Launching a business comes with a lot of obstacles, but for entrepreneurs who have been through it, one challenge stands out in their mind: financing.
CO— recently interviewed a group of entrepreneurs from a variety of industries about their biggest startup challenges. Some cited hiring and recruiting, figuring out a pricing model, and building brand awareness, but the overwhelming majority said access to capital was their greatest difficulty when they were starting out.
Several of our interviewees said they had to self-fund to keep their business afloat; one even took out two mortgages on his home to get the money he needed.
While startup founders of all backgrounds and industries find it difficult to raise capital, it's often even more challenging for minority entrepreneurs.
"As a woman, a woman of color, and an immigrant, the doors to [accessing] finance are not always wide open," said Funlayo Alabi, CEO and co-founder of Shea Radiance. "We've had to be really creative in raising finances."
Why is it so hard for entrepreneurs to get funding?
Traditional bank loans for small businesses have historically been tough to obtain, but recent market trends are making it even more difficult for new startups to get the funding they deserve. According to Ewing Marion Kauffman Foundation, there are three primary barriers entrepreneurs face in accessing capital:
1. The disappearance of community banks. Small community banks are often more willing to take a chance on budding business owners, but their numbers have been steadily declining since the Great Recession of 2008. Large banks have become larger by swallowing up their smaller competitors, and are often unwilling to make loans under $100,000 because they're simply not profitable. This hurts the average startup founder, who only needs about $30,000 on average.
2. The rise of service-based businesses with no collateral. Most modern startups are service-based businesses with a cash flow business model. Traditional bank loans are typically made against a business's assets, but without significant collateral, these new service firms don't meet the underwriting criteria for many big banks.
3. Venture capital's focus on 'high growth potential.' Stories of wildly successful investor-backed startups and aspirational shows like "Shark Tank" have fueled dreams of venture capital (VC) for new entrepreneurs. While it's true that VC firms have helped founders achieve astounding growth, it's an incredibly small percentage of them. Kauffman Foundation found that just 0.6% of businesses actually raise VC due to the industry's focus on companies with the potential for "high growth."
Among the startups that received VC in 2016, more than three quarters of them were located in California, Massachusetts, or New York. Moreover, almost all of them were white, male founders: Women and founders of color received less than 2% each of VC that year.
The rise of alternative lenders issuing faster, smaller loans with less restrictive criteria is a beacon of hope for current and aspiring founders. However, there's still a long way to go before access to funding is truly equitable for all entrepreneurs.
Taking the risk, in spite of the odds
Despite their difficulties in getting funding, our entrepreneurial panel persevered and got their businesses off the ground. C. Craig Lambert, president and founder of CCVRS, Inc., believes success is all about being willing to take that risk of putting yourself out there.
"That's what an entrepreneur does," he said.
Watch our video to hear these entrepreneurs speak more about their biggest startup challenges.
CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.
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