 percent. “This is contrary to the common belief that banks are not the best source of finance for startups,” added Kelley, “This finding reveals the key role banks play in fostering entrepreneurship in their local economy.”
The government also played an important role in business starts. In addition to financing 22 percent of all entrepreneurs, government programs were the most powerful source of funding for social entrepreneurs, revealing the importance of government policy in helping entrepreneurs create lasting economic and social value.
- Crowdfunding, a still-emerging source, contributed to the financial needs of 12 percent of entrepreneurs.
- Six percent of the total U.S. population acted as an informal investor in an entrepreneurial venture.
Summarizing the results from above, all entrepreneurs, on average, drew funding from:
- Banks (36 percent);
- Family (24 percent);
- Private equity or venture capital (24 percent);
- Government (22 percent);
- Employers or work colleagues (16 percent);
- Friends (15 percent), and
- Crowdfunding platforms (12 percent).
Launching startup rates differ by race and age
Total entrepreneurial activity (TEA) in the United States declined by two percentage points to 12% in 2015, reversing a four-year trend of increasing TEA rates. This decline was entirely due to a drop in nascent activity, meaning that fewer people were entering entrepreneurship in 2015.
- With regard to ethnicity, African-Americans start businesses at higher rates than Caucasians (14% vs. 12%), but their established business ownership levels are little more than half that of Caucasians (4.5% vs. 8.7%). This raises questions about why so many African-Americans start businesses, while comparatively few have transitioned to the mature phase.
- Age patterns in TEA rates by gender show low rates (7% to 9%) among younger women (18 to 34 years) and older women (45 to 64 years), with a spike upward to 15% in the middle (35 to 44 years) age group. Men maintain high rates throughout their working ages, declining substantially only after age 55.
- Sixty-nine percent of entrepreneurs in the United States stated they were motivated to start by the pursuit of opportunity and they desired to increase their income or the level of independence in their work.
General research on cost to launch a startup
Financing Entrepreneurship
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- Sixty-nine percent of entrepreneurs in the United States stated they were motivated to start by the pursuit of opportunity and they desired to increase their income or the level of independence in their work.
- Americans remained highly confident in their abilities to start a business but saw fewer opportunities to do so.
- Opportunity perceptions dropped from a high of 51 percent in 2014 to 47 percent in 2015. This is the first drop since these perceptions begun to rise in 2010.
- While entrepreneurs in the United States report the highest level of capability perceptions at the innovation-driven development level (56 percent), one-third of all other economies surveyed report higher opportunity perceptions.
Social Entrepreneurship
- Twelve percent of Americans are leading an/or trying to start a social enterprise.
- Although these entrepreneurs tap a variety of funding sources, government funding is the most popular source.
- While women account for about 39 percent of total entrepreneurial activity in the United States, they account for 49 percent of social entrepreneurship activity.
- Examining social entrepreneurship activity by age shows that the 25-34-year-old age group is most active in trying to start social enterprises, with the 18-24 year-olds also quite involved.
- With regard to future employment, social entrepreneurs tend to be optimistic. They estimate the number of people working in their enterprises five years from now to be about 25 (also a median score)—a doubling of the current number of employees and another indicator of a growth-oriented, forward-looking branch of entrepreneurship.
Innovation and Technology
- Over one-third of U.S. entrepreneurs reported selling products or services that are new to some or all customers and with few or no competitors.
- The percentage of early-stage businesses using new technology and/or selling products or services based on new technology rose from eight percent in 2014 to 10 percent in 2015.
How Gender, Age, and Ethnicity Distribution factor in startup costs
- Entrepreneurship peaks among 35-44-year-olds at 17 percent.
- This age group is also most likely to engage in entrepreneurial employee activity.
- These high activity rates in this age group are accompanied by the highest level of opportunity and capabilities perceptions, as well as personally knowing an entrepreneur.
- Workforce participation rates among the 55 and over population suggest that entrepreneurship, as well as established business ownership, is a key means of employment for those still working in their older years.
- The rate of men’s entrepreneurship trends at one and a half times that of women since 2001.
- However, the rate of women’s entrepreneurship in the United States is higher than in most of the innovation-driven economies—even twice the rate of many innovation-driven European countries.
- Age patterns in TEA rates by gender show low rates (seven to nine percent) among younger women (18-34 years-old) and older women (45-64 years-old), with a spike upward to 15 percent in the middle age group (35-44 years-old).
- Men maintain high rates throughout their working ages, declining substantially only after age 55.
- Additionally, while gender gaps exist in TEA rates, they are greater among established business owners and employee entrepreneurs.
- Activity rates by ethnicity show the highest rates among African-Americans (14 percent), but only one-third this level of established business ownership activity.
- The Caucasian population, in contrast, reports somewhat lower startup activity (12 percent), with established business ownership at three-fourths the startup level.
- The Latino and Asian populations show both low startup and low established business activity.
- In 2015, 10 percent of entrepreneurs were starting businesses based on new technology, continuing a fluctuating but generally upward trend since hitting a low level of four percent in 2009
- Nationwide, there are more than 60 percent more men than women entrepreneurs.
- California and Florida have male rates equal to or greater than the overall U.S. level.
- New York and Ohio show an equal mix of both men and women engaged in entrepreneurial activities.
- Texas is close to equal and also has the highest rate of women entrepreneurs.
About the Global Entrepreneurship Monitor (GEM)
The Global Entrepreneurship Monitor (GEM) was initiated in 1999 as a joint venture of Babson College and the London Business School. Starting with 10 participating economies, the project expanded to include 73 economies in its 2014 survey. The latest global survey spans 62 economies. GEM is the largest and most developed research program on entrepreneurship in the world.
