The Kauffman Foundation advocates for the importance of entrepreneurship in local economic development and recently, the need for capital in small to medium cities.
A recent report looks at how capital is a barrier to entry for many entrepreneurs.
The report finds that 83 percent of new businesses cannot access institutional capital, the dominant source of equity and debt funding available through commercial banks or institutional venture capital firms. Further, entrepreneurs that hire need financing to do so. The main source of capital for entrepreneurs is the personal savings of the owner at 64.4 percent, personal credit cards at 9.1 percent, and home equity loans at 6.3 percent.
There is a difference between an individual’s long-term savings and money needed to live day-to-day. The high rate of personal credit card usage indicates many entrepreneurs are tapping day-to-day funds to launch their business. Indeed noble, but not how private equity or development funds operate. These groups use equity to leverage debt financing to build a robust and sustainable business model. Capital is key.
The report highlights the racial bias against underrepresented founders. It also highlights how a lack of initial wealth is a significant barrier to starting a business. For founders who cannot afford to incur credit card debt or tap short-term cash reserves, the barrier is simply too high to start a business. Business ownership is key to wealth creation. High barriers to entrepreneurship mean that certain populations are left out.
Capital Support Infrastructure
The capital shortage is only the tip of the iceberg for the resource shortage in small to mid-size cities. Capital employs a network of supporters that assist entrepreneurs. Funds employ fund managers and data analysts that work with entrepreneurs to improve their business model, vet opportunities, and evaluate market opportunity.
Also lagging in small to mid-size cities are deal flow. Now capital problem becomes a chick or the egg problem.
Regions must invest in early-stage programs that nurture and encourage deal flow AND in the pipeline of capital for growing firms.
Investing in only one side of the equation is not enough.