3 Financing Keys for Aspiring Entrepreneurs
As bank assets become more concentrated, entrepreneurs face increasing difficulty in obtaining financing. Here's how to maintain your momentum until you find funds.
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By design, MIT's launch of "The Engine" last October gave aspiring entrepreneurs new hope. The venture offers startups funding, space and expertise. For companies in the scientific and technological sector, in particular, The Engine aims to put innovation ahead of profits by providing support to young companies with transformative potential.
MIT's program is a bright spot in an otherwise bleak funding landscape, but its scope is limited. And it's only a blip in terms of what's needed overall. Because the reality is that the banking system is broken, and it's keeping many entrepreneurs from turning their ideas into businesses.
Fewer banks mean fewer entrepreneurs.
The numbers are dramatic. Since the 1980s, the United States has gone from 15,000 banks to just 5,000, according to the Federal Deposit Insurance Corporation. Of the ones remaining, just 12 megabanks control nearly 70 percent of banking assets, former Federal Reserve Bank of Dallas President Richard W. Fisher noted in a 2013 speech.
What's more, big banks tend to favor big business. Reliant on traditional (but outdated) underwriting models, these institutions find it difficult to assess the potential and risk entrepreneurial companies pose. And that's posed a hardship for those small companies, because instead of prompting banks to adapt, the consolidation trend has actually had the opposite effect: Banks simply aren't lending to many startups.
Need proof? Look no further than the declining entrepreneurship rate. Trending downward for decades, the percentage of new businesses fell below an important threshold in 2008. That year, more businesses closed down than new ones were created, for the first time since tracking began, according to Gallup. The decline has continued ever since.
For any new company to survive, then, it must explore the road less traveled.
The curious case of Amazon
While Amazon hasn't seemed like a "startup" or a "young company" for quite some time, the retail giant offers an interesting case study in current financing realities for new businesses that challenge the status quo. The company has a history of favoring growth and has spent years creating significant asset value, but not earning a profit.
The traditional financial underwriting model just wasn't able to appropriately assess an opportunity like the one Amazon represents. So, as a result, initial funding didn't come from a bank.
Obviously, Amazon found other avenues to execute its vision. And that vision worked: As of the third quarter of 2016, it posted its sixth consecutive profitable quarter, with several quarters setting company records.
Okay, not every startup is an Amazon. But when it comes to obtaining capital, aspiring entrepreneurs face hurdles that force most of them to scramble to figure out their financing. Such limited options can stifle innovation, risk-taking and the ability to get companies up and running.
Out with the old: financing fundamentals for 2017
The truth is, even if traditional banks can't be bothered to help, alternative funding options for startups exist. From bootstrapping or friends-and-family funding, to crowdfunding and venture capital, these options have reshaped the challenge for entrepreneurs: Today, they need to focus on not getting so caught up in accessing capital that their execution suffers.
Here are three keys to help maintain your own entrepreneurial momentum while you explore options and obtain financing.
1. Forget the 50-page business plan. Don't wait for the planets to align. Get started now. The days of writing an intricate business plan and getting a bank loan are over. Today, it's about focusing on developing a minimum viable product and continuing to iterate in parallel with building your company and securing the necessary financing.
Entrepreneurs like BarkBox co-founder Henrik Werdelin have been touting the virtues of the 100-day approach: If an idea can't be developed into a minimum viable product that garners customer interest within 100 days, it gets dropped completely.
In other words, given the speed of marketplace change, getting to market as soon as possible is imperative. Entrepreneurs who spend years developing an idea often find the market has left them behind. Instead, the easiest, fastest and most economical way to validate an idea is to put it into the market sooner rather than later. And speed has its rewards: Getting some market traction can work wonders for attracting additional financing.
2. Spend more sweat than money. In the early stages, spend carefully and use equity wisely when you're acquiring talent, vendors and service providers. Build -- and pay for -- only what's needed to develop and deliver the minimum viable product.
Poor cash-flow management is the reason 82 percent of young companies fail, according to Jessie Hagen of U.S. Bank. When cash is in short supply, consciously putting a heavier value on sweat equity helps keep spending in check and the business moving forward.
3. Don't beg; build relationships instead. When seeking financing, keep in mind that old adage about people wanting what they can't have. At the start, be especially mindful of cultivating relationships. Don't be desperate for financing -- or at least don't convey that. Nothing chases bankers and investors away faster than a proposal that sounds like groveling.
Instead, focus on creating in investors and lenders a sense of FOMO, or "fear of missing out." Generating market excitement and feedback through effective delivery of a minimum viable product can do more to create investor interest than any plan or proposal.
So, if you can connect on an emotional level and build relationships over time, potential investors will ask to be part of your company's future, instead of the other way around.
The bottom line: The best way to go from idea to startup to successful business is to keep moving forward. Financing -- or the lack of it -- stops a lot of entrepreneurs before they get started. While it's not easy to build a company with little capital, taking incremental steps to get a solution to market paves the way for investment down the road. So, you'll have won on both fronts.