United States Small Business Administration

RS Number 131

January 1993

Purpose

An entrepreneur's own contribution to the equity capital of their business is constrained by their wealth. If those constraints are binding, entrepreneurs often seek to attract equity capital from external sources. Because formal investors in small businesses incur relatively high transaction costs, some small business owners seek to attract informal investors. This report uses special survey data to explore how and where entrepreneurs find equity capital.

Scope and Methodology

This research was based upon analyses of survey data collected expressly for this project. The survey's primary sampling frame of 12,157 firms with fewer than 500 employees was drawn from the Dun's Market Identifier (DMI) file leased from the Dun and Bradstreet Corporation. Firms in certain industries, states and age groups were deliberately over-represented in the primary sampling frame to maximize the number of women-and minority-owned businesses interviewed.

All of the firms were first telephoned to obtain their owners' sex and race. Approximately 3,800 of the original 12,157 were disqualified from the survey at this point because their telephones were disconnected, their telephone numbers were incorrect or any of a handful of other reasons.

In the second phase of the survey, 4,500 randomly selected firms (from the remaining 8,323 in the primary sampling frame) were mailed a survey questionnaire during October 1982. Ultimately, survey responses were obtained for 699 firms. Because of the number of responses obtained from minority-owned firms, meaningful recapitulations of the data by individual minority group were not possible.

Highlights

Overall, this survey research revealed considerable similarities between minority- and non-minority-owned firms in terms of the amount, composition, and sources of their equity capital.

The current market value of equity capital was, on average, $291 million for non-minority-owned firms, and $236.2 million for minority-owned firms (for an overall average of $282 million). The differences between the observed equity capital endowments of minority- and non-minority-owned firms is not statistically significant.

Overall, 9.4 percent of the firms in the survey had one or more informal investors, a figure that is consistent with previous research. There were no statistically significant differences between minority- and non-minority-owned businesses in terms of their propensity to have informal investors, or in the number of informal investors in these businesses.

One component of businesses' equity capital is sweat equity (unpaid hours of work by small business owners). A very rough estimate of the average annual sweat equity capital investment in businesses is $8,2000, with a corresponding capitalized value of $41,200.

Owner-contributed property is another component of small businesses' equity capital. Roughly one-third of the owners in the survey proffered some personal property as part of their businesses' equity capital investment, with no significant differences between minority or non-minority owners' propensity to do so. Of those owners who contributed some personal property in the form of equipment, there was so significant differences between minority and non-minority owners in the average value of those contributions. Among non-minority-owned businesses with any owner-contributed real property, the average amount of equity capital of this type was $146,800, significantly higher than the corresponding figure of $43,100 for minority-owned businesses.

The largest holders of equity capital among the responding firms were the principal owners and their family members, at 50.1 percent. Friends and associates, and other public sources accounted for another 30.1 percent and 19.3 percent, respectively.

For more information, contact Advocacy's Office of Information at (202)205-6531.

Ordering Information

The complete report is available from:

National Technical Information Service

U.S. Department of Commerce

5285 Port Royal Road

Springfield, VA 22161

(800)553-6847

Order number: PB93-144582

Price Codes: A06 (Paper); A02 (Microfiche)

*Last Modified 6-11-01