Will banks that received TARP bailout funds be forced to lend money to small, struggling businesses? Will the Small Business Administration ride to the rescue and help out small companies with dwindling cash reserves? Are venture capitalists actually venturing any capital these days?
For a better understanding of the state of finance for small businesses, we spoke with Wharton management professor Gary Dushnitsky, who studies entrepreneurship.
“Large companies have large cash reserves,” he says. “And small businesses have small cash reserves, which means less breathing space.” Dushnitsky says that even small companies with viable business models are more sensitive to what is happening in the credit markets. “You have more slack as a large business. Big companies have the ability to withstand a bump in the road, but small companies do not.“
The venture capital (VC) community has two major concerns, according to Dushnitsky: First, the initial public offering (IPO) window has been closed for several quarters and the taste for mergers and acquisitions has declined. “On the venture capital front there is concern that funds will go toward sustaining the existing portfolio of companies, not new start-ups” that face greater risk. He says that venture capitalists may not want to fund new companies. “They’d rather sustain existing companies.”
The second big concern of venture capitalists, says Dushnitsky, is that they are feeling the crunch because many of their investors’ portfolios are being scaled down. “Their partners cannot keep their commitments,” he warns. Venture capital firms typically raise money from institutional investors such as pension funds and wealthy individuals. Then the VC decides where to invest the funds on behalf of those investors. In exchange, the VC gets a management fee and a part of the returns. Unless you’ve been living under a rock for the past year, you know that pension funds, universities and wealthy investors are all feeling skittish about risky investments.
Companies that can’t bring costs down can’t grow or get involved in big projects, even if they have viable business models. Says Dushnitsky: “They need to reduce inefficiency and redundancies. And of course they need to look for opportunities to find alternative sources of funding.” These sources include corporate venture capital units as well as “angel” investors (typically friends and family). According to Dushnitsky, there is money out there for entrepreneurs. In our next posts, we’ll take a look at alternatives to traditional private venture capital firms.