ACCESS TO CAPITAL For ENTREPRENEURS : REMOVING BARRIERS

2y ago
55 Views
2 Downloads
2.06 MB
56 Pages
Last View : 2m ago
Last Download : 2m ago
Upload by : Jayda Dunning
Transcription

APRIL 2019ACCESS TO CAPITAL forENTREPRENEURS:REMOVINGBARRIERS

This is a report published by the Ewing Marion Kauffman Foundation utilizing content and data from multiple sources and externalcontributors. Every effort has been made to verify the accuracy of the information contained in this report and is believed to becorrect as of the publication date. Nonetheless, this material is for informational purposes and you are solely responsible forvalidating the applicability and accuracy of the information in any use you make of it. 2019 Ewing Marion Kauffman Foundation

AUTHORSAccess to Capital forEntrepreneurs: Removing BarriersAuthorsVictor Hwang, vice president, Entrepreneurship, Ewing Marion Kauffman FoundationSameeksha Desai, director, Knowledge Creation and Research, Ewing Marion Kauffman FoundationRoss Baird, innovator-in-residence, Ewing Marion Kauffman FoundationAcknowledgementsMichael Cox, consultant, Ewing Marion Kauffman FoundationChris Cusack, consultant, Ewing Marion Kauffman FoundationTiffany Hartsell, editorNicholas Monroe, consultant, Ewing Marion Kauffman FoundationPeter Roberts, associate professor, Emory UniversityAccess to Capital Landscape Consultative GroupTo ensure a diverse set of insights for this report, leaders in fields related to capital andentrepreneurship were consulted for feedback and recommendations. The consultativegroup consists of entrepreneurs, investors, researchers, and philanthropic leaders, including:Steve Case, co-founder, America Online; CEO, RevolutionMaria Contreras-Sweet, former administrator, Small Business AdministrationBen Hecht, CEO, Living CitiesLaura Huang, associate professor, Harvard UniversityMarianne Hudson, executive director, Angel Capital AssociationInessa Love, professor, University of Hawaii at ManoaNigel Morris, co-founder, CapitalOne; chairman, QED InvestorsJoyce Klein, director, Economic Opportunities Program, Aspen InstituteMiriam Rivera, trustee, Ewing Marion Kauffman Foundation; managing partner, Ulu VenturesPlease cite this report as: Hwang, V., Desai, S., and Baird, R. (2019) “Access to Capital for Entrepreneurs:Removing Barriers,” Ewing Marion Kauffman Foundation: Kansas City.Special thanks to Kim Wallace Carlson, Alyse Freilich, Lacey Graverson, AJ Herrmann,Larry Jacob, David Kimmis, and Derek Ozkal.A C C E S S T O C A P I TA L F O R E N T R E P R E N E U R S R E M O V I N G B A R R I E R S I

TA B L E O F C O NT E NTSTABLE OF CONTENTS1. EXECUTIVE SUMMARY3. INTRODUCTION4. THE KNOWLEDGE LANDSCAPE20. EFFORTS TO HELP ENTREPRENEURS ACCESS CAPITAL32. GUIDING QUESTIONS TO HELP GENERATE SOLUTIONS37. ENDNOTES43. REFERENCESii A C C E S S T O C A P I TA L F O R E N T R E P R E N E U R S R E M O V I N G B A R R I E R S

