The global financial downturn has left entrepreneurs more reliant on their own funding while new sources of entrepreneurial finance such as crowdsourcing are also gaining in popularity, according to the Global Entrepreneurship Monitor 2015-2016 Special Report on Entrepreneurial Finance.
The global financial crisis has left a lingering mark on entrepreneurship across the globe, with the majority of entrepreneurs (95%) relying on their own funding for start-up ventures.
Despite the fact that the average cost of starting a business has dropped, say the authors, access to finance is one of the most serious problems for businesses in many economies, with small and medium-sized businesses struggling the most.
“This recent financial crisis, the worst of the last 80 years, has had a profound effect on the economic as well as the entrepreneurial landscape,” say authors Dr Caroline Daniels, Mike Herrington and Penny Kew.
The last special report on entrepreneurial finance, which draws on data collected during the annual research cycle, was released ten years ago. Since then, availability of funds, sources of funding as well as the cost of starting a business have all evolved.
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 the fact that medians were used in 2015 as opposed to average amounts in the previous two reports means that a straight comparison is not possible, this does indicate a willingness among current entrepreneurs to start a business with fewer resources and the capability to do so and we think that this has to do with the influence of the internet,” says Herrington.
From a global perspective, 95% of entrepreneurs use personal funds when starting a business. Israel and Spain, at 79%, report the lowest percentage of entrepreneurs using their own money as a source of entrepreneurial finance. Rates of owner investment vary widely, from a low 47% in Burkina Faso and Senegal to 91% in China and 98% in Indonesia. Entrepreneurs are also increasing the proportion they invest on average – in 2004, they provided 66% of their start-up capital, while in 2015 they provided 72%.
“This indicates a much stronger sense of self-reliance in the present economic climate,” says Herrington.
Herrington says that use of own resources, sometimes called ‘bootstrapping’, is mostly born out of necessity when entrepreneurs cannot secure outside funding. “This is especially true for women entrepreneurs who may face unequal treatment from traditional lenders, both in developed and developing countries.”
Gender differences extend beyond banking. With the exception of just two economies, women entrepreneurs report needing less money to start a business than men. In Canada, men reported needing 8.5 times more funding – the highest gender gap reported.
For many entrepreneurs, their own savings, as well as contributions from neighbours, family and friends played an important role; investment 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.
“In all regions, the majority of informal investors provide funds to close family members, while a substantial percentage provide funds to friends and neighbours.”
Banks remain an important source of finance in all regions – their funding contributions range from a quarter of entrepreneurs in Africa and Asia & Oceania, to providing financing for a third of entrepreneurs in North America. Government funding also plays a role and is highest in North America and Europe.
But 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 globalisation 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 and Oceania, at 2%, 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.”
Download the special report from here.