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United States Small Business Administration

RS Number 131

January 1993

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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