EXECUTIVE SUMMARYEXECUTIVE SUMMARYNew businesses play an important role in economic dynamism in the United States,contributing to the economy by creating jobs, innovations, and productivity growth.The Ewing Marion Kauffman Foundation recognizes this significance of new businesses andbelieves every entrepreneur who has the potential to succeed should have the supportiveconditions necessary to start and grow a business. The Foundation seeks a nation of“Zero Barriers” to entrepreneurship.Barriers can affect the trends and outcomes associatedwith entrepreneurship. They can prevent people fromever becoming entrepreneurs, or they can slow thedecision to start up and impede business success.There have been persistent gaps in entrepreneurialactivity in the United States. Data from 1996 to 2017show that men are consistently more likely to startbusinesses each month than women, and 2017 wasthe first year in which the rate of black and white newentrepreneurs was the same.1Lack of access to capital is often cited as one of theprimary barriers facing entrepreneurs. This reportsurveys the current knowledge landscape regardingaccess to capital with an eye towards innovativeconcepts for improvement to capital access systems.The Knowledge LandscapeAccess to capital plays an important role inentrepreneurship, in both direct and indirect ways.External private institutional capital—in other words,bank lending and venture capital—dominates theresearch and public discourse. Yet, at least 83 percentof entrepreneurs do not access bank loans or venturecapital at the time of startup. Almost 65 percent relyon personal and family savings for startup capital, andclose to 10 percent carry balances on their personalcredit cards.In fact, entrepreneurs face geographic, demographic,and wealth barriers, exacerbated by a capital marketstructure that does not effectively find and support themajority of entrepreneurs. There is significant unmetdemand for financing.Efforts to Help EntrepreneursAccess CapitalMost efforts to expand access to capital and increasenew business creation and success have focused onsupporting small business lending and venture capital,direct efforts to provide capital to entrepreneurs. Few ofthese efforts have created systemic change.This report identifies barriers entrepreneurs face in accessing capital,surveys efforts to break down these barriers, and identifies possible responses.A C C E S S T O C A P I TA L F O R E N T R E P R E N E U R S R E M O V I N G B A R R I E R S 1

EXECUTIVE SUMMARYRather than creating and growing specific investment vehicles to invest directly inentrepreneurs, organizations with influence—such as large institutions,foundations, and governments—could instead build upmarket infrastructure to enable the marketplace of entrepreneursand capital mechanisms to solve problems.There are, however, new, innovative strategies that workat the system level or offer alternatives to bank loansand venture capital. An emerging group of people—known as “capital entrepreneurs”—is advancing newvehicles to reduce the barriers entrepreneurs face inaccessing capital. They are building more flexible modelsof capital formation, driving innovation within equity anddebt structures, and piloting and developing new ways tosource entrepreneurs and deploy capital. These includerevenue-based investing, entrepreneur redemption,online lending, crowdfunding, and blockchain.These capital entrepreneurs would benefit from:(1) new industry standards, categories, and technologiesto mitigate the friction that limits the flow of capitalto entrepreneurs,(2) professional communities of practice to helporganize and clarify goals and objectives related toincreasing access to capital, and(3) new strategies for capital aggregation to helpincrease the flow of capital and close market gaps.Emerging SolutionsBuilding capital markets infrastructure representsone opportunity for improving entrepreneurs’ accessto capital. Rather than creating and growing specificinvestment vehicles to invest directly in entrepreneurs,organizations with influence—such as large institutions,foundations, and governments—could instead buildup market infrastructure to enable the marketplaceof entrepreneurs and capital mechanisms to solveproblems.The Kauffman Foundation has identified five types ofinfrastructure that show promise:Capital infrastructure. Greater diversity of investmentvehicles and intermediary financial institutions can bedeveloped to bridge the gap between money centers andthe spectrum of entrepreneurs seeking capital.People infrastructure. Capital entrepreneurs have theopportunity to develop new investment vehicles thatprovide access to the 83 percent of entrepreneurs whoare not served by private institutional capital.Information infrastructure. Enhanced data andtechnology can create stronger infrastructure and clearerstandards for efficient market operations, speeding theflow of capital to a greater number of entrepreneurs.Knowledge infrastructure. More targeted researchcan better inform efforts to improve capital access forentrepreneurs, providing insight regarding the originsof capital market gaps and the effects of capitalconstraints on firms.Policy infrastructure. Entrepreneurs and capitalentrepreneurs can be at the table to assert their voiceswhen lawmakers and regulators are forming policiesthat affect the functioning of capital markets forentrepreneurs.In an effort to push thinking on this topic forward andto focus future work on increasing access to capitalfor entrepreneurs, we close this report with questionsfor governments, foundations, entrepreneurial supportorganizations, ecosystem builders, and others withineach of these five broad categories.2 A C C E S S T O C A P I TA L F O R E N T R E P R E N E U R S R E M O V I N G B A R R I E R S

