September 23, 2014

Top 5 Trends for Small Business Finance in 2009

Top 5 Trends for Small Business Finance in 2009The year 2009 will be a difficult one for small business finance.   We’re in the midst of a recession that looks to rival, if not beat, the recession of 1980-1982 as the worst since the Great Depression.

While I’d like to make some rosy predictions about small business finance in the coming year, I’m afraid that the data won’t support that.  So I’m going to have to point to the reality.

Here are my top five trends for small business finance for 2009:

1. The amount of capital provided to small and start-up companies will continue to shrink

All of the sources of finance, from venture capitalists to business angels to banks to peer-to-peer lenders, are all reducing the amount of money that they are providing to entrepreneurs.   Until the problems in the credit markets get resolved and the economy starts to grow again, it’s very unlikely that we will see a reversal of this trend. Getting money will be difficult for entrepreneurs in 2009.

2. Investors in start-up companies will continue to face a poor market for exiting from their investments

The IPO market is in a deep slump and there is little indication that it will emerge from that downturn in 2009.  With the economy in recession and sentiments turned against investments in public equities, it’s hard to see how any but the handful of start-ups with already strong positive cash flow will go public in the coming year.  The market for acquisitions looks almost as bad.  Few companies can raise debt to acquire other businesses right now, and, with the stock market down, acquisitions with company stock are difficult to pull off.  Until the economy gets moving again, the acquisitions market should stay in the doldrums.

3.  Methods for internally financing companies will grow in popularity

With sources of external financing remaining difficult to tap in the coming year, we will see the emergence and growth of creative ways to finance businesses internally.    For instance, companies that help people tap their 401Ks to finance their businesses, and consultants that advise entrepreneurs on ways to bootstrap their growth, will grow in popularity.

4. Government officials won’t pay much attention to entrepreneurial finance

With massive job losses and big companies on the brink of failure, policymakers won’t make 2009 the year that they adopt major new policies toward entrepreneurial finance. No one in the government will be re-reading Josef Schumpter to figure out how to stimulate the process of creative destruction.  Instead, they will be focused on the opposite — bailing out big companies.  Virtually of all the ideas for changes to entrepreneurial finance that had been floated previously — such as cutting capital gains taxes on start-ups and funding new high tech companies — will be driven off the agenda by a focus on fixing the problems faced by big businesses.

5. Attitudes toward financing start-ups and small businesses will change

During 2009, a new realism about entrepreneurial finance will continue to emerge.  Entrepreneurs are beginning to recognize how difficult it is to raise money for their companies , and are beginning focus more on finding the right sources of capital for their businesses.  Moreover, they are becoming less willing to start businesses with little chance of getting needed capital.  At the same time, investors, like venture capitalists and angel groups, are lowering their expectations of how much money they will make off of their investments and are increasing their expectations of how long it will take to exit from them.  The shift toward greater realism about entrepreneurial finance will accelerate during 2009, bringing us back from the inflated views of recent years.

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About the Author: Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool’s Gold: The Truth Behind Angel Investing in America; Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By; Finding Fertile Ground: Identifying Extraordinary Opportunities for New Ventures; Technology Strategy for Managers and Entrepreneurs; and From Ice Cream to the Internet: Using Franchising to Drive the Growth and Profits of Your Company.

28 Comments ▼

Scott Shane


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

28 Reactions

  1. I think #1 has an upside too. Lower start-up capital can help weed out businesses that would normally be started willy nilly. It will force people to face facts and actually plan their ventures better. I think that’s a good thing.

  2. Number four is a bit depressing but reality, nonetheless, and I see a bright spot somewhere in number five. It is what it is right now. The way you have to look at it is through a positive perspective.

    Change creates opportunities and helps us to evolve. It’s time to shed some old ways and learn to adopt new, better ways. The transition won’t be an easy one as they never are. But the end result will make it worth the sacrifices, I think.

  3. I agree with Amanda. It will be interesting to see how peer to peer lending adapts to the current market situation. Micro loans are relatively successful in the third world where credit is otherwise non-existent for those individuals. I believe that the same can be true for micro-credit in an entrepreneurial sense. Sites like prosper.com can be used to “package” several smaller loan amounts to create a lending market of their own to assist small businesses. Ultimately, the micro-loan market could present itself as a great alternative for small businesses when compared to the banks because of all the changes that will occur in that industry. Hopefully small and emerging businesses see that opportunity to collaborate outside of a failing system.

