Essential but Not Sufficient: Access to Capital as an Element of Growth
By Robert Fuller, Beyster Institute Staff

It is said that cash is the lifeblood of a venture, growth requires access to additional cash, and that rapid growth requires access to even more cash!  Access to this capital is often seen as one of the major stumbling blocks entrepreneurs face in trying to grow their companies. In the first article of this series on Growth Entrepreneurs, we described a concept put forward by Dr. Florence Eid on “institutional complementarities.”  Under this concept, there are four elements that complement each other which are required to create private sector activity in an emerging economy:

1. Access to capital
2. Entrepreneurial talent
3. A flow of innovative ideas
4. A favorable legal/regulatory infrastructure

All of them are essential to growth, but none of them taken individually are sufficient for growth, particularly in emerging economies. Access to capital can take many forms depending on where you are located, what type of business you are in, and how much control you are willing to give up or share with others. The entrepreneur often has to choose between “little to build with” and “won’t own or control the result.”  In this article, we will look at the element of access to capital as it relates to growing a business enterprise.

This year’s Nobel Peace Prize went to economist Muhammad Yunus of Bangladesh for his work in developing the field of micro finance. By U.N. estimates, micro finance has provided access to needed capital for at least 100 million entrepreneurs and small business owners around the world. In the U.S., when we think of access to capital for growth companies, we often jump directly to equity investment. In addition to angel investors and venture capital, growth-oriented entrepreneurs can access a growing array of alternative ways to raise capital, including foreign markets, corporate shells, private investment in a public equity (PIPE), direct public offerings, and reverse mergers. These are all very sophisticated tools. Not every entrepreneur who wants to grow their company, in the U.S. much less in emerging economies, can utilize them. A 2000 study by the Milken Institute conducted for the U.S. Department of Commerce Minority Business Development Agency concluded that:

Growth in the U.S. economy has largely been fueled by carving channels of capital from investors to entrepreneurs, our most important source of job, income and wealth creation. A fundamental mismatch between these sources of job creation and access to capital persists, especially with respect to the minority business community.¹

A subsequent analysis of funding opportunities by the Beyster Institute identified two recommendations for helping to address this disparity in the U.S.:

1. Implement a National Capital Access program that would allow banks and other financial institutions to make loans to higher-risk borrowers.
2. Develop a national mezzanine-financing program.²

One channel of capital that has historically been overlooked by all but a few visionaries is Employee Ownership. Employee Ownership (EO) is a set of tools for stimulating business growth and gaining competitive advantage by making employees significant stakeholders in the growth of their company’s equity value. According to Anthony Mathews, Senior Employee Ownership Consultant at the Beyster Institute, there are different EO strategies that can work for start-up companies, to grow a company, or to revitalize a static enterprise. While most of these strategies rely on the concept that “a dollar saved is a dollar earned” by improving the profitability of the company rather than adding outside capital into the mix, a study by the National Center for Employee Ownership (NCEO) shows that when employee ownership is combined with a management style that encourages employees to share ideas and information, companies grow 6 to 11percent faster per year than expected otherwise. This study again points back to the issue of institutional complementarities – access to capital provides the greatest benefit when coupled with entrepreneurial talent (in this case, management style).

Many countries have identified access to capital as a significant public policy issue for accelerating entrepreneurship within their economy. For example, a combined report from Russian Ministry of Science and Technology and the U.S. Department of Commerce on the Russia–U.S. Entrepreneurial Forum held September 24, 2003 in Moscow concluded:

Entrepreneurial firms require capital to grow. Venture capital is a catalyst for economic growth. There is a positive trend of attracting capital to early stage companies in Russia, but there are a limited number of companies that are ready to receive the financial support.³

In the report, the issue of access to capital ties directly into the need to train entrepreneurs about accessing capital and also to the need for better systemic solutions to legal and regulatory challenges identified by the working groups at the Forum. Once again, we see the effect of the institutional complementarities at work. So, while we can see that access to capital is an essential element of creating an entrepreneurial economy and helping entrepreneurs grow their ventures, access to capital alone is not sufficient to accomplish the task. In future articles in this series we will continue to look at the various elements of the institutional complementarities for growth entrepreneurs from both the economic development aspect as well as the perspective of entrepreneurs themselves.

1Yago, G. and Pankratz, A., The minority business challenge: Democratizing capital for emerging domestic markets, Milken Institute, Santa Monica, CA, Sep. 25, 2000, p iv.

2Smilor, R., Fuller, R., and Sherman, D., Accelerating job creation and economic productivity: Expanding financing opportunities for minority businesses, Beyster Institute, La Jolla, CA, April 2003, p 7.

©2006. The Beyster Institute and its authors and their entities. All rights reserved.

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