Wall Street Journal: Forget Angels, Try Your Parents or Piggy Bank
The conventional wisdom in Silicon Valley is that venture capitalists and angel investors provide funding for the majority of startups. So most entrepreneurs start their journeys by knocking on their doors.
But this is almost always a waste of time because angels and VCs fund only a tiny portion of startups.
Harvard Business School professors William R. Kerr and Josh Lerner, and Antoinette Schoar of MIT, researched the investment decisions of one of the largest angel-capital groups, Tech Coast Angels. They found that 90% of the more than 2,000 startups that approached this group only garnered enough interest to elicit a follow-up offer from fewer than 10 of the group's angel investors.
These entrepreneurs had almost no chance of receiving financing. Only 2%—or about 20—of these 2,000 startups attracted enough interest from between 35 and 191 angels to move on to the next round of consideration, giving them, on average, a 40% chance of getting funded, according to the study's results.
My team at Duke University worked with Raj Aggarwal of University of Akron and Krisztina Holly at the University of Southern California to research the backgrounds of 549 entrepreneurs whose companies had made it past the begging-for-seed-money stage and were generating real revenue. We found that only 9% had raised any angel capital, and 11% had raised venture capital after they had grown. (There was some overlap between these two groups).
In other words, nine out of ten successful startups did it all on their own.
Where did the funding come from for those companies that failed to attract an outside investment? For the vast majority—70%—of successful entrepreneurs starting their first companies, it was from personal savings. A much smaller number raised money from business partners, bank loans, friends and family, and other sources.
If you don’t have savings and your co-founders are as poor as you are, and if mom and dad won’t loan you money, then your best bet is to find people that know you—your friends. If they too won’t help, then you’re stuck seeking out angel investors. Just be aware that not all of them are angels—some may jerk you around and waste a lot of your time.
While these figures may seem daunting, our research showed that there is some good news for founders seeking outside capital. For entrepreneurs who are launching their second, third or fourth startup, the percentage receiving venture funding increases to 26%, and the percentage securing angel financing climbs to 22%.
Correction: Harvard Business School professors William R. Kerr and Josh Lerner, and Antoinette Schoar of MIT, researched the investment decisions of one of the largest angel-capital groups, Tech Coast Angels. An earlier version of this essay excluded Ms. Schoar. Also, only 2%—or about 40—of these 2,000 startups attracted enough interest from between 35 and 191 angels to move on to the next round of consideration, giving them, on average, a 40% chance of getting funded, according to the study's results. Previously, this essay stated that about 20 of the 2,000 startups attracted enough interest from between 35 and 191 angels to move on to the next round of consideration.