The Small Business Equity Capital Situation: An Economic Development Perspective

Abstract

Mony observers perceive a gap benveen ihe need for high risk, patient equity capital andits availability to privately-held, small businesses. Owners of successful companies, consistently profitable but small anil lacking glamour, often report that rapid expansion is hard to fund.Tlie major sources of worl'ing capital for such firms are loans, and lenders are uncomfortable witli rapid change. Lettders view fast growth and debt financing as incompatible.The alternative is equity fiinding, and equi ty funding seems hard to find.The autliors review ihe equity capital situation for small business. Tliey weigh the relative meidis of differing erpert opinion, and assess the policy implications. The authors take an economic ilevelopnient perspective; i.e., they seek solutions that will make the economic pie bigger.They contend tliai ihe best solutions will have a balanced, twofold impacri (l) increase the availobility of high risl, patient equity capital, and (2) increase the availability of high-quality equity iiiveitnients in privately-held, small businesses. They argue that the best solutions will combine evolutionary changes in public policy and private action. The authors describe specifically how legislatioii, regulation, and jinancial institutions might evolve. The resulting marketplace would provide the strongest small companies with beuer access to the capital needed for rapid growth. They also describe specific steps thar small businesses and tlieir advisors can take to better prepare to enter equity markets.