Just How Big is the Capital Gap?
If you haven’t heard of the Ewing Marion Kauffman Foundation, they’re an incredibly important organization for the Heartland, who invest heavily in, and help foster, the entrepreneurial ecosystem in and around Novel’s home turf of Kansas City.
They recently released their report Access to Capital for Entrepreneurs: Removing Barriers: 2023 Update. The news this year is more of the same: Access to startup funding continues to be a huge barrier to helping Founders realize their vision.
But what’s truly daunting is just how big that capital gap has become.
According to the report, 90% of businesses will need some type of startup funding, however, 83% of them do not have access to institutional lenders, like banks.
Of the 17% that do have access, only about 1 in 3 companies were given the full amount they requested, whereas 56% received less than half.
To put the size of the capital gap in perspective, if you need $1M to keep your business growing, you only have about a 2% chance of getting that amount. 🤯
Those aren’t great odds. If you could settle for $500k or less your chance is closer to 4%. Still not good.
And if you’re a diverse Founder, the picture is even more grim. We’re talking < 1% grim.
In addition, as much as we’d all like to put the COVID pandemic behind us, the social and economic ramifications it brought only worsened this capital gap. Between 2019 and 2021, the number of businesses that received none of the funding they requested rose to 36%.
As if the personal strains of COVID weren’t enough, these Founders faced the threat of their businesses dying on the vine, long before they ever got a chance to reach scale.
However, the pandemic brought with it some bright spots as well. For example, the rate of new entrepreneurs increased over 20%, and even now remains higher than pre-pandemic levels.
A few explanations for this uptick include an increase in the necessity of entrepreneurship driven by high unemployment levels, breakdowns in childcare availability making traditional employment more difficult for parents, in addition to increased teleworking opportunities that gave entrepreneurs more flexibility to pursue their ventures.
Even so, without ready access to startup funding, it will be difficult for all these new entrepreneurs to bridge the capital gap and scale their ideas.
To complicate things, when it comes to institutional lenders – like banks – that type of capital can be nearly impossible for SaaS and Tech Founders to access without incredible personal risk.
Generally, these institutions require hard collateral and profitability, which can be difficult for startups in growth mode. The only option left is putting your own personal credit and assets on the line – no thank you!
Fixing the Problem
With the report establishing a gigantic capital gap for SaaS funding, the question arises: What’s a Founder to do?
One conclusion that seems especially relevant is that “many [companies] choose not to apply because they expect to be turned down, that financing costs are too high, or that the application process is too difficult.
At Novel, we think there are two ways to turn the tides on this dismal landscape:
We need alternative capital options.
It’s not 2021 anymore; SaaS companies in a place to receive VC dollars can’t rely on the same 2021-era valuations. Rather, Founders are increasingly sacrificing more equity in exchange for less startup capital.
Traditional non-dilutive funding helps alleviate the capital gap somewhat, but as we mentioned previously, banks are not typically a great fit for most SaaS companies.
This is where alternative financing – Novel’s specialty – can bring Founder-friendly options to the table.
With Novel, you get startup funding with no personal or IP risk and no profitability required, only growth and controlled burn.
You also get an easy-to-access online application, facilities and payments that aren’t extractive to your business, and capital access that is based on business performance, not your personal network or collateral.
Sound reasonable enough?
We need to get capital into the hands of diverse Founders.
While it’s important to decrease the capital gap for all entrepreneurs, it’s equally important to focus on historically marginalized and underserved groups especially, as they tend to be left behind by certain programs and initiatives.
That means increasing support for Community Development Financial Institutions (CDFIs), Minority Depository Institutions (MDIs), and fintechs – like alternative capital lenders – since they are generally more effective at reaching underserved populations. Currently, these lenders still make up a relatively small percentage of the overall funding pool.
By investing in new, alternative funding models and catalyzing tech-based financial innovations, lenders can reduce biases and barriers experienced by entrepreneurs, especially businesses owned by women and people of color.
Because at the end of the day, all entrepreneurs from all walks of life deserve the same, equal shot at success, regardless of their personal background, identity, or financial circumstances.
After all, who knows how many good ideas we’re missing out on because of the capital gap?
For more information, or to download a full copy of the Kauffman Foundation report, click here.
Source: Cosgrove, B., Gaskin, P., Goff, T., Kenney, E., Milli, J., and Vassell, H. (2023)
“Access to Capital for Entrepreneurs: Removing Barriers: 2023 Update,” Ewing Marion Kauffman Foundation: Kansas City.
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