Now we come to money. There is a popular myth that flocks of venture capitalists roam all corners of America throwing money at anyone who has a great idea. This is nothing more than pleasant fiction. Within the startup community, it’s common knowledge that more than three-quarters of all venture capital investments go to just three states, California, Massachusetts, and New York. Despite the efforts of people like Steve Case, Peter Theil, and J.D. Vance, that percentage hasn’t changed for almost fifteen years. States like Texas, North Carolina, Colorado, and Utah are making inroads, but they are still just picking over the financial scraps left by the big three. Much of this has to do with the sectors that attract investment. Technology is still king and tech companies are heavily concentrated in a handful of states. This leaves little for other sectors, or more importantly for our averagists, small main street businesses in out of the way places.
All of this really shouldn’t surprise anyone, and it’s not necessarily a bad thing. Venture investment usually comes with strings and entrepreneurs should be wary about pursuing business relationships with investors whose goals are almost always different from their own. Small businesses need enough money to get the doors open, buy some inventory or office equipment, and operate long enough for revenue to start flowing. If an outside investor is required, the best path is to find angel funding; a single investor who is willing to front enough money to get the business off the ground and is patient enough to not expect an immediate return. But angel funding is only slightly less difficult to come by than venture funding. After surveying 5000+ small business owners, the Kaufman Foundation discovered that over 80.4% of small business startups are financed with personal savings or bank loans where the owner uses their assets as collateral. A little over 14% use personal or business credit cards. Angel money and venture capital account for just 6% and 0.5% of startup financing.[i]
Source: Kauffman Foundation
These numbers match Brian Helmick’s personal experience. Brian is an investor and president of a company that has millions in capital investments around the country. He has seen the difficulties small-town entrepreneurs have trying to raise capital and believes they won’t improve anytime soon. People who want to start mom-and-pop retail shops or businesses based on trade skills like carpentry, welding, or auto repair face financial barriers that are almost insurmountable. For most of the 20th century, those types of businesses provided comfortable incomes for America’s middle class. They kept millions of families financially stable. But today, starting a shop on main street with outside money that isn’t backed-up with the owner’s personal assets is next to impossible.
“It is extremely difficult, almost impossible to find an individual to finance a startup in most of Middle America.” Helmick told me during a call from Charlotte, North Carolina. “The angel level is so difficult. In most of the startups we’ve seen, it’s friends and family, debt financed on credit cards, or mortgaging the equity out of a house.”
Helmick remembers when local banks were an option, but over the last twenty years many smaller community banks that have traditionally been the lifeblood of small-town economic development have been acquired by larger financial institutions. This has severed the local bonds that enabled small business owners to get unsecured bank loans.
“It used to be that in small towns everyone knew everyone else. You knew the president of the local community bank. You went to church with the bank board. Your kids played together. So, if you wanted to open a business on main street, like a floral shop, you could probably convince the bank to make that loan without putting your house up as collateral. With large regional and national banks taking over, those types of relationships are completely gone. These local banks are going to continue being gobbled-up over the next ten to fifteen years.”
Billy Bare experienced this reality back in 2017. After retiring from the police force in Ashland, Kentucky, Bare wanted to take his experience as a firearms instructor and open a gun shop with an indoor firing range. Morehead State University had a small business development center (SBDC) located directly across the street from Bare’s precinct, so he decided to go in and see what they could do to help. “I got to know the lady, and she was like, ‘Why don’t I help you write a business plan and connect you with some local lenders who might be able to help you out.’ I was like, well, this won’t cost me anything so why not?”
After crunching the numbers, Bare developed a solid plan and estimated he’d need around $700,000 to get his shop off the ground. Relying on the referrals from his new friend at the SBDC, he began reaching out to various banks and credit unions around Ashland. “I called two regional banks and they laughed. One literally laughed in my face. But I eventually found a local lender that bit. The loan officer was into guns and saw the vision. He understood the [gun] culture, the opportunity, and the need I wanted to fill.”
