Abstract
Academic and policy makers’ interest in start-up business financing originated from two areas of concern – capital requirements for a start-up and the availability of external sources of private financing for a start-up. The former is important because underestimation of capital requirements has been mentioned by most small business management professional as one of the most critical deficiencies in start-up planning affecting the prospect for success or survival of a start-up (Studies on “new firm creation” using the Panel Study Entrepreneur Dynamics (PSED) data concluded that majority of nascent entrepreneurial start-ups failed to become operational businesses (Reynolds 2007).) Many nascent entrepreneurs have lost their lifetime savings in starting a business by being overly optimistic about the time and the resources it takes to develop and operate a viable business. The amount of capital required relative to the availability of internal resources will determine the need for external sources of capital. (Internal resources include monetary resources such as personal savings, other income (from the spouse as well), personal credit lines, as well non-monetary resources such as an office/work place at home, office equipment and telecommunication facilities, and personal transportation.) Unavailability of external sources of financing from private capital markets has been blamed for the high failure rate among start-ups.
This chapter updates information about the databases available for researchers in conducting financial research on small and startup firms. Three major databases on startup financing are discussed in detail, including comments on the strengths and weaknesses of each of the three major databases regarding their uses for conducting different types of research. It is followed by a review of major data sources for small firm financing, including time-series information, on activities in specific financing markets for small firms.
*This chapter is an updated version of the author’s work previously published in the Journal of Entrepreneurial Finance & Business Ventures (Now Journal of Entrepreneurial Finance), Ou, C. Statistical Databases for Economic Research on the Financing of Small Firms in the United States, December, 2005 Journal of Entrepreneurial Finance and Business Ventures 10(3), 35–61.
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Notes
- 1.
A database conducive to time-series analysis requires consistency in both the definition of variables and the statistical methodology of data collection.
- 2.
Preserving the privacy of the subjects of research – avoiding revealing the identity of individual reporting units – is a major concern of statistical collection agencies.
- 3.
Examples include IRS Statistics of Income Division’s individual income tax public use files and the Bureau of the Census Business Information Tracking Series files.
- 4.
US Small Business Administration, Office of Advocacy, Small Business by the Numbers.
- 5.
For example, flow information might include output, sales, and profits during a given quarter or a given year, as contrasted with stock-type information on the number of employees, value of total assets, or value of debts outstanding as of a certain date. This is one reason statistics collected in many commercial databases are not used by researchers as aggregated statistics for comparisons over time. For example, employment data from the Dun & Bradstreet file are not suitable for analysis of job creation over time by small firms in the USA.
- 6.
In this respect, data collected through interviews are more accurate than that obtained through mail surveys, unless the questions in the mail survey are simple and easily understood. Data collected in the SCF and SSBF are examples – all terms were well defined and interviewers were well trained to explain the terms when necessary.
- 7.
For more information about the KFS survey design and methodology, please see Ballou et al. (2007). A public use dataset is available for download from the Kauffman Foundation’s website and a more detailed confidential dataset is available to researchers through a secure, remote access data enclave provided by the National Opinion Research Center (NORC). For more details about how to access these data, please see www.kauffman.org/kfs.
- 8.
The D&B business master list is one of the most comprehensive privately maintained business registry in the USA (some 10 million business entries). However, there are 25 million businesses in the USA in 2004 and many of these businesses are non-employer firms (19.5 million of them) and majority of them had annual revenues below $10,000. See Office of Advocacy, US Small Business Administration, The Small Business Economy-2008, Table A.1, July, 2009.
- 9.
Those nascent entrepreneurs that never become a start-up as defined by KFS will, of course, not be covered at all.
- 10.
The ability of the owner(s) to carry out a time-consuming start-up with no monetary compensation is much more constrained to a low-income, unemployed potential nascent business owners.
- 11.
The survey collected detailed information for a comprehensive assessment of the business creation process by a nascent entrepreneur. Data collected included factors that affect an entrepreneur’s decision to create a business as well as those factors that “may be associated with completing the start-up process with a new firm” (Reynolds 2007).
- 12.
Reynolds (2009).
- 13.
With questions on: additional equity provided by the start-up team members; additional loans to business from such sources as personal asset backed loans; lease commitments on physical assets; working capital loans; supplier credit;owners’ personal loans; personal loans from of spouses, relatives, kin personal loans; employee and other persons; credit card debt to the new business; bank loans to the new business; and government agency loans.
- 14.
See Reynolds (2009).
- 15.
SBO statistics describe the characteristics of US businesses by ownership category, i.e., by gender, Hispanic or Latino origin, and race of principal owners; by geographic area at the national, state, and sub-state regional levels; by 2-digit industry sector based on the 2002 North American Industry Classification System (NAICS); and by size of firm (employment and receipts). Summary reports of the 2002 SBO include – the Company Summary, released on September 14, 2006, and two additional reports on Characteristics of Businesses and Characteristics of Business Owners, released on September 27, 2006. (www.census.gov/econ/sbo/index.html), See also Fairlie and Robb (2008).
- 16.
