Raising Entrepreneurial Capital

Sherlock also addresses an issue that owner s of many small businesses cite

as a reason for the failure of their business—the effect of bad economic

times. This may be more excuse than reason, however, as his statistics show

that, even in the worst of times:

. Business failures typically average four to five failures per 1,000 businesses

in any normal year (~0.5%).

. In the recession of 1981 to 1983, the failure rate increased to nine out of

1,000 businesses (0.9%).

. During the Great Depression of the early 1930s, the annual failure rate

was only 1.25%. This means that 98.75% did not fail on a yearly basis.

BUSINESS BANKRUPTCY PROJECT

In 1998, Teresa A. Sullivan, Elizabeth Warren, and Jay Westbrook

reported on the ‘‘Financial Difficulties of Small Businesses and the Reasons

for Their Failure’’ for the Business Bankruptcy Project at the University of

Texas at Austin. A major repo rt of the findings of this project was published

in the Summer 1999 edition of the American Bankruptcy Law Journal.

The question asked of a sample of business owners (multiple responses

cause total over 100%) was: ‘‘Wh y did you end up in bankruptcy court?’’

Responses were (% of respondents):

Outside business conditions (competitors, cost increases, etc.): 39

Financing: 28

Inside business conditions (loss of customers, mismanagement, etc.): 27

Tax problems: 20

Dispute with a particular creditor: 19

Personal reasons (illness, divorce): 17

Calamities (fire, flood): 10

Other: 6

ORGANIZATION OF THE BOOK

The rest of the book is laid out logically to follow the financing stages of a

firm’s life.

Chapter 2 is an in-depth look at debt financing. In addition to traditional

bank loans, we will discuss asset -based lending, venture banks, and the Small

Business Administration’s role in lending to business start-ups.

Introduction—In the Beginning 33