Raising capital for a startup is a difficult process. Convincing a person or entity to invest in a new business can feel like a dead end—most potential lenders or investors will want business history as proof that your business will succeed. And startups just can’t offer that.
Nonetheless, many new businesses before you have figured out how to make it work, and you can learn from their successes and challenges. To help you do so, we’ve compiled some of the most surprising startup funding statistics. Get ready to have your perception of raising capital for startup businesses altered:
Raising capital for startups isn’t all slide decks, pitching a concept, and multi-million dollar deals. Though most headlines will focus on the VC, Silicon Valley side of things, those stories are less than a percentage of what raising startup capital typically entails. And there are numbers to prove it.
Here are eight hand-picked statistics to show you the true nature of what raising capital for startups really looks like:
According to a poll run by Gallup, 77% of small businesses rely on the personal savings of their founders for initial capital needs . This means that, despite never-ending talk and news of startups raising capital through external sources, more than three-quarters of new businesses require financial skin in the game from founders—regardless of how much capital they’re able to raise externally.
That said, the financial skin in the game that financing a startup requires from founders might not be as significant as you think. According to the results of a study run by Kabbage, a third of small businesses start with less than $5,000 . Less than $5,000 of startup capital is a meager sum, especially when measured against the behemoth sums that many tech startups raise.
Whether you’re planning on starting a business with personal savings, equity, debt, or all of the above, the financial ramifications of opening up shop can be daunting. Nonetheless, if a third of small businesses can make do with less than $5,000 of initial funds, those ramifications might not be so dire.
Another poll, run by the Wells Fargo Small Business Index, found that the average small business requires about $10,000 of startup capital . This statistic, measured against the fact that a third of small businesses start with less than $5,000, shows just how widely startup capital requirements—and accessibility—can vary. While some small businesses are able to start up with less than $5,000 of capital, there are other small businesses that require and have access to much more capital, skewing this average upward.
Although about 100% of headlines on startup funding cover venture capital, only about 0.05% of small businesses raise startup venture capital . This stat comes from an Entrepreneur article and helps paint a more realistic picture of what startup funding looks like for your average new business.
Public perception of startup funding is justifiably skewed by disproportionate coverage of “seed funding,” “unicorns,” and “supergiants.” And that stuff is certainly exciting and worth writing about. But it represents less than a percentage point of startup funding as a whole. This stat is important for any aspiring small business owners to keep in mind as they attempt to fund any entrepreneurial pursuits.
Another statistic about raising startup capital that helps illustrate the drastic difference between startup venture capital and typical small business startup capital? The average seed round is $2.2 million, according to Natalie Dillon of Susa Ventures . That’s 200x times the $10,000 of startup capital that the average small business needs. Of course, many startups go through seed rounds in hopes to grow much, much larger than your average small business, intentions that will lead to much larger amounts of funding. However, these numbers, side-by-side, still help illustrate the outlying nature of venture capital within startup funding as a whole.
Nevertheless, seed funding and startup funding aren’t necessarily synonymous these days. In fact, in the same article, Dillon reveals that the average company raising a seed round of venture capital funding has already had 3.03 years in business . This means that businesses that successfully close their seed round of funding are already pretty well-established and have business history to leverage their way into venture capital.
To better understand the venture capital funnel, CB Insights studied a cohort of 1,119 startups that raised seed rounds over 10 years and found that just 12 exited with a $1 billion-plus exit valuation . That’s just 1.07% of the seed cohort. Though many exited the funnel through IPO, M&A, or becoming self-sustaining, which are ideal for some startups. Nonetheless, many cite this “unicorn status” of $1 billion-plus exit valuation as a goal for startups to aspire to.
According to Inc, startups with two co-founders are more likely to see success—and that success manifests in multiple ways. Within the context of raising capital for startups, this heightened success means an average of 30% more capital .
Though some might think of two startup founders as a recipe for power plays and bickering, it’s actually an indication of balance and well-roundedness. Investors like to see co-founders, rather than a lone-wolf entrepreneur, and their funding practices reflect that.
