Where startups get their funding — perception versus reality and how you can leverage this information to get funded

If you are an entrepreneur with a startup in need of capital, three potential funding sources are likely to come to mind: 1) venture capital (VCs); 2) angel investments (angels); and 3) crowdfunding. Given the amount of press and hype the three of these sources of startup capital receive, many people assume that one or more of these are how most startups obtain their funding. However, that is simply not true. In fact, only a tiny percentage of startups obtain their funding from VCs, angels or crowdfunding.

Venture Capital
A December 2016 report released by the Kauffman Foundation shows that each year, less than two percent of startups in the United States obtain their startup capital from VCs. The study showed that in 2014, VCs invested about $68 billion in 7,878 businesses across the United States. And among these, a full 30 percent of firms that benefited from those VC deals were in just four metro areas: San Francisco, Los Angeles, New York and Boston.

Angel Investors
Looking at the number of startups that receive their funding from angel investors, the percentages are not much higher. The Kauffman Foundation survey showed that in 2014, only about 8,900 startups were funded by angels. This represents only about 2.2 percent of the approximately 400,000 startups launched each year. Top cities for successfully connecting with angel investors include San Jose, San Francisco, Boston, Los Angeles, Austin and Charlotte. Chicago, Detroit and Cleveland are the toughest cities to be in if you are looking to get funding through angels.

Crowdfunding
There are four different types of crowdfunding campaigns startups can use to secure capital:

• Reward-based (contributors receive something of value in exchange for their contributions)
• Donation-based (funds are contributed with no expectation of reward)
• Loan-based (funds are paid back at mutually agreed upon terms)
• Equity-based (contributors receive a portion of equity in the company in exchange for their contributions)

Yet despite the growing popularity and all the media hype, statistics show that only about 3 percent (12,000) of startups are funded through crowdfunding campaigns each year. Of these, 28 percent of recipients were in four metropolitan areas: New York, Los Angeles, San Francisco and Washington, DC.

So where does most startup funding come from then?
While at least initially, founders may have a goal of obtaining capital from VCs, angels or crowdfunding, the numbers clearly show a different outcome. In fact, more than 80 percent of startups are self-funded, either through savings, retirement plans, loans or lines of credit. About 24 percent of new startups launched each year obtain their funding from friends and family (the numbers overlap because many startups are funded via multiple sources).

How you can leverage this information to secure funding for your startup
If you are an entrepreneur trying to figure out how to fund your new business venture, you might be disheartened to learn the dismal statistics about the ‘big three’ sources of startup capital. But knowing this information up front can give you a competitive advantage in your efforts to secure startup funding. Here’s how:

• Instead of building up false hope, create a realistic plan for raising the funds you need to launch your startup. Smart founders accept the reality of the startup funding landscape and plan accordingly. This means they don’t pin all their hopes on securing the funding they need from angels or VCs. Instead, the create a well-rounded plan that seeks to secure funding from all available sources, not just one.
• Don’t start pitching until you are ready. Many founders go from concept to raising funds without having the proper foundation in place or even validating their business model. When pitching your startup to investors, you often only get one chance to make the right first impression. Smart founders make sure they’ve got the right foundation in place and have perfected their pitch before they start pitching angels or VCs.
• Take a closer look at crowdfunding. It is important to note that as a late-comer to the startup funding scene, crowdfunding is growing rapidly and still evolving. From 2015 to 2020, the total global crowdfunding volume is expected to grow from $35 billion to more than $96 billion. Based on this expected growth, over the next several years, expect the percentage of startups that get their launch capital from crowdfunding to surge. After steps one and two above, explore crowdfunding as a potential capital source. While crowdfunding is not right for every startup, take a close look at the numbers and best practices to see if it might be right for you.

With few exceptions, raising the funding necessary to take a business idea from concept to launch is one of the most difficult challenges founders face in their entrepreneurial journeys. The process is almost always far more complicated, stressful, time-consuming and lengthy than expected. But if you are truly committed to launching your startup, then embracing this reality is one of the most important steps you can take in the quest for securing capital. By accepting the facts, planning accordingly and then taking the appropriate steps, you can exponentially increase the likelihood that you will be successful in your fund raising endeavors.