However, several important pieces of information on the characteristics of start-up firms and their owners asked in 1992 CBO were omitted in the SBO (2002) (see also Fairlie and Robb 2008). Since information about the owners was derived from the business populations based on the tax returns files, basic business information such as business organization forms, etc. was collected from administrative records.
- 17.
The questions on start-up financing asked in 2002 survey were found deficient in collecting the needed information on various sources of financing, in addition to the problems related to defining a “start-up” in an one-time survey. Though improved, problems remain in the new survey instrument for the upcoming 2007 SBO.
- 18.
Some 10% of “start-ups” in the PSED-II became “new firms” (initial profitability) after two follow-up interviews (i.e., 24 months after entry to start-up process). See Reynolds (2009). Consequently, the majority of the start-ups will continue to require injection of additional capital several years after the start-up year, however, defined.
- 19.
The first two surveys were called the National Survey of Small Business Finances (NSSBF). The Small Business Administration co-sponsored the first two surveys in 1988 and 1993. The Federal Reserve Board conducted a new survey covering information for the year 2003 during 2004–2005. The 2003 SSBF has been available for public use since 2007. For details, please visit www.federalreserve.gov/pubs/OSS/OSS3/nssbftoc.htm
- 20.
See Bitler et al. (2001). See also US Small Business Administration (September 2003).
- 21.
Despite an extra effort extended to increase the response rates for minority-owned firms in the 1998 survey, the outcome was a disappointment to the Federal Reserve Board’s project director. The final count of small minority-owned firm respondents was 273 African-American owned firms, 214 Asian-origin firms, and 260 Hispanic-origin owned firms.
- 22.
It is always expensive to collect financial information from small businesses – because of the high costs of reaching the potential respondents, obtaining successful responses, editing the responses, etc. The costs are belied to have amounted to several hundred dollars per successful response for the 1998 and 2003 surveys. High cost has been one of the major considerations in the Federal Reserve Board’s decision on conducting this survey.
- 23.
- 24.
Major reporting problems occurred in the first year (1993), but since 1994, the data have been mostly reliable.
- 25.
Origination amounts are the larger of the loan extension, loan commitment, or total loan value if the extension is part of a loan participation.
- 26.
However, a member of a bank holding company (BHC) can file a separate report or report its activities in the consolidated report filed by the parent BHC.
- 27.
See, KeyPoint Consulting, LLC, (by Hancock, Wilcox, and Peek) the Effects of Mergers and Acquisitions on Small Business Lending by Large Banks, a report prepared for the US Small Business Administration, Office of Advocacy (March 2005). www.sba.gov/advo/research/banking.html
- 28.
For more information about the history of the CRA, see Home purchase lending in low-income neighborhoods and to low-income borrowers, Federal Reserve Bulletin, 71–105, February 1995, and New information on lending to small businesses and small farms: the 1996 CRA data, Federal Reserve Bulletin, 1–35, January 1998.
- 29.
See Table G in US Small Business Administration (December 2003).
- 30.
Given the recent increase in interstate mergers, call report data become less relevant and CRA data become more relevant in understanding the lending activity in a given state.
- 31.
For example, in the call report database, Wells Fargo is shown as located in California, but the CRA database shows Wells Fargo lending in all 50 states. Consequently, CRA data are important in analyzing the state-by-state lending behavior of the larger banks.
- 32.
However, this assumes that small loans are initiated with small firms. In some situations, this assumption may not be tenable. The 1997 revision to the CRA required banks to report loans to businesses with annual revenues under $1 million. This should provide useful reference information.
- 33.
In the 2000 version of The Bank Holding Company Study, matching was successful so that both the Call Report and CRA information on BHCs could be ranked using Advocacy’s four-variable methodology.
- 34.
Data became available in 1997. See also annual analyses of banks’ lending to small firms by the US Small Business Administration (December 2003), and editions for years from 1994 through 2001.
- 35.
For the 2001 Survey of Consumer Finances, the median-length interview required approximately 79 min, although complicated cases took substantially longer.
- 36.
See Kennickell and McManus (1993) for a discussion of the sample design. The list frame is based on statistical records derived from tax returns. The list sample is designed to over-sample relatively wealthy families (excluding the Forbes’ 400 wealthiest in the USA). Of the 4,449 completed interviews in the 2001 survey, 2,917 families came from the AP sample and 1,532 came from the list sample. The response rate for the AP sample was about 68%. The overall response rate for the list sample was about 30%.
- 37.
See Haynes and Ou (November 2003) (www.sba.gov/advo/research/).
- 38.
See also Haynes et al. (1999).
- 39.
The database could be an useful source of information on small sole proprietorships owned by American households—those that have yet to be captured in the Census Bureau file. In the 2010 Survey, the Federal Reserve has included an extensive survey on the sources and the uses of financing the businesses owned by business owners. The 2010 SCF data should be available to the public in 2011.
- 40.
Internal Revenue Service, Statistics of Income Division, Sole Proprietorship Returns, various years; Partnership Returns, various years; Corporation Income Tax Returns, various years, and Corporate Source Book, various years. However, no balance sheet information is required in the sole proprietorship tax filings. See also the SOI Division’s SOI Bulletin for articles about these publications, as well as an analysis of the developments in these sectors.
