By David E. Gumpert

A few weeks ago, an entrepreneur I know who has a successful business under his belt was discussing his idea for a new venture. It sounded quite promising but required extensive marketing expenditures and inventory investment to get going. "Have you thought about how much startup money you'll need and where you'll raise it?" I asked.

He gave me a puzzled look, as if startup money was the farthest thing from his mind -- and indeed it was. "We'll get this business going at very low cost," he said. There was no talk about bank loans, angels, venture capitalists, the Small Business Administration, or any other of the usual suspects that come up when entrepreneurs launch businesses and obsess about financing.

LESS SEED MONEY.  Now I was the puzzled one. I had just read a recent survey from the University of New Hampshire Center for Venture Research, which tracks investing by angels in startup and early-stage deals. In its report on the first six months of 2004, it lamented that wealthy individual investors are increasingly being drawn away from startups and more toward young growing businesses.

"Angels are shifting their investment strategies toward post-seed investments, and thus reducing the proportional amount of seed and startup capital," says Jeffrey Sohl, the center's director. "This restructuring of the angel market has in turn resulted in fewer dollars available for seed investments, thus exacerbating the capital gap for seed and startup capital in the United States."

Certainly, the survey's implication is that startups will have a tougher time securing the money they need to get going, with all the economic ramifications that implies. For example, fewer startups would imply job-creation problems, since early-stage companies traditionally create a significant proportion of new jobs.

"INVISIBLE" MARKET.  As I did some more research on the subject of startup financing, I realized that I had fallen into a common trap of equating financing conditions with prospects for new businesses. The reality is that startup-financing dynamics have long been one of those mystery areas of the entrepreneurial process.

The notion that angels are a major force in backing startups was first put forth by William Wetzel, a retired business professor at the University of New Hampshire, back in 1980. He gave a presentation at the first annual Babson College Entrepreneurship Research Conference about "informal investors" and their important role in launching new ventures. "My point was that this was an invisible capital market with no institutional strength to it at all," Wetzel says today.

Since Wetzel's first looked into angel investing, this area has become ever more organized -- and institutionalized. More than 50 angel-investor groups have sprung up around the country, meeting monthly or semiregularly to listen to entrepreneurs pitch for investment funds.

SELF-FINANCING RULES.  It's clear this arena has "arrived" because there's now an Angel Capital Assn. The association says typical investments were around $400,000 each last year, but several groups' average investment per outfit was in excess of $1 million and went as high as $2.5 million -- further corroboration of the University of New Hampshire's survey showing angels making larger investments.

But the startup entrepreneur I described at the beginning of this column says he's unaware of any of the trends followed by researchers and investment associations. He remains confident that his success won't be determined by the amount of startup capital he raises.

In that respect, he's typical of American entrepreneurs, says Amar Bhide, a professor at Columbia Business School who's one of the few small business experts not bemoaning a funding crisis for startup entrepreneurs. He points to research suggesting that 80% of new businesses are self-financed, generally in the range of about $10,000.

GET THINGS GOING CHEAPLY.  Much of this capital often comes from friends and family (see BW Online, 11/23/04, "Funding and Family: Mix with Care"). Fewer than 5% obtain investment funds from angels or venture capitalists. As examples, he cites entrepreneurs like Bill Gates of Microsoft (MSFT ) and Sam Walton of Wal-Mart (WMT ), who launched their now-giant outfits with little startup cash.

The lesson from my entrepreneur friend is clear: Don't agonize about raising money to start your business. Find ways to get it going for less than you think, and if less is still more than you can afford, try doing part of the business and save the rest for when you've generated some cash. Obtain whatever money you don't have via credit-card advances and loans from relatives. You don't have time to fool around with angels who are themselves increasingly drawn to more established ventures. The real world beckons.

David E. Gumpert is author of Burn Your Business Plan! What Investors Really Want from Entrepreneurs and How to Really Start Your Own Business. Most recently, he's the co-author of Inge: A Girl's Journey Through Nazi Europe.