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Breaking down barriers to capital access

Victor Hwang
Victor Hwang, vice president of Entrepreneurship at the Kauffman Foundation, speaks at Finovate. | Photo: @Finovate

Every month, more than half a million people in the U.S. start a business, however more than 400,000 of them need better financial products to start, grow, and sustain their company.

Every month, more than half a million people in the U.S. start a business, however more than 400,000 of them need better financial products to start, grow, and sustain their company. This is both a massive gap and a massive opportunity. If we work together to address this need, we can shape a new category in the financial sector and reach millions of underserved business customers.

Venture capital and traditional banking are not fully serving entrepreneurs’ needs. The Kauffman Foundation analyzed the landscape and found a surprisingly high percentage of entrepreneurs – more than 83% – do not access bank loans or venture capital. And, access to capital presents an even greater challenge when it comes to people of color, women, and individuals of limited wealth. Many of these entrepreneurs are left to rely on personal sources of capital, primarily personal savings, credit cards, or home equity lines. Nevertheless, much of the attention continues to focus on questions such as, “how do you get more bank lending to small businesses,” or, “how do we expand venture capital to more people?”

We need to start paying attention to entrepreneurs who represent middle America and the middle class – folks like Natasha Griswold. Her story starts with an eviction notice from her apartment when she was five months pregnant. Instead of giving up, she was able to land a job as a hairdresser in a salon. One of Natasha’s clients was a senior man who had a hard time making it from his nursing home to the salon. This sparked an idea: What if she started a service that could help her client and solve a problem for many other people? Natasha followed her entrepreneurial instincts, and now owns ten Elder Hair Care salon units that travel to nursing homes. She not only built a successful business but created new jobs for people in her community.

But, her path was filled with hurdles and barriers because the system is not a level playing field. As a woman of color, based in the middle of the country with a small business, Natasha faced obstacles getting access to capital. Entrepreneurship shouldn’t be harder based on your skin color, your zip code, or who your parents are – but the truth is that it is. Loan requests from black entrepreneurs are three times less likely to be approved. Only about 9% of proposals submitted to angel investors come from women entrepreneurs. Oftentimes, these entrepreneurs have been historically left behind – that needs to change.

We need to be the arbiters of change and build viable solutions from within our communities. Earlier this year, the Kauffman Foundation launched a new pilot project – the Capital Access Lab to support capital entrepreneurs. In principle, it’s a new fund to invest in alternative capital funds that are testing new ways to invest in currently underserved entrepreneurs. For example, alternative capital funds could support profitable businesses that are too risky for a loan but not risky enough for venture capital. All of this translates to a healthier, more accessible economic environment that results in more growth, creation of new and sustainable jobs, and solutions for consumers.

So what can you do to support entrepreneurs?

If you’re an investor or an asset manager, we would welcome the chance to collaborate with you to think through new opportunities, whether it is a way to work together in the Capital Access Lab or develop new ways to solve problems facing entrepreneurs.

If you are fund manager, try alternative models of investing. If you are thinking about trying out a new model of funding, I encourage you to apply to the Kauffman Foundation’s Capital Access Lab.

If you’re a fintech entrepreneur who has alternative ways to source, select, or underwrite the 83% who do not access capital – or better serve the 17% that do access venture capital or bank loans – we want to have a substantive conversation with you.

There’s room for everyone to grow in this economy. We want and need everyone to have a seat at the table. Let’s all support entrepreneurs who have a vision, but cannot easily access the capital they need to make that vision a reality.