What is the Most Common Source of Funding for Entrepreneurs? [2023 Update]

No matter what kind of business you're launching, whether you're building a tech startup or kicking off your career as a content creator, you'll likely need capital. There are lots of different types of startup funding to consider; just as important is knowing where you're going to get the money. Today, we're focusing on the latter: the 6 most common sources of funding for entrepreneurs.

But before we jump in, we want to make a clear point: there are a lot of different types of entrepreneurs, including startup founders, small business owners, artists, athletes, creators, and consultants. We're proud to support a wide variety of these types of entrepreneurs through our work investing directly in individuals and their ideas.

From a (very) high level, there are 7 common sources of startup funding:

1. Personal Capital or Personal Savings

Source: Small Business Finance Frequently Asked Questions (February 2022)

This is by far the most common source of funding for small businesses and startups in the early stages. In fact, 75% of entrepreneurs surveyed by the Small Business Administration reported using personal savings. Another 10% reported using personal credit; all told, that means the vast majority of entrepreneurs are self-funding, at least in the beginning.

At the earliest stages, this may be the only way to get your company going. And some entrepreneurs choose to self-fund the entire way. (In the startup world, people who are self-funding their business throughout their growth journey often refer to themselves as "bootstrapping.") In other words, most entrepreneurs start with personal savings, but not all of them continue growing that way.

In 2022, the median amount of savings the average American under 35 has is about $3,500. The average is closer to $11,000. For most aspiring entrepreneurs, this just isn't enough to actually launch a business (it's barely enough to cover 3 months of expenses). That's why lots of entrepreneurs will start with their own capital, and quickly move to other sources of funding.

2. Financial Institutions (i.e. Banks and Credit Unions)

Some financial institutions such as banks or credit unions may provide capital to a new entrepreneurial endeavor. This typically looks like traditional debt, in the form of a business or personal loan. It can also look like credit debt. There's data to suggest that 20% of small business owners turn to a bank for funding; that number is smaller for early stage tech startups and creator businesses.

The benefits of turning to a traditional financial institution for a loan is that you don't have to give up equity. The downside is two-fold: you're on the hook, no matter how your business performs, and financial institutions tend to be more risk averse and less likely to lend to certain types of businesses.

3. Friends & Family Funding

Next up, the time-honored traditional of asking friends and family to support your business idea. Sometimes referred to as "friendly funding" or a "F&F round," this type of funding comes from people who know you and support you. It can be a great fit for some types of businesses. For example, this may be the only option for an athlete or artist looking to launch their career.

Money from friends and family can take many different forms: a debt agreement, an equity agreement, or even a hybrid.

That said, mixing business with personal relationships is risky.

4. Institutional Investors

These are the venture capital firms and private equity funds that might invest in a business, depending on their growth potential. There are also non-traditional institutional investors, like Chisos, that back entrepreneurs.

For hyper-growth or high growth potential startups, raising funding from a prestigious venture capital firm can be a great option. Not only can VCs invest larger sums, which is often critical to achieve growth potential quickly, they also typically offer additional support and resources. Global venture funding has been down significantly in 2023, about 20% MOM.

For other types of entrepreneurial endeavors, other institutional investors can be a powerful partner for scaling and growth, including via mergers and acquisitions.

5. Individual Investors

The phrase “individual investors” could refer to angel investors or crowdfunding investors. These are investors who are not currently in your network, and who are investing in entrepreneurs with their own capital.

Angel investors are affluent individuals who provide capital for a business startup, usually in exchange for ownership equity or convertible debt. Angels are often retired entrepreneurs or executives who don't just bring money but also valuable management advice and important contacts. In 2021, the Center for Venture Research estimated that there were 363,460 active U.S. angels investing in startups. If we expand the definition to include other types of entrepreneurs beyond startup founders, for example, small business owners, creators, athletes, and artists, this number is probably higher.

Crowdfunding is another popular type of funding that comes from individual investors; this approach allows entrepreneurs to raise small amounts of money from a large number of people. There's traditional crowdfunding (small amounts of money from lots of people, often in exchange for perks) and equity crowdfunding (where you grant ownership in your business). Crowdfunding can serve as a dual-purpose tool: it can help you validate your business idea while simultaneously raising funds. However, running a successful crowdfunding campaign can be time-consuming and requires strong marketing skills.

This is more common in the earlier stages of growth.

6. Government or Non-Profit Organizations

Government entities and nonprofits may offer grants or other forms of funding to early stage entrepreneurs. Some governments offer grants, subsidies, or low-interest loans designed to stimulate business growth in particular sectors. Unlike loans, grants usually don't have to be repaid.

Finding the right option for you will require a lengthy research and application process, so keep that in mind as you decide. That said, these sources can be a really meaningful stamp of approval for an entrepreneur, because there's typically stiff competition for these grants, and the organizations often represent a mission or purpose.

7. For-Profit Companies

For-profit organizations, such as some accelerator programs or corporations, may invest in entrepreneurs, too. This is more common in larger companies and corporations who have an innovation department. That said, some companies will offer grants or other resources to entrepreneurs in their sector or region as a way to give back to the community.

This path may be more available to startups. Large corporations often look for innovative startups to form strategic partnerships. In these arrangements, the larger company might provide funding, resources, or distribution channels to the startup. In return, the startup usually offers a product or service that complements the larger company's existing business. Corporate partnerships can bring credibility and a massive network to new businesses but tread carefully, as there's the risk of the smaller business being overshadowed or swallowed up.

Bonus: Business Earnings

After achieving some traction, most entrepreneurs begin funding their business through retained earnings. That is, the business begins to support itself. This is a really important milestone to celebrate.

Looking for capital to launch yourself as an entrepreneur? Chisos Capital is here to help.

We back individuals and their ideas as early as day one. You can apply online for capital using our free, easy application form.

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