INTRODUCTIONINTRODUCTIONEntrepreneurship plays an important role in economic dynamism in the United States.Entrepreneurial ventures serve as the workhorse for the economy by contributing jobs, fuelinginnovation, and adding productivity. Startups in the United States less than one year old areespecially important for net new job creation.² Yet as the rate of startups in the United States hasdeclined, so too has the share of jobs they add to the national economy:³ Per capita startup jobcreation in the first year declined from 7.52 jobs in 1998 to 5.27 jobs by 2017.4The Kauffman Foundation recognizes the importanceof entrepreneurship in the United States and seeks tounderstand and reduce barriers to entrepreneurship.Entrepreneurs and researchers often cite lack ofaccess to capital as a significant barrier faced by manyentrepreneurs. In order to understand the role of accessto capital in entrepreneurship, identify gaps in thisaccess, and determine possible solutions to these gaps,the Kauffman Foundation conducted extensive researchon this topic in 2017 and 2018. The effort included: A literature review on access to capital, including ananalysis of previous attempts to improve access tocapital; Conversations with more than 500 financial assetowners, investors, and entrepreneurs; Regular discussion with a working group ofpreeminent scholars, entrepreneurs, and investorsacross the U.S.This report presents the results of the research,surveying the knowledge landscape on access to capitalwith an eye toward mechanisms to support systemicimprovements in capital access for entrepreneurs inthe United States. The report concludes with five keyquestions to shape a call for action and to guidefuture thinking.Entrepreneurs and researchers often cite lack of access to capitalas a significant barrier faced by many entrepreneurs.A C C E S S T O C A P I TA L F O R E N T R E P R E N E U R S R E M O V I N G B A R R I E R S 3

THE KNOWLEDGE LANDSCAPETHE KNOWLEDGE LANDSCAPEInitial startup costs vary from firm to firm, depending on the size and type of thebusiness, the nature of its activities, its industry, its location, and many other factors.The vast majority of entrepreneurs need financingto assist with these start-up costs and to grow theirbusinesses. Data from the 2016 Annual Survey ofEntrepreneurs5 shows that only between 5 and10 percent of businesses that have paid employeesdo not need financing at startup. Between 90 and95 percent of entrepreneurs that hire, then, require someamount of financing to start their businesses.Types of capitalThere is a wide range of types of capital to support newbusinesses. The use of capital by entrepreneurs variessignificantly by type of capital available and by theneeds, type, and characteristics of the entrepreneur andthe business. Capital can be internal (self-financing) orexternal (from an outside source). It can also be public(e.g., government grants) or private (e.g., banks orinvestment firms). And some capital is institutionalwhile other capital can be informal.6External financing for entrepreneurs falls largely intodebt and equity categories. Debt financing requiresrepayment, and equity financing is conditionalon an ownership stake in the venture. Equity can beexternal (i.e., venture capital and angel financing) orinside (i.e., owner financing).The Kauffman Foundation is particularly interested inexternal private institutional capital, as this type offinancing largely represents the ability of the market tomeet demand for capital.As shown in Figure 1, the top three sources of capitalused by businesses for startup or initial acquisitioncapital are: personal/family savings of the entrepreneur(64.4 percent), business loans from banks or financialinstitutions (16.5 percent), and personal credit cards(9.1 percent). Venture capital is used by only 0.5 percentof entrepreneurs.External private institutionalcapitalBank lending (debt) and venture capital (equity)dominate the external private institutional capitallandscape. However, as shown in Figure 1, at least83 percent of new businesses are not accessing thisexternal private institutional capital at startup.7Traditional debt financing can take the form of bankloans and formal credit channels. New firms relyheavily on debt financing and while estimates canvary depending on the time frame and firms beingstudied, debt channels provide substantial capital forBetween 90 and 95% of entrepreneurs that hirerequire some amount of financing to start their businesses.4 A C C E S S T O C A P I TA L F O R E N T R E P R E N E U R S R E M O V I N G B A R R I E R S