Bare was able to scrape together enough money for a down payment, but still had to use his house as collateral for the $700,000. “I had no money. I was a policeman. I went through a divorce in 2013 and I had nothing. I was eating dollar meals. But the community bank believed in me. I was flipping houses before that, and my dad and I had a little bit of cash. We had our 20% down and our personal assets. But that was all we had. We’re not from a wealthy family.”
Billy Bare of Bare Arms Trading Company. Photo Courtesy of HD Media and the Huntington Herald Dispatch.
Things came together though and “Bare Arms Trading Company” opened in 2017. Later that year, Bare rented a temporary retail space in a local mall to sell branded t-shirts, hats, and other apparel items during the Christmas season. It was a marketing campaign; his only interest was to raise awareness about the gun shop. The t-shirts sold out within a matter of days. Customers loved both the wordplay and the Bare Arms brand. “The temporary store did really well, and I was like, ‘cool’, but we closed it down after the Christmas season was over. I was in the gun business, not the t-shirt business.”
The Ashland gun store continued to grow. Bare saw more opportunities in nearby Huntington, West Virginia and began developing plans to expand, but he didn’t want to simply replicate the same type of shop he’d built in Ashland. Instead, he wanted a gun shop with expanded inventory, a multi-lane firing range that could safely handle both handguns and rifles, and a themed restaurant all in one building. He figured he’d need around $2,000,000 to do it right. By chance, the loan officer who helped him open the first store had recently moved to a larger bank with higher lending limits. Even though he still had to use his personal assets as collateral, based on the performance of his first store, Bare was able to get the financing in place and opened the second flagship store in 2018. Things continued to grow.
During the 2018 Christmas season, Bare decided to rent space at the local mall in Huntington and follow the same promotional strategy he’d used in Ashland the previous year. Once again, his t-shirt inventory sold out. Bare agreed to extend the seasonal lease on the mall space and began making more shirts. That’s when things shifted into high gear. “A little later my accountant started showing me the numbers and he said flat out, ‘Billy, you’re not in the gun business, you’re in the t-shirt business.’ So that’s when we started expanding our retail stores.”
Four years later, even with all the negative headwinds caused by the COVID pandemic, Bare Arms Trading Company now has nine retail stores, three restaurants, and two gun range complexes located in West Virginia, Kentucky, Tennessee, and South Carolina. Sadly, the small community bank that helped him get started was purchased by a larger institution and changed its lending standards to meet more stringent federal guidelines. Today, Bare would never have been able to get financing to start his company.
So, what options do main street entrepreneurs have to raise money? Several regional banks around the country have recognized both the need and opportunity in local lending markets and are developing programs that lower the requirements for commercial loans. Ohio-based Huntington Bancshares, for instance, has branch locations in hundreds of small towns across eleven states and places emphasis on filling the gap left by community bank closures. According to SBA data, Huntington is the most active 7a small business lender in the nation, by a huge margin. In the current fiscal year alone, it has approved 1,668 7a loans. The next most active 7a lender is Wells Fargo with 720 approved loans.[ii] More regional banks could help fill the gap, but are significantly constrained by federal banking regulations, a fact that even the Federal Reserve System’s Board of Governors has recognized.[iii] There is plenty of capital in the banking system to revitalize main streets across the country. Federal and state regulators just need to get out of the way.
So, for the time being, the only options available for main street entrepreneurs are the ones that have now become mainstays in the small business community; personal savings, credit cards, borrowing money from friends and family, or putting a house up for collateral to get a bank loan. Venture capital will not fill the gap left by the disappearance of community banks. The idea that a merry band of venture capitalists and angel investors will wander out of a magical forest to help finance small businesses in Middle America is nothing more than a fairytale born out of a time that’s long since passed.
[i] https://www.ondeck.com/resources/startups-really-get-money-start
[ii] https://www.sba.gov/partners/lenders/7a-loan-program/100-most-active-sba-7a-lenders
[iii] https://www.federalreserve.gov/publications/2019-november-consumer-community-context.htm
