Four Myths About Starting a New Business

Here are four dispelled myths about starting a new business:

Savannah Now:

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.

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 percent of all venture capital dollars and 72 percent of the companies that got VC money during the past 15 or so years. VCs fund only about 3,000 companies per year, and only about a 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 1 in 4,000. That’s worse than the odds that you will die from a fall in the shower.

Banks don’t lend money to start-ups.

Federal Reserve data show that banks account for 16 percent of all the financing provided to companies that are 2 years old or younger. While 16 percent might not seem that high, it is 3 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.

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 in which you choose to start your company has a huge effect on the odds that it will grow.

During the past 20 years or so, about 4.2 percent 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 percent 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.

Image via SunnyVale

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