Access to Capital for Entrepreneurs: Removing Barriers

The Ewing Marion Kauffman Foundation recognizes this significance of new businesses and believes every entrepreneur who has the potential to succeed should have the supportive conditions necessary to start and grow a business. The Foundation seeks a nation of “Zero Barriers” to entrepreneurship.

Barriers can affect the trends and outcomes associated with entrepreneurship. They can prevent people from ever becoming entrepreneurs, or they can slow the decision to start up and impede business success. There have been persistent gaps in entrepreneurial activity in the United States. Data from 1996 to 2017 show that men are consistently more likely to start businesses each month than women, and 2017 was the first year in which the rate of black and white new entrepreneurs was the same.

Lack of access to capital is often cited as one of the primary barriers facing entrepreneurship. This report surveys the current knowledge landscape regarding access to capital with an eye towards innovative concepts for improvement to capital access systems.

The knowledge landscape

Access to capital plays an important role in entrepreneurship, both in direct and indirect ways. External private institutional capital – in other words, bank lending and venture capital – dominates the research and public discourse. Yet, at least 83 percent of entrepreneurs do not access bank loans or venture capital at the time of startup. Almost 65 percent rely on personal and family savings for startup capital, and close to 10 percent carry balances on their personal credit cards.

In fact, entrepreneurs face geographic, demographic, and wealth barriers, exacerbated by a capital market structure that does not effectively find and support the majority of entrepreneurs. There is significant unmet demand for financing.

Efforts to help entrepreneurs access capital

Most efforts to expand access to capital and increase new business creation and success have focused on supporting small business lending and venture capital, direct efforts to provide capital to entrepreneurs. Few of these 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.

Rather than creating and growing specific investment vehicles to invest directly in entrepreneurs, organizations with influence – such as large institutions, foundations, and governments – could instead build up market infrastructure to enable the marketplace of entrepreneurs and capital mechanisms to solve problems.

There are, however, new, innovative strategies that work at the system level or offer alternatives to bank loans and venture capital. An emerging group of people – known as “capital entrepreneurs” – is advancing new vehicles to reduce the barriers entrepreneurs face in accessing capital. They are building more flexible models of capital formation, driving innovation within equity and debt structures, and piloting and developing new ways to source entrepreneurs and deploy capital. These include revenue-based investing, entrepreneur redemption, online lending, crowdfunding, and blockchain.

These capital entrepreneurs would benefit from:

New industry standards, categories, and technologies to mitigate the friction that limits the flow of capital to entrepreneurs.
Professional communities of practice to help organize and clarify goals and objectives related to increasing access to capital.
New strategies for capital aggregation to help increase the flow of capital and close market gaps.

Emerging solutions

Building capital markets infrastructure represents one opportunity for improving entrepreneurs’ access to capital. Rather than creating and growing specific investment vehicles to invest directly in entrepreneurs, organizations with influence – such as large institutions, foundations, and governments – could instead build up market infrastructure to enable the marketplace of entrepreneurs and capital mechanisms to solve problems.

The Kauffman Foundation has identified five types of infrastructure that show promise:

Capital infrastructure. Greater diversity of investment vehicles and intermediary financial institutions can be developed to bridge the gap between money centers and the spectrum of entrepreneurs seeking capital.

People infrastructure. Capital entrepreneurs have the opportunity to develop new investment vehicles that provide access to the 83 percent of entrepreneurs who are not served by private institutional capital.

Information infrastructure. Enhanced data and technology can create stronger infrastructure and clearer standards for effective market operations, speeding the flow of capital to a greater number of entrepreneurs.

Knowledge infrastructure. More targeted research can better inform efforts to improve capital access for 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.

In an effort to push thinking on this topic forward and to focus future work on increasing access to capital for entrepreneurs, we close this report with questions for governments, foundations, entrepreneurial support organizations, ecosystem builders, and others within each of these five broad categories.

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