The Golden Egg

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.

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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.

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