Valley of Death Hurts Startup Businesses

State could help with WHEDA funding. Why not try it on a pilot basis?

By - May 11th, 2015 03:07 pm
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The so-called “Valley of Death” for launching high growth companies is very real in Wisconsin, at least on one side of the financing equations.

The first financing for a new venture usually comes from “friends, families and fools.” The next investment is often called the “seed round” at, say $25,000 to $50,000, from the same people or one of the few seed funds. Then comes what’s called the A round, often from angel investor networks or angel funds.

At those levels, over the last decade, Wisconsin has been a lot better in providing funds to high-growth entrepreneurs. There is money available that was never there before, except in dribbles.

It’s the next round, the B round that gets harder to find. But it is obtainable on the equity side with the sale of more stock. Often, it is from angel investors who are doubling down. It’s either an “up round” at a higher valuation if the company is taking off, or a “down round” if lift-off for revenues is promising but still down the road.

What’s missing, though, is debt capital to go with B round equity investments, namely lending from banks. With both state and federal regulators all over them, banks have become very risk adverse, especially for companies without a long, profitable track record.

There are some loans available from public agencies at the local and state level, and there are some loan guarantees at the federal level. But those programs are not enough to support fast growth ventures.

Once the new enterprise sees its sales start building into the millions of dollars, working capital needs for inventory, receivables and growing staff become all important. Even with current assets building up, the young companies, even if profitable, are not bankable in today’s lending environment.

That needs to get fixed. It is now common knowledge that all net new jobs, especially high-pay jobs, come from startup companies. So it is critical for the prosperity of the state that bank capital be created to fill the “Valley.”

That points to the need for substantial guarantees at the state level to lower the risk for banks.

This could be done by an agency like the Wisconsin Housing and Economic Development Authority (WHEDA), which has already done a few such guarantees at a low level.

One requirement: The lenders and guarantees should not insist on onerous personal guarantees from the founders. Most of them already have huge chunks of their own skin in the game.

If Wisconsin could solve this hole in the debt capital picture, it could become a magnet for entrepreneurs who want to launch high-growth companies.

We need to be aware of the reality that there will be some defaults on the loans and/or guarantees, because these new ventures are risky. But the payoff in jobs, sales and income tax revenues to the state from the companies that make it and their employees should more than offset the losses.

It’s worth a shot. Start small; test the benefits versus the costs. Cut it back if it doesn’t work. Expand the guarantees if it proves to be a winner.

John Torinus is the chairman of Serigraph Inc. and a former Milwaukee Sentinel business editor who blogs regularly at johntorinus.com.

Categories: Business, Politics, Torinus

2 thoughts on “Valley of Death Hurts Startup Businesses”

  1. Daniel says:

    “It is now common knowledge that all net new jobs, especially high-pay jobs, come from startup companies.”

    That’s common knowledge? Startups may create a disproportionately high amount of net new jobs, but I’d like to see some support for the much different claim made in this article.

    Cf., https://www.stlouisfed.org/Publications/Regional-Economist/April-2011/Are-Small-Businesses-the-Biggest-Producers-of-Jobs

  2. Bruce Thompson says:

    Daniel, This is the conclusion from ongoing studies by the Kauffman Foundation. With existing firms, growth and shrinkage cancel each other out: Here is a link to one of their reports:
    http://www.kauffman.org/what-we-do/research/firm-formation-and-growth-series/tech-starts-hightechnology-business-formation-and-job-creation-in-the-united-states

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