Editor’s note: This post was republished with permission from the Ewing Marion Kauffman Foundation’s Growthology blog.
This post in a series by the Growthology team, where we will take a look at some of the topics discussed in State of the Field, a compilation of knowledge on entrepreneurship research written by the leading experts in the field.
Venture capital and VC-backed startups are some of the most popular archetypes of entrepreneurship. Unicorns, which we usually only hear about if they are investor-backed, dominate the news. 20-year olds raising 20 million dollars in the Bay Area for a tech company are a sexy story, and get a lot of airtime in news about entrepreneurship regardless of how prevalent they are.
Between TechCrunch and the TV show Silicon Valley – awesome as both those are – it’d be easy to think entrepreneurship, especially growth entrepreneurship, is all about venture capital.
It is not.
While venture capital is an important and fascinating input to entrepreneurship in general and to growth entrepreneurship in particular, the role VC plays is a lot different from what most of us assume. So, on this blog post, I take a look at the data and the research to share 3 facts about venture capital and entrepreneurship you may not know.
(By the way, if you are interested in growth entrepreneurship – from well-known VC-backed IPOs to silent killers– we are launching later this month the first-ever Kauffman Index of Growth Entrepreneurship. You can learn more here and sign up below.)
1) Less than 5% of startup funding comes from venture capitalists
Various studies have found that only a very small number of startup funding comes from venture capitalists.Hellmann, Manju and Marco (2011) found that 1% of all startup funding came from VCs, and data from the Kauffman Firm Survey – the longest and largest longitudinal study of entrepreneurs to date – shows that 4.4% of startup funding came from VCs for the roughly 5,000 companies studied (angel investors provided 5.8% of the funds). Most of the startup capital in the country comes from personal savings, friends and family, and loans. (Robb and Robinson, 2012).
While the “mind share” of VCs looms large for most us, their actual prevalence among startups is relatively small.
2) Most high-growth companies are not VC-backed
A natural follow-up question to the data points above is: “sure, when you look at all startups VCs don’t play a large role, but what if we focus only on those startups that grow?”
When we look at high-growth firms, we see that venture capitalists have a larger presence among them than just among the general startups. A survey my colleagues at Kauffman (led by Yas Motoyama) did with 479 Inc. 5000 companies – some of the fastest-growing private companies in America with at least multi-million dollar annual revenues – found that only 6.5% of them raised money from venture capitalists while 7.7% of them raised money from angel investors. Again, even among those high-growth companies, the most common sources of funding were personal savings, loans, and friends and family.
When we look at IPO companies, which are a pretty specific type of growth firm – often looking for a large exit, and with a founder that likely puts higher priority in wealth than control – we see a higher VC presence. 37% of the IPOs between 1980 and 2015 were VC-backed – which is a pretty high number, though less than most of us would assume.
There are many paths to entrepreneurial growth, and taking venture capital funding is an important one. But it is just one of them, and it is not the path most growth companies take.
3) VC-backed companies have a disproportionate impact on the economy
While they may look contradicting on a first glance, the fact #3 here is essentially the mirror image of #2. VCs fund only a small number of startups, but the companies they fund have a disproportionate impact on the economy. The fact that less than 5% of startup funding comes from VCs, yet VC-backed companies make up 37% of IPOs and 6.5% percent of the high-growth companies is impressive no matter how you look at it.
 After all, valuations usually happen when a company is either 1) raising money, or 2) selling out (e.g., M&A or IPO). If you are a private founder-owned company not doing either of these things, how would the public find out you are worth a billion bucks? Possible, but pretty unlikely.
Arnobio Morelix is a senior research analyst and program officer in Research and Policy at the Ewing Marion Kauffman Foundation, where he is a principal investigator on the Kauffman Index of Entrepreneurship, the first and largest index tracking entrepreneurship across city, state, and national levels.
Morelix also is an editor of Kauffman’s entrepreneurship research blog, Growthology.org, which is syndicated by Missouri Business Alert.
Find Morelix on Twitter: @arnobiomorelix.