The Funding Black Hole: A Call for Innovation

There is a funding black hole.  It sucks in and destroys the gross majority of startups worldwide.  It may have even frustrated more innovation, economic development and human progress than all of history’s wars, diseases and natural disasters combined.  This “black hole” is the global gap in startup funding.

Small Capital Needs

Startup funding exists at the smallest levels, either through microfinance (averaging less than $400 per loan), friends, family, small business loans, government assistance or personal wealth.  While an encouraging beginning, none of these capital sources scale well (unless one happens to be already rich or flush with wealthy loved ones).  Loans are particularly burdensome for entrepreneurs, with microfinance being onerous at larger amounts.

Large Capital Needs

The next level of significant startup funding is via equity investment.  Angel investors often provide equity investments for startups needing between $25,000 – $750,000 ($USD), with a 2008 average invested amount of around $275,000 by Angel groups in the US.[i] The next level of funding is through institutional venture capital firms, who average around $5 million per deal.[ii]

While a partial solution, Angel and VC capital has thus far proven unattainable for the gross majority of startups; not because of the amount of funding desired, but because of the astronomic growth and high exit potential needed to attract this funding in the first place.

To attract equity investment, startups must promise at least 11-fold returns over seven years (or 20-50% average annual returns) with dramatic acquisitions or IPOs.  They must be a “home run,” with no points given for a “double or a single.”  A Kaufman study of the Inc 500 fastest growing firms in the US between 1997 – 2007 found that only 16% received institutional venture capital investment[iii].

The Black Hole

This black hole between diametrically small and large opportunities devours the majority of promising startups.  More than 99% of all employer firms in the US are small and startup businesses (employing more than half of all private sector employees), of which more than 50% fail every five years.[iv] It is worth repeating – roughly half of US employer firms fail every 5 years.  In corporate terms, that is enormous turnover with profound consequences for economies, families and reliant business partners of every manner.  Many businesses fail on their own accord, often deservedly so.  However there are profound benefits to be realized from getting the numerous other, sound, high-potential startups the capital that could maximize their impact.

Who will fill the gap?  What proverbial cork will stop up the black hole?  Who will provide those genuinely deserving startups the funding needed to transform markets, economies and lives?  This is not a call for charity or shoddy investments, it is a call for innovation.  The black hole has been called out.  Startups everywhere wait for an answer – for financial innovation – to whisper back from the abyss.

Authors:

Thomas Thurston, President, Growth Science International, LLC,

Mark Streich, Founder, Surxel Venture Advisors


[i] Angel Capital Association, ACA Member Landscape – 2009 Different Than 2008 (And Not), (April 16, 2009)

[ii] Chachere, Peterson & Mendell, National Venture Capital Association & PriceWaterhouseCoopers, Venture Capital Investing Has Modest Start in 2010, Amidst Economic and Market Uncertainty, (April 16, 2010)

[iii] “Right-Sizing the U.S. Venture Capital Industry,” Paul Kedrosky, Ewing Marion Kauffman Foundation, June 10, 2009 (http://www.kauffman.org/uploadedFiles/USVentCap061009r1.pdf) (Accessed June 12, 2010)

[iv] U.S. SBA Office of Advocacy FAQ 2009 (www.sba.gov/advo/stats/sbfaq.pdf) (Accessed June 12, 2010)

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