Doing Business in China

To start a business avoiding ten myths takes a lot of money Venture capitalists business angels are rich Start-ups debt Banks not lend money

1. It takes a lot of money to finance a new business. Not true. The typical start-up only requires about $25,000 to get going. The successful entrepreneurs who don't believe the myth design their businesses to work with little cash. They borrow instead of paying for things. They rent instead of buy. And they turn fixed costs into variable costs by, say, paying people commissions instead of salaries.

2. Venture capitalists are a good place to go for start-up money. Not unless you start a computer or biotech company. Computer hardware and software, semiconductors, communication, and biotechnology account for 81% of all venture capital dollars and 72% of the companies that got VC money over the past 15 or so years. VCs only fund about 3,000 companies per year, and only about one quarter of those companies are in the seed or start-up stage. In fact, the odds that a start-up company will get VC money are about one in 4,000. That's worse than the odds that you will die from a fall in the shower.

3. Most business angels are rich. If rich means being an accredited investor -- a person with a net worth of more than $1 million or an annual income of $200,000 per year if single and $300,000 if married -- then the answer is "no." Almost three quarters of the people who provide capital to fund the start-ups of other people who are not friends, neighbors, co-workers, or family don't meet Securities and Exchange Commission accreditation requirements. In fact, 32% have a household income of $40,000 per year or less and 17% have a negative net worth.

4. Start-ups can't be financed with debt. Actually, debt is more common than equity. According to the Federal Reserve's Survey of Small Business Finances, 53% of the financing of companies that are 2 years old or younger comes from debt and only 47% comes from equity. So a lot of entrepreneurs out there are using debt rather than equity to fund their companies.

5. Banks don't lend money to start-ups. This is another myth. Again, the Federal Reserve data shows that banks account for 16% of all the financing provided to companies that are 2 years old or younger. While 16% might not seem that high, it is three percentage points higher than the amount of money provided by the next highest source -- trade creditors -- and is higher than a bunch of other sources that everyone talks about going to: friends and family, business angels, venture capitalists, strategic investors, and government agencies.

6. Most entrepreneurs start businesses in attractive industries. Sadly, the opposite is true. Most entrepreneurs head right for the worst industries for start-ups. The correlation between the number of entrepreneurs starting businesses in an industry and the number of companies failing in the industry is 0.77. That means that most entrepreneurs are picking industries in which they are most likely to fail.

7. The growth of a start-up depends more on an entrepreneur's talent than on the business he or she chooses. Sorry to deflate some egos here, but the industry you choose to start your company has a huge effect on the odds that it will grow. Over the past 20 years or so, about 4.2% of all start-ups in the computer and office equipment industry made the Inc 500 list of the fastest growing private companies in the U.S. 0.005% percent of start-ups in the hotel and motel industry and 0.007% of start-up eating and drinking establishments made the Inc. 500. That means the odds that you will make the Inc 500 are 840 times higher if you start a computer company than if you start a hotel or motel. There is nothing anyone has discovered about the effects of entrepreneurial talent that has a similar magnitude effect on the growth of new businesses.

8. Most entrepreneurs are successful financially. Sorry, this is another myth. Entrepreneurship creates a lot of wealth, but it is very unevenly distributed. The typical profit of an owner-managed business is $39,000 per year. Only the top 10% of entrepreneurs earn more money than employees. And the typical entrepreneur earns less money than he or she otherwise would have earned working for someone else.

9. Many start-ups achieve the sales growth projections that equity investors are looking for. Not even close. Of the 590,000 or so new businesses with at least one employee founded in this country every year, data from the U.S. Census shows that less than 200 reach the $100 million in sales in six years that venture capitalists talk about looking for. About 500 firms reach the $50 million in sales that the sophisticated angels, like the ones at Tech Coast Angels and the Band of Angels, talk about. In fact, only about 9,500 companies reach $5 million in sales in that amount of time.

10. Starting a business is easy. Actually it isn't, and most people who begin the process of starting a company fail to get one up and running. Seven years after beginning the process of starting a business, only one-third of people have a new company with positive cash flow greater than the salary and expenses of the owner for more than three consecutive months.