The 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.