The Small Business Equity Capital Situation: An Economic Development Perspective
Abstract
Many observers perceive a gap between the need for high risk, patient equity capital and its availability to privately-held, small businesses. Owners of successful companies. consistently profitable but small and lacking glamour, often report that rapid expansion is hard to fund. The major sources of working capital for such firms are loans, and lenders are uncomfortable with rapid change, lenders view fast growth and debt financing as incompatible. The alternative is equity funding, and equity funding seems hard to find.
The authors review the equity capital situation for small business. They weigh the relative merits of differing expert opinion, and assess the policy implications. The authors take an economic development perspective; i.e., they seek solutions that will make the economic pie bigger. They contend that the best solutions will have a balanced, twofold impact: (1) increase the availability of high risk, patient equity capital, and (2) increase the availability of high-quality equity investments in privately-held, small businesses. They argue that the best solutions will combine evolutionary changes in public policy and private action. The authors describe specific 'ally how legislation, regulation, and financial institutions might evolve. The resulting marketplace would provide the strongest small companies with better access to the capital needed for rapid growth. They also describe specific steps that small businesses and their advisors can take to better prepare to enter equity markets.
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