- 41.
The sample sizes are around 12,000 for corporate tax returns and 50,000 for sole proprietorship returns.
- 42.
The US Department of Commerce’s Bureau of Economic Research and Bureau of the Census have made much use of the SOI database. SOI data on corporations have also been essential for reaching high-income households in the USA for the Survey of Consumer Finances.
- 43.
Prentice Hall, Financial ratios for US Business, various years (until 1985?).
- 44.
See The State of Small Business: A Report of the President, 1987,.
- 45.
Consequently, it is not very meaningful to calculate one important indicator – the debt-to-equity ratio. The broad NAICS industry grouping does not help either.
- 46.
NFIB Research Foundation, Credit, Banks, and Small Business – the New Century, at www.nfib.org
- 47.
NFIB, “The Credit, Banks…” micro-data are available for researchers wishing to use them. While the NFIB membership is large and generally reflects the broader population, the sample inevitably creates questions about whether it is representative of the small business population in the USA. The authors of the studies discussed weighting the data in response. A set of weights appears in the dataset for those who are more concerned about whether the sample is representative and less concerned about change over time. The weights were created by the authors from a three-axis matrix consisting of employee size of the business (four classifications), industry (eight major SIC codes), and geographic region (seven regions). The matrix was produced by the Office of Advocacy of the U.S. Small Business Administration.
- 48.
- 49.
The usefulness of this account is further diminished by its “residual” nature – that is, many of the estimates are derived from the subtraction of other accounts from the total. The result is that larger than average estimates are observed for several items in the accounts after revision of the estimates.
- 50.
The Federal Reserve Board generally conducts the survey quarterly, timing it so that results are available for the January, May, August, and November meetings of the Federal Open Market Committee. The Federal Reserve occasionally conducts one or two additional surveys during the year – for example, in 1998 and 2001.
- 51.
Research staff at the Federal Reserve Board have usually been very receptive to suggestions about doing special tabulations on the database for use by the Small Business Administration.
- 52.
The survey was conducted by Federal Trade Commission before 1984 when the Bureau of the Census took over the collection and publications of the database.
- 53.
However, data are provided only on small manufacturing corporations with assets under $10 million. Moreover, because of the small number of respondents in the survey with a shorter questionnaire, estimates were made for several variables in place of data collected.
- 54.
In fact, monthly surveys are conducted by NFIB with larger sample size for the end of the quarter months. The other two are: (1) Small Business Poll (special issues faced by small business) and (2) Survey of Small Business Problems and Priorities. Note that the Small Business Poll solicits information from a nationally representative sample of small firms (conducted by the Gallup Organization) rather than from the members of NFIB.
- 55.
For an effort to test a possible relationship between these variables and small business economic conditions, see Joel Popkin and Company (July 2003).
- 56.
SBA’s Small Business Investment Company program (SBIC) was initiated in 1963, providing a training ground for many promising venture capitalists.
- 57.
Dr. Stanley Pratt was the prime mover of this database effort. The Venture Capital Journal kept track of the developments in the venture capital industry beginning in the mid-1970s. The company has since been acquired by Thomson Financial Co. and the data collection was performed by PriceWaterhouse-Cooper (in the MoneyTree project). The National Venture Capital Association co-sponsored this data collection effort and published the Venture Capital Yearbook.
- 58.
The number of VC firms increased from 87 (in 1980) to 892 (in 2002) with VC capital under managed rose from $3 billion to $253 billion in 2002. See 2003 National Venture Capital Association Yearbook (2002 data) prepared by Thomson Venture Economics for NVCA.
- 59.
See 2003 National Venture Capital…. Op.cit. See also, The MoneyTree Survey, a quarterly study of venture capital investment activity in the USA, a collaboration between PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association (www.moneytree.com).
- 60.
The angel investors invest in private businesses without the use of investment professionals such as partners and their associates in VC companies. They rely on informal networks and contacts for investment opportunities.
- 61.
See “The Angel Investor Market in 2002: Investment Activity and Growth Prospects” in www.unh.edu/cvr/ Information was obtained through mail survey of managers of angel club/alliances and individual investors. Of 108 confirmed angel clubs, 45 surveys were returned, representing a response rate of 42%. The respondents represented a diverse set with respect to geographic location and organizational structure and as such, the sample appears to adequately represent the disbursement of angel activity in the USA.
- 62.
See Table “Common Stocks Initial Public Offerings by All and Small Issuers” in “The State of Small Business – A Report of the President,” various years.
- 63.
SEC used to public information on these offerings for presentation at the annual Small Business Capital formation Forum. See US Securities and Exchange Commission, Directorate of Economic and Policy Analysis, “Small Business financing Trends” various years.
- 64.
The Federal Reserve Board should be able to design a data dissemination approach that can resolve the privacy issues in public use database.
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Ou, C. (2011). Statistical Databases for Research on the Financing of Small and Start-Up Firms in the United States: An Update and Review. In: Advances in Entrepreneurial Finance. Springer, New York, NY. https://doi.org/10.1007/978-1-4419-7527-0_12
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