24 Startup Funding: Traditional Venture Funding
CJ Cornell
Traditional Funding
Recently, the Ewing Marion Kauffman Foundation (the world’s foremost organization focusing on entrepreneurship and education), posted some data on the most common sources of funding for new companies:[1]
| Source | Amount | Share |
| Banks and Other Loans | 38,059 | 34.09% |
| Personal Savings | 32,658 | 30.00% |
| Friends and Family | 6,910 | 6.30% |
| Credit Cards | 6,756 | 6.20% |
| Angel Investors | 6,350 | 5.80% |
| Venture Capital | 4,804 | 4.40% |
| Government Related | 2,129 | 2.00% |
| Other | 11,350 | 10.40% |
| TOTAL | 109,016 | 100.00% |
But this data needs some interpretation: It appears that Angel and VC funding (the kinds most commonly associated with new ventures) barely total 10 percent of all startup funding.
This can be misleading. First: “new company” is not the same thing as a “startup” in the entrepreneurial sense of the word. The vast majority falling under the broad definition of “new company” are really small businesses—those that are not developing a new product or service, nor addressing new markets. Thus, the level of risk and investment needed is much lower than typical high-technology ventures.
In addition, the chart does not differentiate between the stage of company seeking funding. In other words, a startup’s founder might use personal savings, credit cards, and loans from family to get started—but once the startup becomes a company with a more definable product and market, it’s time for other forms of funding.
Venture Funding
In the context of startup ventures and entrepreneurship, funding equals external resources (usually money), plus some support. External means the resources are being controlled by individuals, groups, companies or organizations that are not officially connected to the startup venture. Resources means cash/money (usually), but in many cases resources are other instruments of value for the new company: a line of credit, office space, retail or manufacturing space, equipment, supplies, or access to distribution channels.
And since the funding source has a vested interest in seeing the new startup succeed, the funding often comes with support—in the form of advisors, board members, connection to key customers or markets, etc.
Attracting and Securing Funding
This is the big question on the minds of most new entrepreneurs. In the beginning, most aren’t too discerning. The type of funding needs to match the type of startup company, and its situation. For instance, if a startup company feels they can guarantee payback of a $500,000 loan within two years with 20 percent interest—but they approach venture capital firms—it will be a futile quest. Regardless of if it’s a good deal, financially, venture capitalists, as a general rule, just don’t loan money to startups.
Money is money, right? And this is the moment when entrepreneurs begin to waste a lot of time and effort chasing the wrong kinds of funding.
So, in the followin