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, 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.”