The journey of a business owner is filled with countless challenges, and the most significant is raising capital. This fundamental business activity is pivotal to maintaining growth but fraught with complexities. It often tests the mettle of entrepreneurs and leaves them in a state of profound anxiety and frustration. The harsh truth is that most business owners need to prepare for this uphill battle. In this article, we dive deep into the challenges of raising capital and shed light on the realities entrepreneurs face during this demanding process.
Understanding the Landscape
To comprehend the intricacies of raising capital, it is crucial to understand the business finance landscape. The Small Business Administration (SBA) reports that over 627,000 new businesses open each year in the U.S., with the majority being small businesses [1]. On the flip side, around 595,000 businesses close each year, with inadequate funding being a primary reason for their demise [1]. These figures depict a grim picture and underline the dire need for business owners to understand capital acquisition better.
Capital Raising Challenges
- Stringent Lending Criteria: Traditional lenders, such as banks, employ strict lending criteria that many businesses still need to meet. A 2019 Federal Reserve report highlighted that 43% of small businesses applied for loans, but only half received the requested amount [2]. The principal reasons for rejection included weak credit history, insufficient collateral, and low profitability.
- Limited Access to Venture Capital: Venture capital (VC) funding is a substantial source of financing, but access is limited. According to the National Venture Capital Association, only 1% of U.S. companies have obtained VC funding [3]. The issue arises because VCs typically favor technology-driven startups, leaving businesses outside these sectors scrambling for funds.
- The reluctance of Angel Investors: Angel investors can provide significant funds, but the competition is fierce. A study by the Angel Capital Association found that only 25% of companies that apply for angel investment receive funding [4].
- Equity Dilution: Issuing shares to raise funds leads to equity dilution, which can decrease the founders’ control over the company. A study by Correlation Ventures found that founders owned just 15% of companies at the time of their IPO [5].
- High-Interest Rates: Alternative lending options like peer-to-peer platforms or direct lenders often levy high-interest rates. A Federal Reserve report showed that small businesses borrowing from online lenders paid an average APR of 94.1% [6].
An Ill-Prepared Majority
Data and experience show that most entrepreneurs must be equipped to navigate this treacherous terrain. A CBInsights study found that 29% of startups fail because they run out of cash, and 8% fail because they get outcompeted [7]. Both scenarios underline the severe need for more financial acumen among entrepreneurs.
Many business owners must pay more attention to a robust business plan and a sound financial model. A study by Palo Alto Software found that entrepreneurs with a business plan are 2.5 times more likely to secure funding [8]. Despite this, many businesses approach lenders without these fundamental tools.
There needs to be more understanding of different types of capital. A study by Wells Fargo found that 53% of small businesses use personal funds for capital, and only 33% rely on bank funding [9]. The over-reliance on personal funds and the under-utilization of other capital sources underscore the limited understanding of capital acquisition.
Final Thoughts
The process of raising capital is far more challenging than most entrepreneurs anticipate. Most need to prepare to face the realities of this process, resulting in business failure or stagnation. Entrepreneurs must understand these challenges, develop solid business plans, and carefully strategize their capital acquisition efforts.
References [1] U.S. Small Business Administration Office of Advocacy. (2020). Frequently Asked Questions About Small Business. [2] Federal Reserve Banks. (2020). 2019 Small Business Credit Survey. [3] National Venture Capital Association. (2020). The NVCA Yearbook. [4] Angel Capital Association. (2019). The American Angel. [5] Correlation Ventures. (2020). Founder Dilution: How Much is “Normal”? [6] Federal Reserve Banks. (2018). 2018 Small Business Credit Survey. [7] CBInsights. (2019). The Top 20 Reasons Startups Fail. [8] Palo Alto Software. (2018). Impact of Business Planning on Success. [9] Wells Fargo. (2020). Wells Fargo Small Business Index.
