I occasionally hear a community leader, thought leader or government official state that there is no shortage of capital. Some will also add statements that all good businesses get funded. When I hear these statements I struggle to reconcile them with my own personal knowledge of the startup industry in Colorado. But, I can’t.
Here is one example that was published on the Internet. “There’s a perception out there that small business lending is difficult to obtain and on a decline. The reality couldn’t be further from that,” stated Patrick MacKrell, President of the New York Business Development Center in a newsletter dated July 16, 2013. Although he acknowledged that certain types of business, particularly retail, always have trouble obtaining capital, he concluded, “The truth is that credit-worthy, well-managed and well-operated businesses have absolutely no problem with access to capital.”
I have tried to understand what could lead a person like this to make a statement that is so obviously wrong. Wrong at several levels and in different manners.
Business lending did decline. How could it not? New federal regulations imposed upon banks stricter lending guidelines and higher capitalization requirements.
To say that a credit-worthy business can obtain credit means no more than saying a hungry person cannot obtain food. The fact a business obtained credit is the definition of credit-worthy.
However, when banks, angel investors and venture capitalists change their funding criteria, all businesses that no longer meet those criteria are no longer investment worthy. Who is worthy and who is not investment worthy is, and always will be, based upon the criteria of the capital source. When those criteria change and the percentage of the businesses that meet the criteria changes from 50% to 5%, then there is an access to capital problem. Or more accurately, there is a worse access to capital problem.
The fact is that any effort, project or campaign to improve access to capital by startups and small businesses must deal with opinions publicized by people who are in positions of authority with access to the press who will deny and misdirect public opinion in their own self-interest.
Whenever a person makes a statement that “access to capital is not a problem”, please challenge that person to provide evidence in support of their position. Specifically, they should be asked if access to capital is a problem for startups, minority businesses, businesses in distressed economic regions, or businesses that historically have low profit margins.
Just because mature, middle-market businesses clearly have more capital options, doesn’t mean that they are unconstrained by capital markets and that they are unable to realize their full potential for growth and job generation. Even a business well positioned to obtain capital may expend a substantially greater amount of time and money in gaining that capital and may pay a higher price for the capital.
Our capital markets remain focused on large businesses and our securities regulatory structure makes it prohibitive for nearly all of the investment banking industry to make money servicing small businesses. Opinions vary, but the lower dollar limit is between $250,000 and $10 million: a floor where investment bankers and broker/dealers cannot make any money raising money for a small business.
Raising money in amounts below this floor is the greater challenge, but not the whole challenge.
Alternative funding may address the problem of access to capital in part. However, without established networks of communications between sources of capital at the local, state and national level, the capital that these sources can deploy will remain limited.
Crowfunding still presents the promise of substantial improvement for small dollar capital markets. Multistate (federal) accredited investor only crowdfunding is starting to surge. Meanwhile, many states are now legislating intrastate crowdfunding while the SEC seems unable or unwilling to set rules for non-accredited investors to participate.
At the local level, Capital Communities may coordinate interaction between businesses, investors and intermediaries to reduce the time and cost of obtaining capital and improving the probability of a successful funding. This movement of money from Wall Street to Main Street is part of the Buy Local agenda.
There is no simple solution. But, there is a problem.