95 PERCENT OF ENTREPRENEURS WORLDWIDE FINANCE THEIR OWN STARTUPS
The global financial crisis has left a lingering mark on entrepreneurship across the globe, with 95 percent of entrepreneurs relying on their own funding for startup ventures—this according to the Global Entrepreneurship Monitor 2015-2016 Special Report on Entrepreneurial Finance (pdf), released with sponsors Babson College, Universidad Del Desarrollo, Universiti Tun Abdul Razak, and Tecnológico de Monterrey.
This special report studied entrepreneurial finance patterns across the globe. The last of its kind was issued 10 years ago, prior to the 2008 downturn. Since then, availability of funds, sources of funding, as well as the cost of starting a business have all evolved.
“Although the average cost of starting a business has dropped, access to finance is one of the most serious problems for businesses in many economies, with small and medium-sized businesses struggling the most,” said Babson College Senior Lecturer and report co-author Caroline Daniels.
The average amount needed to start a business in 2004 was $54,000 and $65,000 in 2006. In 2015, the median amount was just $13,000.
“Although medians were used in 2015, as opposed to average amounts in previous reports, this drop does indicate a willingness among current entrepreneurs to start a business with fewer resources and the capability to do so. We think that this has to do with the influence of the internet,” said co-authors Mike Herrington and Penny Kew.
“This indicates a much stronger sense of self-reliance in the present economic climate,” adds Herrington.
Entrepreneurs are also increasing the proportion they invest on average—in 2014, they provided 66 percent of their startup capital, while in 2015 they provided 72 percent.
For many entrepreneurs, their own savings, as well as informal investments from neighbors, family, and friends played an important role; contributions from strangers was rarer. “Beginning life in a privileged position, therefore, still gives entrepreneurs a jump-start, particularly in Africa and North America, where rates of informal investment are highest,” says Kew.
The impact of informal investment on entrepreneurship is immense. Since 2012, an average of six percent of the global adult population have provided informal investment to an entrepreneur per year, totaling over $1 trillion between 2012 and 2015. This is an increase since the 2006 GEM report on financing, which calculated that four percent had provided informal investment, totaling $600 billion. (Note: 42 countries participated in the 2006 GEM survey, compared to 66 countries from 2012-2015).
The report shows that traditional forms of entrepreneurial finance are increasingly being supplemented by burgeoning sources such as peer-to-peer lending, crowdfunding, microfinance, and community cooperatives. At the same time, industries, business models, and the concept of the ‘marketplace’ is being redefined by mobile technology.
Daniels says globalization and the role of technology—including social media—cannot be underestimated, particularly in more developed nations. “Entrepreneurs in North America are substantially more likely to have access to more sophisticated sources of entrepreneurial funding, such as VC and crowdfunding,” she explains. “Fourteen percent of North American entrepreneurs are financed through crowdfunding. By contrast, Africa and Asia & Oceania, at just two percent, lag significantly in terms of access to this form of funding.”
Business is increasingly global, adds Daniels. “As the awareness of who has access to resources is growing, stakeholders are exploring ways to increase the types of financing available in all economies.”
Additional Key U.S. Findings
- North Americans are the most likely to fund work colleagues.
- They are also the group most likely to fund strangers—a fifth of informal investors in North America fall into this category.
- North America has the second highest percentage of early-stage entrepreneurs who received funds from informal investors at 11 percent. Africa had the highest at 12 percent.
- Globally, North American entrepreneurs required the highest amount of capital to start a business, alongside Europe.
- In North America, entrepreneurs projecting six-plus jobs require seven times more money, on average, than those projecting zero to five jobs.
- This compared to a differential of 2.5 in Latin America and the Caribbean.
- North America reports the highest internationalization levels of all regions alongside Europe, with each region reporting, on average, around one fifth of entrepreneurs with substantial international sales (25 percent or more).
About the Report
The Global Entrepreneurship Monitor 2015-2016 Special Report on Entrepreneurial Finance analyzes the GEM 2015 findings on entrepreneurial finance. A key focus is to develop an understanding of the current entrepreneurial financing ecosystem as experienced by GEM’s diverse set of economy members, and to highlight regional, as well as economic development phase trends in terms of sources and usage of entrepreneurial finance.
This special report is authored by Babson College Senior Lecturer of Entrepreneurship Caroline Daniels; University of Cape Town Professor and Global Entrepreneurship Monitor Executive Director, Mike Herrington; and Penny Kew.
About the Global Entrepreneurship Monitor (GEM)
The Global Entrepreneurship Monitor (GEM) was initiated in 1999 as a joint venture of Babson College and the London Business School. Starting with 10 participating economies, the project expanded to include 73 economies in its 2014 survey. The latest survey spans 62 economies. GEM is the largest and most developed research program on entrepreneurship in the world. GEM is unique because, unlike most entrepreneurship data sets that measure newer and smaller firms, GEM studies the behavior of individuals with respect to starting and managing businesses. GEM academic teams in each participating economy are members of an exclusive research project that provides access to the collective knowledge of some of the world’s most renowned researchers and institutions involved in entrepreneurship research. At a time in history when individual entrepreneurial activity may hold the key to transforming the global economy and discouraging ingrained economic disparity in countries with minimal economic opportunity, GEM data has influenced national economic policies and continues to expand its collaborative role. Global sponsors of the research include Babson College (lead sponsor) in the United States, Universidad Del Desarrollo in Chile, Universiti Tun Abdul Razak in Malaysia, and Tecnológico de Monterrey in Mexico. For more information, follow GEM on Twitter.
About Babson College
Babson College is the educator, convener, and thought leader of Entrepreneurship of All Kinds®. The top-ranked college for entrepreneurship education, Babson is a dynamic living and learning laboratory where students, faculty, and staff work together to address the real-world problems of business and society. We prepare the entrepreneurial leaders our world needs most: those with strong functional knowledge and the skills and vision to navigate change, accommodate ambiguity, surmount complexity, and motivate teams in a common purpose to make a difference in the world, and have an impact on organizations of all sizes and types. As we have for nearly a half-century, Babson continues to advance Entrepreneurial Thought & Action® as the most positive force on the planet for generating sustainable economic and social value.