  4. Great list! One of my new year hopes is that #4 is wrong. And there is some noise out of DC that keeps me at least a bit optimistic on this topic. But unfortunately, I think you are right.

  5. “Instead, they will be focused on the opposite – bailing out big companies.”
    It is a grim reality for small business owners every where- not just in USA. In Asia, we can find similar trends too. Most governments feel that it is the big companies that provide large number of jobs. So, they have to be saved. Small business owners perhaps do not need bail out in most cases but they just need some more government support.

  6. Professor, your article is both insightful and challenging. The five capital-related scenarios you forecast appears to me to not adequately weight the signaling role of prices. Specifically, the rental-cost-of-capital will allocate where the smart money accrues. As I am sure you recall, back during the Carter recession, car loans were 18+ percent, and 30 year mortgage notes were 12+ APR. Nonetheless, individuals still bought cars and homes. Personally, in the early and mid 90’s I took down several SBA7A loans at a two-over prime variable rate. Over the life of the notes, my financial costs doubledbut access to the capital was there. As I survey the markets, my read is that dynamic markets require flexibility and maybe, just maybe former exit strategy models need to be reengineered to coincide with the free cash flows of the firm and not predefined payback periods. In closing, I got a real kick out of your term “public equity” in your point number two comments. As a monetarist, I find that Keynesian term to be quite the oxymora . Great read Doc.

  7. Scott, as others have noted, this is insightful, challenging, a slight bummer, but the reality slap it gives many of us is healthy and needed.

    @Robert: I have to echo your sentiments — i shared with several folks at the Wall Street Journal (where i was a columnist for a short time focused in an entrepreneur section they did) — that Peer-to-Peer Lending may provide. One of my publisher clients actually has a report on Peer-to-Peer Lending trends (email me for a free sample of an older report that i can share: q4sales@gmail.com).

    Scott, I have several startups that I’m active with, two that I’ve invested in and my expectations are not that I’ll have any near term return (even prior to the bust), but this info and trend watching is something I will be sharing with them and others. One of them solves a scheduling problem (the link i use in my reply signature) which is more mission critical and which will be impacted by the acquisition trend slightly. They are more into the keep growing our cash flow type of approach, which I find more reassuring right now. Get upright on our own revenues versus investor money.

    Point three was exciting to me because my second investment in a startup is for a company that does just what you outline — help small biz owners structure and use their Solo 401K so they can loan themselves money (subject to IRS rules and all that, of course). This is also how I made my investment in Shiftboard — through my own solo 401k. I love it. I will be having these guys read this post as there’s much to learn here.

    Thank you for a thoughtful and deep post. You inspire helpful comments as well. This is terrific.
    TJ

    p.s. I also think this other site post can offer some ideas for helping biz owners do more with less: http://smallbiztrends.com/2008/11/outsource-delegate-business-to-grow.html/

  8. I talk to lots of new business owners. I am seeing a trend toward starting a side gig and using earnings from a primary job to fund it, for the following reasons:

    1. people are less busy at work
    2. most folks haven’t taken an earnings hit (since they haven’t lost their job) but are spending less money anyway, and saving more
    3. people do not feel optimistic about most investment assets right now
    4. existing businesses are becoming conservative and leaving growth options on the table – which are appealing for part-time and wanna-be entrepreneurs

  9. It will be good if an objective realism will be establish when it comes to small business finance. Do you have a Josef Schumpter book tip?

  10. I hope #4 gets at least some attention. Small business job creation is the source of recovery for the long term. But entrepreneurs will find a way, as Sean writes.

  11. To Seah Harper:

    I am seeing the same trend, but I am skeptical of long-term success. Part-time effort often results in part-time results. At some point these entrepreneurs have got to take the leap, or their business will never be more than a hobby!

  12. It looks like our economy is finally taking a hard turn from the spendthrift venture capitalism of the late 90s. Banks/Investors are so wary of investing in any type of start up now that it comes down to having your own capital to fund your start ups or else you may be out of options. It’s unfortunate that it’s come to this, as it will negatively affect technological advance in the U.S., but it was inevitable on the same note.

