It’s a cruel paradox, cruel paradox. Social networks and crowd-funding sites now empower entrepreneurs. Smart ideas, innovative concepts and creative inventions are more plentiful than ever. Yet in a time of unbounded promise, capital to fund them remains elusive for most entrepreneurs. Which means one thing: many great ideas go unfunded.
According to a recent survey by the National Small Business Association, 43 percent of small business respondents said that in the last four years they needed capital, but could not find it. One in three small businesses reported that their loans or lines of credit were reduced. One in ten had their loans or lines of credit called back by the bank.
I’m in the business of helping entrepreneurs succeed. Many times throughout my career I’ve seen outstanding business ideas fail due to a lack of planning and funding. So if there’s one message I can offer, it’s this: entrepreneurs, small business owners, and CEOs must understand the options for accessing capital and plan accordingly.
Here are the realities entrepreneurs must understand:
- No new sources of capital have emerged. How small businesses finance themselves has not changed: They tap personal assets, friends and family, angel investors, venture capital funds, and banks. The structure of these financing mechanisms has remained unchanged for decades. The constraints that these sources place on small business capital formation are well documented.
- Traditional sources are increasingly difficult to tap. Self-funding is strained in an economy of shrinking savings and battered home values. Friends and family – the most common source of equity capital — are suffering the same economic realities as entrepreneurs. Banks’ shifting risk profiles led to reduced business loan exposure following the financial crisis, with higher risk early stage businesses the first to be jettisoned. Angels and VC’s, who only provide 1 percent of funding, are capitalizing fewer deals and are focused on narrow industry sectors like technology.
- Capital available through first-generation …