The Washington PostDemocracy Dies in Darkness

No, entrepreneurs, most of you don’t need angel investors or venture capitalists

Mark Cuban and many other high-profile investors are in Austin this week for SXSW. (ABC/Adam Rose)

AUSTIN, Texas–It’s understandable, perhaps even inevitable, to walk away from events like South by Southwest with the impression that entrepreneurs must persuade investors to write them a big fat check in order to succeed in today’s start-up world. In many cases, it’s as much about validation as it is the money and with some of the most renowned investors strolling the streets of Austin in search of hot new companies, you could be forgiven for assuming something must be wrong when a new company mentions it’s – gasp – self-funded.

Only, that simply isn’t true. Not by a long shot.

During an event in Austin on Monday, the Kauffman Foundation outlined research dispelling some of the most common myths that distort America’s idea of the business-building process, tops among them the notion that most successful start-ups raise money from outside investors. Check out the chart below, from a decade-long study the Kansas City-based research and advocacy organization conducted on more than 5,000 new firms.

Kauffman’s researchers discovered that roughly two-thirds of the companies were financed by either personal savings, investments by friends and family or traditional loans. Only one in 10 obtained funding from venture firms or angel investors (individual start-up backers). In fact, credit cards – among the most expensive mechanisms of financing – was used more commonly by start-ups than either angel or venture funding.

“It’s very different than the stereotypical start-up story we hear about,” Arnobio Morelix, one of the group’s economic researchers, said during a presentation.

Now, wait. While that may be true for new companies across the entire economy – including everything from dry cleaners to law firms – it doesn’t capture the importance of outside investors to those fast-growing start-ups we think of in places like Silicon Valley, right? Surely, the businesses that actually take off and grow and create jobs rely much more heavily on well-heeled investors.

Not true either. While Kauffman’s study above included a representative sampling of new companies by industry, the group followed up with a similar survey more recently of the country’s 500 fastest-growing companies, as compiled annually by Inc. Magazine. Take a look.

Not much difference here, as only 7.7 percent of the fastest-growing companies took money from angel investors, while even fewer are backed by venture capitalists. Once again, personal savings and bank loans are far away the most commonly used source of funding.

Of course, that isn’t to say angel investors and venture capitalists aren’t enormously important for a certain subset of entrepreneurs, particularly those building companies whose survival depends on their ability to scale quickly. However, those companies that do not immediately attract attention from outside investors shouldn’t automatically throw in the towel.

“It’s a sexy story when a 20-year-old raises $2 million for a new company, and that’s what we hear about,” Morelix said. “Those stories are important, but they aren’t really representative of the process most start-ups go through.”

Follow J.D. Harrison and On Small Business on Twitter.