By Samuel Fromartz
The United States has the fattest wallet for backing start-ups among the major industrialized nations and the amount available — $60 billion — is far higher than previous estimates, according to a study released in July.
The study by the Kauffman Center for Entrepreneurial Leadership and Babson College found that entrepreneurial activity in the United States ranks among the highest in the world, with one-in-12 adults engaged in a new company start-up, compared with one-in-60 in Finland and Japan.
The net result is that the United States creates about 600,000 to 800,000 new companies every year, with another two million people every year entering self-employment. More than a third of new ventures are started by women.
Although many factors would account for the overall level of entrepreneurial activity, the availability of financing appears to give U.S. company founders a leg up.
The United States accounts for about 71 percent of the start-up capital available worldwide, the study said. Europe has about 19 percent, followed by Latin America with six percent and Asia with three percent.
Contrary to widespread impressions, venture capitalists account for only a small slice of the overall pie of private equity financing, the researchers said.
Of the estimated $60 billion spent annually in the United States to back start-ups, $56 billion — or 93 percent — comes from individual investors. Only $4 billion in seed financing comes from venture capitalists.
Previous estimates have put private equity financing from individuals at only $20 billion a year.
The study also said that of the 600,000-800,000 companies born every year, venture capitalists account for fewer than 1,000 — or less than 1 percent.
“It’s not the Microsofts that are accounting for all of this growth, but all the wannabes, the people who are taking loans, bootstrapping, opening up store fronts and starting companies every day,” said Michael Camp, head of research at the Kauffman Center in Kansas City, Mo.
But if venture capitalists back less than 1,000, how do the other 799,000 get financing? The study said financing of $50,000 to $1 million is particularly difficult and that most rely on family, friends and work associates.
The researchers found that 5.5 percent of all American adults made such an investment in the past three years, with the average slightly more than $5,000.
The impact of all this entrepreneurial activity on the U.S. economy cannot be underestimated.
While the Fortune 500 companies shed more 5 million jobs since 1980, the economy has added 34 million new jobs. Small businesses now employ 53 percent of the private work force.
Sixty-seven percent of all inventions also occur at small companies.
The 10-country study concluded that as much as a third of the difference in national economic growth may be due to differences in entrepreneurial activity.
The researchers analyzed data, conducted in-depth interviews with more than 300 national experts, and commissioned surveys of 1,000 adults in each country.
Article Copyright 1999 by Sam Fromartz. Reproduced with permission.
