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 is 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. Let's take a look at the data and research to share three facts about venture capital and entrepreneurship you may not know.
Various studies have found that only a very small number of startup funding comes from venture capitalists. Hellmann, Manju and Marco (2011) found that less than 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.
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 percent of them raised money from venture capitalists while 7.7 percent 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 percent 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.
While they may look contradicting on a first glance, the third fact here is essentially the mirror image of the second. 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 percent of startup funding comes from VCs, yet VC-backed companies make up 37 percent of IPOs and 6.5 percent of the high-growth companies is impressive no matter how you look at it.
Moreover, VC-backed companies have a disproportionate role in job-creation (5.3-7.3 percent) and innovation.
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.