The start-up blues - entrepreneurs, banks and venture capital companies

Washington Monthly, Jan, 1989 by Jeremy Schlosberg

You thought banks and venture capital firms help entrepreneurs launch their businesses. Guess again.

Jeremy Schlosberg is a New York writer

They're out there. Right now. Opportunities. The kind that can make you independent, rich, or both.

-BusinessWeek

It's not any secret that running a new business is rough going. The hours. The sweat. The risk. But what's less well understood are the incredible battles entrepreneurs must fight just to open for business-never mind face the competition. Like Walter Payton, they must weave past those institutions that are supposed to help. Venture capitalists who sneer. Bankers who smile politely and say no. Advisers from government development offices who have no useful advice. A tax code that encourages Michael Milken more than Joe Fix-It. Genuine encouragement is frustratingly rare. The best encouragement of all-it's green and fits nicely in a wallet-is all but impossible for many fledgling entrepreneurs to locate. Opportunities may be out there, as BusinessWeek says, but so are the landmines.

Of course, not everyone who wants to start a business is up to the task. But entrepreneurs face a kind of social Darwinism that can quash the fit as well as the unfit. Talk to any entrepreneur who has made it and he or she, with the knowing look of an 1wo Jima veteran, will regale you with tales of how that little start-up was almost blown out of the water. Listen to a few such stories and you'll realize that the astounding failure rate of new businesses-by most accounts, four out of five-isn't just a healthy weeding out of incompetents. Even in this age of the glorified entrepreneur, our society continues to block the path of the aspiring owner.

Who cares? So what if some self-styled Mrs. Fields bombs? The fact is that when the entrepreneur suffers, we all do. After all, 80 percent of new jobs are created by businesses employing 100 or fewer people. And it's more than jobs that the small businessperson brings to the economic table. It's innovation of an order rarely seen in the Fortune 500 world, the expansion of capitalism into areas that are unprecedented, even unimagined. (At Xerox, researchers had worked furiously to develop a personal computer, but management made the brilliant decision to cancel the project.) If a product you use is useful, delicious, or fun, chances are an entrepreneur first conceived it-even if it has since been swallowed by a larger company. An entrepreneur is part inventor, part marketer, part guinea pig, part sacrificial lamb, Big business rarely innovates, but routinely appropriates. When we cut off the entrepreneur we're committing economic suicide.

And the benefits of entrepreneurship can't be measured simply in dollars. If we're serious about the pursuit of happiness, we have to do more to let people do the kind of work that won't put them to sleep or make them feel worthless, For many Americans, that means the responsibility and creativity of running their own business. But instead of building the kind of culture where entrepreneurs are encouraged, we've created an environment where they feellike losers even before they roll the dice.

'Are you crazy?'

Getting money is the Berlin Wall that any entrepreneur must clear. "The biggest problem is always, always, always money," says Peter Francese, an entrepreneur who founded American Demographics.

It's natural to think that seed capital, that first infusion of cash needed by any business, can be readily had from two sources: banks and, venture capital firms. It's natural, but it's also wrong.

As far as banks go, Judy Anderson, president of Venture Management Service, a consulting firm in New York, puts it best when she says, "Banks are not interested in start-ups, period."

Why not? The reason is primarily cultural. The people who "self-select" into becoming entrepreneurs and bankers are, says And"such different people that they have a hard time talking to each other'" Paul Hawken, in his book, Growing a Business, writes"most bank managers and loan officers have never run a business and live in mortal dread that they might have to some day"

Instead of being trained to spot the bold new idea or a solid, well thought-out business plan, bank officers are trained to see how much money you've got. Douglas Castle, a financial consultant in the New York suburbs, admits that a "bank's attitude towards a business plan is that they think them all inherently false." He adds that banks just go by the applicant's financial records. If these look unblemished, the bank officer may "offer you a second mortgage [on your house] and call it a business loan."

This leads to a situation that sounds like an old joke, but it's true: banks want to lend entrepreneurs money only if they don't need it. "I had bankers asking me if I had stock, bonds, or other collaterallike that," says Mary Codd, CEO of Coddbarrett Associates, a Providence-based computer graphics design and systems firm. 'And I'm thinking, 'Are you crazy. Why would I be here if I did?'" When she tried to explain her ideas about graphic design, she wound up with "glassy-eyed stares."