  13. @Thomas I think you’re right that having your own capital will be key. I’m not trying to argue with you, but would like to ask you to clarify what you mean about banks and investors being wary of startups. I have not found that since many of the problems have been big companies doing foolish things.

    For example, myself and a handful of other investors in Shiftboard are looking at investing additional funds and see them doing an incredible job, especially in this market.

    I guess if you are talking about internet bubble types of companies than wariness is in order. Do you believe that our technological edge will be lost because funding is now harder to get? Please know that i’m asking these questions in a positive and genuinely inquisitive tone.
    TJ

  14. Hi Scott,

    Regarding this -> Instead, they will be focused on the opposite – bailing out big companies.

    Why do you think they are more focused to that, Scott? Do you think they should focus on the other way around? Why?

  15. RE: 5. Attitudes toward financing start-ups and small businesses will change.

    Or, new business will flourish while highly qualified execs move from corporate America to start their own ventures. How much money do you really need, yes some ventures require millions, most require grit, determination, focus and commitment.

    I just launched ZimpleMoney.com ZimpleMoney’s web product enables people or organizations to make and manage direct loans, rents, leases, settlements and tithing. ZimpleMoney is focused on “naturally” occurring networks like family, friends, churches, schools, organizations, non-profits, charities and foundations. ZimpleMoney sends bills, receive and distribute payments, post to loan ledgers, sends late notices, sends alerts as to the status of billing and collection process and provides tax records. We also provide a digital document management tool to upload files. Take a look at our site at http://www.ZimpleMoney.com Zimpley, Steve Rabago, ZEO ZimpleMoney

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  16. Creativity stimulates.
    Solid creative solutions come to those who are busy creating not looking for a hand out. Our government has never been good at running YOUR business or YOUR life so get busy doing it yourself.
    I was well into my 40’s before realizing it is a do it yourself life. It is never to late to wake up to the fact and begin where you are at. Moving foreward. Motion is required.

  17. Hi Scott, I thought all the readers might also want to take a look at this post at InformationWeek. John Foley did a great job of pointing out that the financial fallout will make for better startups.
    http://www.informationweek.com/blog/main/archives/2008/10/financial_fallo.html

  18. Thomas Glenn, with all due respect what are you saying? The signally role of prices “points” to where targeted investment capital should accrue. Sometimes money should sit on the sidelines regardless of innovative idea. Government needs to either get out of the way, or step up with guarantees to investors to get back in the game. What about the role of the SBA (Government investment) to provide insurance to banks to speculate on new business startups given they are the most robust jobs generator in our economy. “Spendthrift venture capitalism of the late 90s” is just inaccurate. There is no higher/sober hurdle rate imposed on business borrowers than what VC’s force on prospective clients, and no hurry to fund.

    Lastly, using your term “spendthrift”; how would you define a $1,000,000,000,000 USD public sector investment currently under consideration? Responsible? What ever happen to NPV, IRR, ROI, Investment per job created? Does the Plan address an exit strategy?

    Never, ever, have I witnessed or experienced the public sector out perform the private sector. I say give Small Business Owners access to capital equal to $1Trillion, and we would collectivity take this economy to revenue and employment levels never yet experienced.

  19. What about companies like Prosper “people lending people money”. IS this going to become more trendy?

  20. @ Point 5.

    As angel investment is just one form of investment it is obvious that the expected returns and length of capitalising on that return will change in accordance to current market conditions and the expected nature of the economy and industry – there’s nothing new there.

    From my expectations Angel Investors rarely suffer from bouts of a lack of realism.

  21. Corporate greed got us here, and more Corporate greed is not going to get us out. I’m really shocked at how naive we can be, we continue to think that those who put us in this situation are the ones who are going to get us out of it. Think about this; all the reading, all the study, all the great business lectures, and all the wisdom of big business led to the dead end road on which we now stand. Those who survive this crunch will be those who step completely off the old road and chart a new course. I wish you all the best of luck as we make our way through this, and hope to see you all at the other end.

  22. I think #1 has an upside too. Lower start-up capital can help weed out businesses that would normally be started willy nilly. It will force people to face facts and actually plan their ventures better. I think that’s a good thing.

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  25. There truly is nothing new under the sun. What we are seeing now is a return to the values of a past century. Government interference (

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