3 Myths About Venture Capital and Entrepreneurship

The narrative of young entrepreneurs securing vast sums from venture capitalists for their startups, particularly in the tech sector, has become a celebrated tale of modern entrepreneurship. Unicorn companies, typically VC-supported, often grab headlines, and the allure of twenty-somethings raising millions in Silicon Valley is frequently spotlighted in entrepreneurial news stories.

Media outlets like TechCrunch and the portrayal of the startup world in the TV series “Silicon Valley” might lead one to believe that venture capital is the cornerstone of entrepreneurship, particularly when it comes to growth-focused ventures.

However, this isn’t quite the case.

Venture capital plays a unique and intriguing role in entrepreneurship, especially in fostering growth, but it’s not as pervasive as many assume. Here are three enlightening facts about the relationship between venture capital and entrepreneurship:

1. Venture Capital Funds a Minor Share of Startups
   Research indicates that venture capital contributes to a small fraction of startup funding. Hellmann, Manju, and Marco (2011) discovered that less than 1% of startup funding is provided by VCs. The Kauffman Firm Survey, an extensive longitudinal study of entrepreneurs, further revealed that only 4.4% of startup funding for about 5,000 companies came from venture capital, with angel investors contributing slightly more at 5.8%. The bulk of funding for startups in the United States is derived from personal savings, family and friends, and loans (Robb and Robinson, 2012).
2. The Majority of High-Growth Companies Don’t Rely on VC Funding
   Looking at startups that exhibit rapid growth, we find that venture capital still plays a minor role. A Kauffman survey led by Yas Motoyama, which included 479 of the fastest-growing private companies in America as per the Inc. 5000 list, showed that only 6.5% had raised funds from venture capitalists, while 7.7% had secured funds from angel investors. The primary sources of funding for these high-growth firms remained personal savings, loans, and friends and family.

Considering IPO companies, which typically aim for substantial exits and where founders might prioritize wealth over control, only 37% of IPOs from 1980 to 2015 had VC backing—a significant proportion, though not as large as some might expect.

3. VC-Backed Firms Have an Outsized Economic Impact
   Despite backing only a small percentage of startups, VC-backed companies play a substantial role in the economy. It’s noteworthy that VC funding accounts for less than 5% of startup funding, yet 37% of IPOs and 6.5% of high-growth companies are VC-backed. Furthermore, these companies significantly contribute to job creation, responsible for 5.3-7.3% of new jobs, and are often at the forefront of innovation.

In essence, while venture capital is a critical element for some businesses, it represents just one of many avenues through which business owners can grow their businesses. The alternative? Bootstrapping.

Alternative to Raising Capital For Your Business

The alternative is simple – choose not to raise capital. Bootstrapping a business, which means relying on one’s own resources and revenue generated by the business instead of seeking external investment, can be a highly effective and rewarding approach for entrepreneurs.

Here are several compelling reasons why bootstrapping can be preferable to raising capital:

Control and Ownership: Bootstrapping allows entrepreneurs to maintain complete control over their business decisions without the influence of investors. This autonomy ensures that the vision and direction of the company remain aligned with the founder’s original intentions. Full ownership also means entrepreneurs retain a larger share of profits and the eventual value created in the business.

Financial Discipline: Bootstrapped companies are forced to adopt stringent financial management practices since resources are limited. This discipline often leads to more thoughtful spending, encourages creative problem-solving, and instills a culture of efficiency that can benefit the company even as it grows.

Customer Focus: Without the pressure to meet investor expectations for rapid growth, bootstrapped businesses can focus on building a solid customer base and developing products or services that truly meet market needs. This customer-centric approach can lead to more sustainable long-term growth.

Avoiding Dilution and Debt: Raising funds through equity financing dilutes ownership, and taking on debt can lead to financial strain. Bootstrapping avoids these issues, allowing entrepreneurs to benefit fully from their hard work and success without worrying about repaying investors or creditors.

Agility and Adaptability: Bootstrapped companies can pivot and adapt more quickly because they are not beholden to investor timelines or expectations. This flexibility can be a significant advantage in rapidly changing markets.

Proof of Concept: A bootstrapped company that achieves success demonstrates a viable business model, which can be more attractive to investors if external funding is sought in later stages. At that point, the company can often negotiate better terms due to a proven track record.

Personal Satisfaction: There’s a profound sense of achievement that comes from building something from the ground up with limited resources. Entrepreneurs who bootstrap often feel a stronger sense of pride and accomplishment.

While bootstrapping is not without challenges and may not be suitable for all types of businesses, especially those that require significant upfront capital, it offers a viable path to success for many entrepreneurs. It fosters a strong foundation for the business, encourages innovation, and ultimately can lead to a more robust, self-sufficient company.