So, now that we’ve taken some time to look at the numbers of raising capital for startups, what do these numbers, considered as a whole, really tell us?
Though implications will vary based on the nature of your startup, these startup statistics offer a few universal insights that all new business owners would do well to grasp.
Zoomed out, these statistics clue us into the following narratives for the process of raising capital:
Initial startup capital will likely consist of money that you or your network pours into the business. Even if you plan to eventually raise venture capital and/or borrow money for your new business, you’ll likely need to have a few months—or even a few years—of business under your belt to do so. The average of about $10,000 of startup capital that small businesses need access to at the very beginning will need to come from somewhere, and the numbers show that most—77%—turn to their own money.
What’s the lesson to learn here? It’s simple—if you want to start a new business, you shouldn’t do so until you have a solid amount of savings to use as startup capital for your first few months.
Alternative options for initial startup capital could be going to friends and family for a loan or finding an angel investor who is willing to take a chance on your fledgling startup. That said, even these sources will likely want to see that you’ve invested your own equity into your startup before coming to them.
You can also consider business credit cards to free up your cash flow, as the main credential they require will be good personal credit. Plus, many business credit cards offer 0% intro APR periods that allow you to carry an interest-free balance for your first months with the card.
That said, if you end getting a business credit card for your startup, be sure you can pay off your spending. This is especially crucial for paying down your spending during a 0% intro APR period, as it can very easily add up. Starting off your business off with high-interest debt is a recipe for financial difficulty.
Compared to its state just 10 years ago, the venture capital landscape is has changed a lot. In fact, the average seed round of the cohort that CB Insights followed was $700,000. A decade later, the average seed funding round is $2.2 million. That’s impressive growth.
In the same article in which Dillon reports this $2.2 million average seed round amount, she also shares that the number of seed funds has only increased minimally.
Raising capital for a startup through seed funding will require that your startup stands out and has proven success. As Dillon puts it, “more and more seed investors have heightened expectations.” If you’re planning on raising capital for a brand new startup through seed funding, then be sure you’ve got a solid business plan, a comprehensive projected startup budget, and a stellar pitch.
As mentioned, the median age of a business going through a seed round is a whole three years in business. A decade ago, the median age hovered just over a year—a more apt age for a business going through a round of “seed” funding.
Dillon states, “We are experiencing a tectonic expectation shift across stages — seed deals look like As, As look like Bs and so on.“ Essentially, personal savings seem to be the new “seed funding.” With the heightened expectations of seed funders discussed in the previous section, startups have begun to bootstrap until they have something to meet these expectations.
This goes hand in hand with the increasing age of businesses that raise seed rounds of startup capital and the increasing size of seed deals. Though there’s no clear way to determine causality in these shifts in seed funding, it’s clear that they all build on each other.
Finally, it’s crucial to take stock of just how few startups reach that $1 billion exit valuation mark. Based on the Entrepreneur statistic that 0.05% of business raise startup capital through VC funding, the pool is small to begin with. Couple that small pool with the CB Insights stat just 1% exit the venture capital funnel with a $1 billion-plus valuation, and you’ve got a really small portion of startups as a whole.
This number isn’t meant to discourage new business owners, rather to simply regulate their expectations. Even if your business does successfully raise a first round startup capital through VC funding, the odds of reaching that $1 billion-plus exit are small. Be sure to keep this truth about raising startup capital at the front of your mind as your business grows and requires more funding.
There you have it: Eight startup funding statistics that test preconceived notions of how raising capital for a startup typically works. At the end of the day, there’s a lot to learn from these numbers beyond simply realizing that startup funding isn’t all VC firms funneling capital into mere ideas.
Though venture capital funding is at a peek, VC firms are taking fewer risks on brand new startups and are offering more money to a smaller proportion of startups. As a result, most new startup founders, whether they intend to raise VC capital, borrow business capital, or both, will need to rely on personal savings and network loans to bootstrap their businesses into demonstrable initial success.
With this initial success to show for, raising startup capital will be much easier. Having real revenues, budgets, and customers to back up your brilliant startup idea will help you effectively pitch to that seed funder or apply for that small business loan.