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Using new data from the 2014 Annual Survey of Entrepreneurs (ASE), this data briefing looks across the largest fifty metropolitan statistical areas (MSAs) to see how entrepreneurs have fared in their quests to secure money from venture capitalists, angel investors, and online crowds. 

Venture Capital Received when Starting a Business:
While 10.3 percent of entrepreneurs report using personal credit cards when starting their business, nationally, only 0.6 percent initially received venture capital.

• The metros with the highest percentage of firms receiving venture capital funding when starting include: San Jose, CA (2.4%), San Francisco, CA (1.5%), Salt Lake City, UT (1.3%), Austin, TX (1.2%), Baltimore (1.1%), Birmingham, AL (1.1%), and Nashville, TN (1.1%).

• The metros at the bottom include: Chicago, IL (0.4%), Detroit, MI (0.4%), Jacksonville, FL (0.4%), New Orleans, LA (0.4%), Orlando, FL (0.4%), Washington, D.C. (0.4), Virginia Beach, VA (0.3%), and Cleveland, OH (0.2%).

Venture Capital Investment Trends across MSAs:
In 2014, roughly $68 billion was invested in venture capital deals in the United States and, 7,878 employer businesses reported receiving VC funds. Thirty percent of those recipients were located in just four metro areas: New York, Los Angeles, San Francisco, and Boston. The national average was 0.2%.

• Metro areas that rank highly in terms of those venture funding success rates include: San Francisco, CA (0.8%), San Jose, CA (0.8%), Boston, MA (0.5%), Hartford, CT (0.5%), Memphis, TN (0.4%), Minneapolis, MN (0.4%), Philadelphia, PA, (0.4%), Richmond, VA (0.4%), Washington, D.C. (0.4%).

• At 0.1 percent, the lowest ranked metros include: Baltimore. MD, Denver.CO, Jacksonville, FL, Las Vegas, NV, Orlando, FL, Riverside, CA, Tampa, FL.

Angel Investment Trends across MSAs:
Nationally, 8,900 firms (0.2%) received angel investments in 2014. Among firms that received the full amount they sought from angel investors, again, 30 percent were in just four MSAs.

• Metropolitan areas with the highest success rates of firms receiving the full amount of angel investments they sought include: San Jose, CA (1.0%), San Francisco, CA (0.7%), Boston, MA (0.5%), Los Angeles, CA (0.4%), Austin, TX (0.4%), and Charlotte, NC (0.4%). Metros at the bottom include Detroit, Cleveland, and Chicago.

• The metros at the bottom include: Chicago, IL, Cleveland, OH, Detroit, MI. Fifteen other metros have a rate of 0.2%.

Crowdfunding Investment Trends across MSAs:
With a national average rate of 0.1 percent, crowdfunding success rates, were lower than that for VC and angel funds. Again, four MSAs—New York, Los Angeles, San Francisco, and Washington, D.C.—accounted for 28 percent of firms that received all the money they sought from crowdfunding sources.

• At 0.3%, the top MSAs for crowdfunding success in 2014 are: San Francisco, CA, San Jose, CA, Washington, D.C., Charlotte, NC, Las Vegas, CA, Memphis, TN, Minneapolis, MN, Oklahoma City, OK, and Raleigh, NC.

• At 0.1 percent, the metros at the bottom include: San Diego, CA, Riverside, CA, Pittsburgh, PA, Orlando, FL, Kansas City, MO-KS, and Chicago, IL.

This briefing explores startup financing trends and how access and cost of capital impact profitability. To do so, we use data from the Annual Survey of Entrepreneurs (ASE). The ASE, conducted by the U.S. Census Bureau, is the largest annual survey of American entrepreneurs ever done and exists thanks to a public-private partnership between the Census Bureau, the Kauffman Foundation, and the Minority Business Development Agency.

The ASE samples approximately 290,000 employer businesses across all U.S. geographies and demographics and tells the story of the American entrepreneur. Below are key findings for this briefing:

Sources of Startup Capital

• Entrepreneurs of all racial backgrounds rely on three primary sources of startup capital: 1) personal and family savings (63.9 percent of all employer businesses), 2) business loans from banks (17.9 percent), and 3) personal credit cards (10.3 percent).
• However, different racial groups rely on these sources in different ways. Asian entrepreneurs rely the most on personal and family savings (73.2 percent of Asian-owned businesses), white entrepreneurs rely the most on business loans from banks (18.7 percent), and black entrepreneurs rely the most on personal credit cards (17.6 percent).

Seeking Follow-on Financing

• Most businesses reported neither needing nor seeking additional financing—aside from startup capital—in the survey year.
• However, certain businesses reported not seeking additional follow-on financing beyond startup capital, despite needing it. The top two reasons
• Whites and American Indians were the demographic groups most likely to avoid additional financing in order to not accrue debt (64 percent and 63 percent, respectively). Native Hawaiians and Blacks were the most likely groups to avoid financing because they believed their businesses would be rejected by lenders (60 percent and 58 percent, respectively).

Access and Cost of Capital Impact on Profitability

• Minorities are disproportionally hurt by the cost of and lack of access to capital. While approximately 16 percent of minority-owned businesses report profits being negatively impacted by the cost and lack of access, only about 10 percent of non- minority-owned businesses report the same.
• Black entrepreneurs, in particular, are almost three times as likely as whites to have profitability hurt by lack of access to capital and more than twice as likely as whites to have profits negatively impacted by the cost of capital.

Capital is obviously vital to entrepreneurs, and the sources and types of capital available to them are changing. The gaps that exist between investors and entrepreneurs have narrowed due to networks created by new technologies. Easier communication has created new ways for investors to aggregate and deploy capital. Furthermore, the transaction costs of capital formation are falling rapidly, as evidenced by the growth of phenomena such as crowdfunding, online angel syndicates, online lending, and new venture funds operating beyond traditional hubs and with novel investing goals.

The Kauffman Foundation seeks to provide improved data and analysis about trends in entrepreneurial capital formation so that we can encourage efforts to enhance the success rates of entrepreneurs everywhere. This report examines current developments in the field, draws out some broad trends, and considers their implications for entrepreneurs.

Data collection was carried out across several parts of the emerging capital landscape. Fourteen interviews were completed with experts across venture capital (VC), angel, crowdfunding, microfinance, and others involved with new financial technologies and products. Datasets and key industry publications were analyzed for venture capital (National Venture Capital Association and Thomson Reuters), angel syndicate investments (Angel Capital Association, Angel Resource Institute, Halo, and Pitchbook), angel investors (Center for Venture Research), and crowdfunding (Equity crowdfunding portals, Crowdnetic, and Kickstarter). More information on methodology and the datasets used can be made available upon request.

Based on interviews and data collected, we identified the following trends:

1. The VC industry is shifting at the biggest and smallest ends of the market.
2. Online platforms—for crowdfunding, angel syndication, and lending—are increasingly important options for seed-stage and early-stage startup needs.
3. Sources of capital are emerging outside of traditional geographical hubs.
4. Women are playing more decision-making roles in entrepreneurial capital.
5. There is robust experimentation with differentiated capital models.

In this report, we explore each of these trends based on a review of data, analyses, and case stories.