The Golden Egg

Regardless of what term you use to describe the current economy, the fact remains that investors are sitting on a whole lot of cash. We know--for 2 1/2 decades, we watched them make it.

The revolution in business finance in the past 25 years has created a tremendous amount of wealth. As that money feeds back into the economy, experts say, the best is yet to come.

A radiant future might seem illusive to any entrepreneur who tried to fund a new venture in 2001, but some perspective is in order. Up until the 1970s, raising capital was almost impossible for entrepreneurs.

"The U.S. was capital-scarce," says John Edmunds, professor of finance at Babson College in Wellesley, Massachusetts.

That changed courtesy of two 1978 laws. The Revenue Act of 1978 cut capital gains tax rates, immediately increasing the returns that investors reaped from risky ventures. That same year, a technical change to the Employee Retirement Income Security Act allowed pension managers to invest a small percentage of their money in venture capital funds.

Suddenly, a ready source of capital had the means and incentive to invest. Venture capital took off like a rocket. According to the National Venture Capital Association (NVCA), investments increased from $561 million in 1980 to $37.7 billion in 2001.

But VC funding wasn't the only capital source undergoing changes. During the 1980s and 1990s, credit card companies greatly expanded the reach of consumer credit, and entrepreneurs jumped at the opportunity. According to a National Small Business United (NSBU)/Arthur Andersen study, half of small businesses financed their capital needs in 2000 with credit cards-making it the most common form of financing.

Banks are also aggressively accepting collateral. The NSBU found 20 percent of entrepreneurs in 2000 used assets or inventory as collateral-up from 4 percent in 1997.

It may have been tough to fund an enterprise in 2001, but you certainly had more options than in 1977.

Technology: First it leveled the playing field. Where's it headed now?
Money: Capital was scarce 25 years ago. Here's its state today.
Management: Trends are multiplying fast. What will stand the test of time?
Marketing: Technology and personalization will rule this arena.
Franchising: Get ready . . . the golden age of franchising is upon us.

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This article was originally published in the May 2002 print edition of Entrepreneur with the headline: The Golden Egg.

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