THE KNOWLEDGE LANDSCAPEAt least 83% of new businesses that hireare not accessing external privateinstitutional capital at startup.FIGURE 1: Source of Startup Capital64.4%Personal/family savings of owner(s)Business loan from a bank or financial institution16.5%10.7%Don’t knowNone needed9.2%Personal credit card(s) carrying balances9.1%Personal/family other than savings of owner(s)8.7%6.3%Personal/family home equity loanBusiness credit card(s) carrying balances4.9%Business loan/investment from family/friends4.5%Other source(s) of capitalGovernment-guaranteed business loan from a bank or financial institutionBusiness loan from federal, state, or local government3.2%1.8%0.5%Investment by venture capitalist(s)0.5%Grants0.2%Source: Annual Survey of Entrepreneurs (2016)entrepreneurs.8 A study using Kauffman Firm Surveydata estimated traditional debt sources to be close to40 percent of initial startup capital.9Venture capital (VC) investors take an equity stake inthe new business as a condition of financing. WhileVC financing provides substantial capital that mightnot otherwise be accessible, it can also be costly forboth the VC and the entrepreneur. It relies on effectivescreening and selection of businesses by the VC. The VCinvestor may provide management, business planningand development, strategic support and networks,and technical expertise to the new business. For theentrepreneur, VC involvement carries expectations oftime commitment, loss of ownership and control rights,and pressure to achieve high returns relative to othertypes of investors.¹0A key difference between bank and VC financing isownership and control over management decisions.Entrepreneurs receiving bank loans retain ownership, andbanks usually do not play a role in the daily managementof the business. VC investors expect equity in return forthe investment, and they also can play an active role indeveloping the business.VCs typically choose high-risk, high-reward investmentsthat could lead to an IPO or acquisition, in contrast totraditional banks’ focus on stable business modelswith less uncertainty.¹¹ Banks seek repayment of theloan with interest whereas VCs seek the potential forextraordinarily high returns to outweigh the risk ofinvestment and potential losses. When banks lend toearly-stage firms, those firms tend to be less risky andless informationally opaque.¹²A C C E S S T O C A P I TA L F O R E N T R E P R E N E U R S R E M O V I N G B A R R I E R S 5

THE KNOWLEDGE LANDSCAPEOther sources of capitalAngel investors provide personal funds in return for anequity stake in the venture. Compared to VC financing,angel investment tends to be smaller and occur earlierin the life of the new business.¹³ Angel investments areprivate transactions not subject to public disclosure,and—unlike the venture capital market—there is littleinstitutional infrastructure supporting the angel market.It is therefore difficult to track angel investments, butestimates suggest that the informal angel financemarket could be twice as large as the formal venturecapital market.¹4Venture debt is a hybrid form of debt/equity finance andprovides a mechanism to raise money that limits equitydilution. Venture debt lenders are specialized financialinstitutions that lend to startups, usually in technologyindustries as a follow-on to VC rounds.¹5Business incubators and accelerators also serve assources of capital for entrepreneurs and are oftenpackaged within a broader support program. Incubatorscan provide guidance and resources, usually focusingon early (even idea level) ventures without taking anequity stake. Incubators may be used by universities,nonprofits, and public agencies to support economicdevelopment and job creation.¹6Accelerators focus on late-stage incubation or“graduation” into the market, and can also provide shortterm support (typically several months) for businessdevelopment, networks, and other resources. Theymay take a minority stake in exchange for seed capital.Accelerators tend to source businesses competitively,including those that are in incubators.¹7Incubators and accelerators serve participating venturesthrough their own programs, but they can also serve as apipeline for future private equity financing.¹8As seen in Figure 1, personal savings and self-financingare prevalent, and entrepreneurs can self-finance usingseveral mechanisms. Personal/family savings are usedby a majority of new businesses, and even personalcredit cards are used more often than businesscredit cards.Role of capital in new businesssuccessExisting evidence shows that capital of different typesis meaningful for the creation of new businesses. Theimportance of capital for entrepreneurs is supportedby a wide body of research, although the specific typesof capital accessed (i.e., banks loans, credit, venturecapital, and personal wealth, among others) can varysignificantly.¹9 The availability of credit has beenconnected to greater success of new businesses.Capital plays a significant role in the early years ofnew businesses. Data from firms in their fourth yearof existence shows that the importance of externaldebt financing rises as new businesses grow.²0 Anexamination of young firms participating in accelerators,which provide financial and nonfinancial support, foundthat two years after raising capital, funded companiesachieved 30 percent more growth in revenue and50 percent more growth in employment than companiesthat did not raise funding.²¹ Furthermore, consumercredit access is shown to matter at each stage of newbusiness development.²²In addition to their direct impacts on individualfirms, capital providers can play an important role inecosystems more broadly by generating systemic andindustry ripple effects that support entrepreneurship.A study of 59 accelerators between 2005 and2012 showed that the arrival of an accelerator in ametropolitan area is linked to regional gains in seed andIn addition to their direct impacts on individual firms, capital providers can playan important role in ecosystems more broadly by generating systemicand industry ripple effects that support entrepreneurship.6 A C C E S S T O C A P I TA L F O R E N T R E P R E N E U R S R E M O V I N G B A R R I E R S

