The ReSET - The Funding Gap for Startups

8/14/17

Newt Fowler

Why do startups (those in business less than 5 years) matter? Because they make up 34% of all employers, almost all net new job creation, and almost 20% of all gross job creation. A recent New York Fed report on startups underscores not only these reasons why startups matter, but also highlights how hard it is for startups to find financing. While this won’t come as a surprise to any early stage entrepreneur, the reality is that there is a funding gap to supporting one of the most important job engines we have in the U.S.

Engine for Growth. Here are some of the insights gained from the NY Fed report:

  • Startups are twice as likely as mature firms to be growing
  • They’re more likely to need financing to grow
  • Startups are more optimistic about their future prospects than mature firms, and, in particular, their potential to hire


Mind the Gap
. Yet most startups struggle with finding financing:

  • Most realize they’re a credit risk
  • They’re more likely to struggle achieving profitability – often due to being undercapitalized
  • Half of startups are seeking financing or have a financing shortfall to meet their needs
  • The funding levels that startups seek are relatively nominal compared to mature firms


According to the Fed Report, the reality is that “more than half of startup applicants are either avoiding debt or are discouraged from applying.” Those that stretch their financing needs often end up using credit cards to finance their working capital needs. I’m sure that’s not a surprise to many entrepreneurs. What is surprising is how under-banked this critical growth component of our country is.

Rethinking Capital. With all the buzz around impact investing, social entrepreneurship, and alternative models for “derisking” investments in early stage companies, the reality is we need to redouble our efforts to design and implement financing vehicles to ensure that this critical driver of jobs and economic performance doesn’t run out of gas. There are many studies highlighting the decrease in startup activity in the U.S. Some question whether we’re watching its slow death –perhaps the downward trend is due less to some devolution in our willingness to take risk than to the structural challenges faced by startups when it comes to financing their growth. The NY Fed has helped shed light on what may be driving this entrepreneurial entropy. Communities which figure out how to capitalize their startup community have the opportunity to buck the trend.

With more than 30 years’ experience in law and business, Newt Fowler, a partner in Womble Carlyle’s business practice, advises many investors, entrepreneurs and technology companies, guiding them through all aspects of business planning, financing transactions, technology commercialization and M&A. He’s the pastboard chair of TEDCO and serves on the Board of the Economic Alliance of Greater Baltimore. Newt can be reached at nfowler@wcsr.com.

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