How Entrepreneurs Access Capital and Get Funded

Summary of Study

Bottom Line: Access to capital, the lifeblood of entrepreneurship, is one of the biggest obstacles facing startups. Federal and state priorities, such as the JOBS Act of 2012, Small Business Innovation Research grants, State Research & Development Programs, reformed public venture funds, and prioritizing open data, can help facilitate access to credit and ensuing entrepreneurship.

Debt is the most used form of capital for young firms, with the primary source being banks loans, especially from small banks which specialize at lending to entrepreneurs. 

Equity is rarer but can be more impactful. The main sources of equity financing are angel investors and venture capitalists, which can add tremendous value to companies through their expertise, networks, and guidance.

Nontraditional forms of capital access, including crowdfunding, government prizes, and grants, are also promising methods of accessing capital.

There are several public policies that facilitate or threaten access to capital: 

  1. The Jumpstart Our Business Startups (JOBS) Act of 2012 made more capital available to startups. It expanded the number of investors entrepreneurs could communicate with as they sought funding. It allowed investors to invest up to ten times as much in startups and with less onerous registration requirements.

     

  2. The SEC has considered increasing the income and net worth requirements necessary to be labeled an accredited investor, which could make up to a quarter of active angel investors ineligible. These changes would shrink the pool of available investment capital and constrict entrepreneurship. They would also counteract positive developments facilitated by platforms like AngelList, which connect investors and startups.

     

  3. The Small Business Innovation Research (SBIR) grants help bridge the funding gap between publicly funded basic research, and privately funded commercialization efforts. This gap is known as the “valley of death.” Programs like this can facilitate longer-term employment growth. One of the principal ways that SBIR does this is by acting as a signal of quality, which can attract further external financing. As a result, programs like SBIR have very large net social benefits.

     

  4. State Research & Development (R&D) Programs have led to a number of innovative efforts to improve R&D. Prime examples include the $1.6 billion Ohio Third Frontier initiative, and the Michigan Life Science Corridor program. Even simpler measures, like state matching of SBIR grants, have proven to be associated with increased competitiveness in securing future funding.

     

  5. Public Venture Funds which operate like venture capital funds but with public money have failed to promote two essential elements of successful entrepreneurship: learning and connectivity among entrepreneurs. Public venture funds can be reformed by splitting up single, large investments and instead making multiple, smaller investments. Local entrepreneurs also can be involved by helping select award winners.

     

  6. Promote Open Data making available the financing methods of startups, so researchers can answer questions about the types of financing entrepreneurs use and their success. Expanding access to valuable data sources will bolster knowledge about what works.

Read the full report here

Feature Charticle

Weighing the Pros and Cons of Funding Sources

Findings:

  • Access to capital, the lifeblood of entrepreneurship, is one of the biggest obstacles facing startups.

  • Debt is the most used form of capital for young firms, with the primary source being banks loans, especially from small banks which specialize at lending to entrepreneurs. 

  • Equity is rarer but can be more impactful. The main sources of equity financing are angel investors and venture capitalists, which can add tremendous value to companies through their expertise, networks, and guidance.

  • Nontraditional forms of capital access, including crowdfunding, government prizes, and grants, are also promising methods to access capital.