Entrepreneurs Limited By Lack Of Capital

By CityTownInfo.com Staff

June 25, 2009

While more laid-off workers are being drawn to entrepreneurship, a study indicates that the majority of newly-launched small businesses close within months.

USA Today reports that according to a CareerBuilder.com survey, one in four jobless workers is considering launching a business, and an analysis conducted by the Kauffman Foundation confirmed that entrepreneurship is indeed on the rise as more unemployed workers seek better options for generating income. But while more adults launched new businesses in 2008 than in 2007, an even larger number closed their doors during the same time.

The main problem, explains BusinessWeek, is that the upsurge in entrepreneurship comes at a time when capital is difficult to obtain. According to a report from PricewaterhouseCoopers and the National Venture Capital Association, venture capital activity sunk to a 12-year low in 2009.

The lack of credit is affecting many jobless MBAs who are trying to launch new businesses."Students recognize how bad the economy is," said Kip Harrell, president of the MBA Career Services Council, an umbrella group for MBA career services officers, "and how hard getting capital is."

Dean Romero of Phoenix is an example. He invested $6,000 of his savings to launch a business selling a product he invented--Breppies, which are soft covers for iPod earbuds. But Romero, who was quoted in USA Today, was unable to raise $250,000 to manufacture and market the product, as he had no collateral to offer the banks.

Ted Kramer, a business analyst with the Small Business Development Center at Palm Beach Community College, told The Miami Herald that entrepreneurs must "have solid footing." Besides having the ability to invest some personal savings into a business, he said, those launching new businesses need good credit and collateral such as equity in a home. Most importantly, they must be realistic with financial projections.

Business Week reports that due to increased interest in entrepreneurship, business schools are increasing support by launching new curriculums on the subject and providing counseling on how to start a business during difficult economic times.

"Students are looking out over the horizon and saying, 'You know what, there may be no job waiting for me when I graduate,'" said Bernhard Schroeder, director of the Entrepreneurial Management Center at San Diego State University's College of Business. "This recession is showing them that they can't trust anyone with their career."

But Schroeder also cautioned that since credit is scarce, students should take advantage of resources like free computer software, coaching, and business plan competitions--which can award seed money and provide important connections.

"We've told them there is no funding, so they have to operate in an environment where their costs are almost zero," he told BusinessWeek. "It's the macaroni-and-cheese mentality."

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