Ross Baird, 3 Trends that Prevent Entrepreneurs from Accessing Capital

Now Reading

3 trends that prevent entrepreneurs from accessing capital
Vice President, Public Affairs Kauffman Foundation

3 trends that prevent entrepreneurs from accessing capital

To fuel startups, and the U.S. startup rate, founders need access to a variety of funding opportunities.

At least 81% of entrepreneurs do not access a bank loan or venture capital.

Over the past few years we’ve been listening and learning from thousands of aspiring entrepreneurs about the barriers they face.

Removing barriers is critical, given the long-term decline in entrepreneurship in our country. Despite a slight uptick following the recession, we remain at a generational low for rate of new business starts.

Access to capital has been near the top of the list from our conversations with entrepreneurs. But, what does it really mean?

We wanted to dig deeper into that question and get a better read of the landscape, so we’ve been doing research to better understand the challenges entrepreneurs face in accessing capital to fuel their startups.

Yesterday, Ewing Marion Kauffman Foundation Innovator-in-Residence and president of Village Capital, Ross Baird shared some early insights from our work with the House Small Business Committee. Here are a few initial key takeaways:

3 Trends that Create Barriers to Capital

1. Large banks have become larger, and small- and medium-sized banks are disappearing. As one example, the number of small community banks totaling under $50 million in assets has declined 41 percent since the Great Recession of 2008, either through consolidation or closing. According to industry experts, the $30,000 in average funds needed to start a firm does not hit the vast majority of banks’ radars. Loans of around $100,000 or less are hard for banks to make profitably.

2. The nature of new businesses has changed. Historically, banks lend against assets. But the majority of new businesses are service businesses that do not have significant assets or collateral, but instead are based on cash flow. Those businesses do not fit banks’ traditional underwriting models. Traditional lending models no longer fit today’s startups: only 18 percent of businesses ever access a bank loan.

3. Venture capital (VC) has been a highly visible part of the growth of many well-known companies. But, while VC has been very helpful for some entrepreneurs, the VC industry is focused on a small percentage of businesses with the potential for high growth: only 0.6 percent of businesses ever raise VC. Furthermore, VC is highly concentrated. In 2016, 78 percent of VC went to just three states (New York, Massachusetts, and California). Less than 1 percent of venture capital dollars went to rural areas. Less than 2 percent of startup financing went to women founders. Only 1 percent went to African-American and Latino founders.

Investing in Rural America

The Committee on Small Business Subcommittee on Economic Growth, Tax, and Capital Access and the Subcommittee on Agriculture, Energy, and Trade meet for a joint hearing titled, “Investing in Rural America.”

The Bottom Line

The bottom line of our initial insights is that we have a lot more work ahead.

The Foundation is particularly focused on this through our work in bridging market gaps and growing entrepreneurial ecosystems. Very little of the total capital flow to entrepreneurs is geared toward women and people of color. With 81 percent of funding coming through personal net worth, family wealth, or connections to networks, it’s not a mystery why today’s make-up of entrepreneurs is overwhelmingly white, older, and male.

Going forward, we know communities need to build the mechanisms and networks that help more people start new businesses. With the nation’s changing demographics, it is both a moral and strategic imperative to ensure inclusion and equity as communities seek to grow local economies.

We will continue to share what we learn, as we work with partners to address systemic issues facing entrepreneurs. We look forward to learning more during the months to come, working together and breaking down barriers for entrepreneurs.

The economy needs ecosystem builders

Read More