Page 137 - 1-Entrepreneurship and Local Economic Development by Norman Walzer (z-lib.org)

126 Deborah M. Markley

the business. The first section of this chapter describes constraints on capi-
tal access by rural entrepreneurs and issues related to capital access as rural
entrepreneurs start up, operate, and grow their businesses.
In addition, since entrepreneurship development is a long-term eco-
nomic development strategy, the system of support for entrepreneurs must
be sustainable over the long term as well. The second section of this chap-
ter, therefore, describes how communities can access the financial resources
to build and sustain an entrepreneurship development system. Specific at-
tention is paid to discussing the challenges of accessing public funding for
local economic development efforts and the opportunities provided by
community philanthropy and foundations for supporting entrepreneurship
development.

FINANCING RURAL ENTREPRENEURS

In a study of Inc. 500 companies, Amar Bhide (2000) concluded that “the
well-funded and carefully planned start-up represents the exception” (22)
rather than the rule among entrepreneurial ventures. Indeed, most of the
company founders interviewed bootstrapped their start-ups with modest
amounts of capital—an average of only $25,000 in 1996. Almost three-
quarters of this start-up capital came from personal savings, credit cards,
family, and friends. Equally important, only 7 percent had financing from
banking institutions, and only 7 percent received investments from formal
venture capital institutions or angel investors.
Rural entrepreneurs face an even more challenging environment in terms
of accessing capital to support their business enterprises because of three
significant constraints. First, there are fewer capital providers in most rural
communities, and the transaction costs associated with identifying and ac-
cessing capital outside the community are high. Consolidation in the bank-
ing industry has reduced the number of institutions serving rural markets
and has changed the mix of institutions. While branches of larger banking
institutions may bring more skilled lenders to rural communities, they of-
ten change the lending mix and decisionmaking locus in such a way that lo-
cal entrepreneurs find it harder to acquire the capital they need. While a de-
termined entrepreneur may locate sources of capital beyond the local
market, the costs of that capital are likely to be higher.
Second, in many rural communities, entrepreneurs are not adequately
prepared to access capital from available suppliers—a case of undeveloped
deal flow. To obtain a loan from a bank or an investment from a venture
capitalist, an entrepreneur must present a business plan and financial state-
ments that provide adequate information to justify a lending or investment
decision. In many cases, entrepreneurs are unprepared to access the capital