THE KNOWLEDGE LANDSCAPEearly-stage financing, including a 104 percent increase inthe number of VC deals, a 1830 percent increase in theamount of seed and early-stage deals, and a 97 percentgrowth in the number of distinct investors.²³Moreover, greater availability of capital at the systemslevel as a result of bank deregulation has been shownto improve opportunities for entrepreneurs. Whenbanks were allowed to expand branches and lendacross state lines, new i

entrepreneurs, providing insight regarding the origins of capital market gaps and the effects of capital constraints on firms. Policy infrastructure. Entrepreneurs and capital entrepreneurs can be at the table to assert their voices when lawmakers and regulators are forming policies that affect the functioning of capital markets for entrepreneurs.

Related Documents:

Bruksanvisning för bilstereo . Bruksanvisning for bilstereo . Instrukcja obsługi samochodowego odtwarzacza stereo . Operating Instructions for Car Stereo . 610-104 . SV . Bruksanvisning i original

10 tips och tricks för att lyckas med ert sap-projekt 20 SAPSANYTT 2/2015 De flesta projektledare känner säkert till Cobb’s paradox. Martin Cobb verkade som CIO för sekretariatet för Treasury Board of Canada 1995 då han ställde frågan

service i Norge och Finland drivs inom ramen för ett enskilt företag (NRK. 1 och Yleisradio), fin ns det i Sverige tre: Ett för tv (Sveriges Television , SVT ), ett för radio (Sveriges Radio , SR ) och ett för utbildnings program (Sveriges Utbildningsradio, UR, vilket till följd av sin begränsade storlek inte återfinns bland de 25 största

Hotell För hotell anges de tre klasserna A/B, C och D. Det betyder att den "normala" standarden C är acceptabel men att motiven för en högre standard är starka. Ljudklass C motsvarar de tidigare normkraven för hotell, ljudklass A/B motsvarar kraven för moderna hotell med hög standard och ljudklass D kan användas vid

LÄS NOGGRANT FÖLJANDE VILLKOR FÖR APPLE DEVELOPER PROGRAM LICENCE . Apple Developer Program License Agreement Syfte Du vill använda Apple-mjukvara (enligt definitionen nedan) för att utveckla en eller flera Applikationer (enligt definitionen nedan) för Apple-märkta produkter. . Applikationer som utvecklas för iOS-produkter, Apple .

och krav. Maskinerna skriver ut upp till fyra tum breda etiketter med direkt termoteknik och termotransferteknik och är lämpliga för en lång rad användningsområden på vertikala marknader. TD-seriens professionella etikettskrivare för . skrivbordet. Brothers nya avancerade 4-tums etikettskrivare för skrivbordet är effektiva och enkla att

Den kanadensiska språkvetaren Jim Cummins har visat i sin forskning från år 1979 att det kan ta 1 till 3 år för att lära sig ett vardagsspråk och mellan 5 till 7 år för att behärska ett akademiskt språk.4 Han införde två begrepp för att beskriva elevernas språkliga kompetens: BI

Grade 1 Mathematics Student At-Home Activity Packet This At-Home Activity Packet includes 16 sets of practice problems that align to important math concepts your student has worked with so far this year. We recommend that your student completes one page of practice problems each day. Encourage your student to do the best they can with this content—the most important thing is that they .