Small Business

The Truth About How New Businesses Are Funded
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Quiz time: Where do entrepreneurs most often get start-up funds?

A) Venture capitalists

B) Credit cards

C) Friends and family

D) Small business loans

E) From their own savings

The answer, in more than half the cases of startups, is E, from their own savings.

Hey, wait. What about all those venture capitalists funding all those startups?

It happens, but not as often as you'd think, says Paul Kedrosky, a senior fellow at the Kauffman Foundation, who sketches out the scenario for viewers, literally, in this animated video, "Money Game."

"More than half of young companies get all their funding from a combination of founder savings and then cash flow from the business," he says.

Next, he says, is credit cards. "Almost every young company, you can think of was funded on credit cards." Once they've hit their credit limit, they'll hit up friends and family.

Banks and venture capitalists come into play much less than you'd think, he says. In fact, "less than 20 percent of fastest growing companies in the U.S. took any venture capital money," he says. "They had all those other sources, and didn’t need it."

And that, he concludes, is not a bad thing.

"If you can run a company off cash flow, keep all the equity, there’s no better thing than being in full control of your destiny."