Why Banks are No Longer the Top Choice for Funding Start-Ups?
“A bank is a place that will lend you money if you can prove that you don’t need it.” – Bob Hope
Growing up in Saginaw, Michigan, a midsize city in the heart of the bustling auto industry, I felt I was at the epicenter of the world. This was an age when Los Angeles competed with Detroit for companies and a labor force.
If you wanted to be an ad guy or an engineer, Motor City and the dozens of towns and cities that flourished around the auto-industry brought a vast infrastructure of supporting businesses and billions of dollars of wealth. Each of these communities were anchored by strong vibrant financial organizations who converted our savings into healthy investments that created wealth, jobs and a positive return of the savings they held on deposit at the bank.
It’s not entirely clear what happened but a perfect storm seemed to have materialized and decimated the financial systems that funded entrepreneurs and their start-ups. Asset classifications are changing with the times and with that assets now include, software code, pharmaceuticals and intellectual property that may be unique but unproven, patented ideas, etc.; these kinds of assets aren’t standard hard assets that banks are organized to see as loan collateral. Rather, the kind of assets banks lend against include real-estate, automobiles, and semi-generic machines. As the typical business loan needs have changed, banks should have evolved; however, it seems banks more now than ever are requiring hard assets to secure funding for any business venture. The soft assets have become “synthetic” financials.
The first crisis in this perfect storm was the control of the Securities Exchange Commission (SEC), the Federal Reserve and other regulatory bodies by the very companies they were supposed to police, the banks. Economists have a name for this – CAPTURE – which held our savings and fueled productive capital investments. Our savings in pension plans, IRAs and 401Ks captured millions of dollars and transferred them to Wall Street where they were “invested.”
Here is where the collapse began:
- High-Cost of Information – modern technologies characterized by highly specialized intellectual property are not viable collateral to support a loan. These modern technologies are the face of today and tomorrow but require substantial investments, and include software code, nano-particles, pharmaceuticals, gene therapy and more.
- High-Cost of Transactions – All investments have a cost, and only increases as time goes on and investments grow. Investing through Venture Capitalists, Angel Groups, Stock, and SAFEs all come with some sort of cost whether it be annual fees, legal costs, loss of capital, etc.
Is the new, new the new normal; are we abandoning ship? With the turn of the 21st century, banks should be revolutionizing their efforts. Instead, the Wall Street Journal explained, “Banks are closing branches at the fastest pace in decades, as they leave less profitable regions and fewer customers use tellers for routine transactions.”