A Compass for Navigating the Ever-Changing Capital Landscape

Written by Kim Zeuli, Sathya Vijayakumar and Lena Ferguson

On March 25, the Securities and Exchange Commission approved new rules in the implementation of Title IV of the JOBS Act, allowing startups and established businesses to raise equity capital from unaccredited investors for the first time, including through online resources. This is no small news: A recent article from Entrepreneur said the new rules “should be a complete game-changer for the way businesses are funded.” Indeed, in the UK, where crowdfund investing has been allowed since 2011, crowdfunding platforms such as CrowdCube and Venovate have experienced overwhelming success and popularity.

It is likely that the capital sources small businesses use today will not be those that entrepreneurs predominately use in the future. The passing of these rules brings this to the forefront. Today’s entrepreneurs have perhaps more capital options to choose from than at any other time in history, with new financial products and organizations being created each year. While this influx is exciting, it complicates an already complicated issue for entrepreneurs: How can businesses find the “right” capital to support their growth?

Without at least a cursory understanding of the different types of available capital, small businesses may limit their search to known resources and thereby may not find the best capital for their growth requirements. In turn, finding the right capital match gives small businesses a better chance of securing capital from a provider that targets their firm type. In partnership with JPMorgan Chase & Co. and their Small Business Forward initiative, ICIC took a step toward making the landscape easier to navigate by creating a practical and concise guide for small businesses that are exploring outside capital.

Our target audience for Financing Growth: A Practical Resource Guide for Small Businesses includes entrepreneurs in incubators and accelerators that have started companies in high-growth industries. As such, we focused primarily on equity capital because it is essential for second-stage growth and, with the explosion in financial innovation over the last decade, it is typically more difficult for small businesses to find comparative information on equity and competing new vehicles than for debt.

The report includes insights into the relative advantages and disadvantages of alternative capital options, successful case studies of each type of capital, the size of each capital market and best fit recommendations to help businesses quickly identify whether a capital type would be appropriate to pursue. We focused on the following four categories of capital:

1. Traditional private-sector capital sources (private equity, venture capital, and angel investors);
2. SBA programs (the Small Business Investment Company, Small Business Innovation Research, and Small Business Technology Transfer programs);
3. Specialized opportunities (program related investments, community development venture capital and EB-5); and
4. New sources of capital (revenue-based capital, rewards-based crowdfunding, and crowdfund investing).

Through our research, we found an overwhelming amount of innovation and growth in emerging capital sources. We also found that incubator and accelerators are providing a high level of support for small businesses, including in financing. No two of these programs are alike, and incubators and accelerators are using a plethora of models to finance small businesses both participating in their programs and in their wider ecosystems and communities. Our report highlights models for funding competitions, venture capital funds, angel investor networks, and web-based and crowdfunding platforms being used at these institutions. The report also profiles federal capital programs for incubators and accelerators to support their funds.

LACI, a cleantech business incubator in Los Angeles, is just one example of the type of support incubators can provide in terms of increasing the efficiency and success of the capital search for the companies they serve. LACI just launched a new funding platform, the California Global Innovation Exchange (CAGIX), which allows investors to easily identify, research, and invest in LACI’s portfolio companies. CAGIX offers customized company search tools based on a number of variables, a secure data room for registered Broker-Dealer due diligence, and simple workflows to guide the investment process.

As the capital landscape evolves and innovates, incubators and accelerators will have an important role to play supporting the growth of small businesses, including helping them to navigate traditional and new sources of capital.

Read ICIC’s new report, Financing Growth: A Practical Resource Guide for Small Businesses, released at an April 16 event in Washington, DC, hosted by JPMorgan Chase & Co. The JP Morgan Chase & Co. Small Business Forward program is a five-year, $30 million initiative to support the formation, growth and success of small business clusters around the world to help small business owners succeed.