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Brother can you spare a loan? An idea on how to fund the “Idea Economy.”

by | Sep 4, 2015 | Daily Life

How do we get traditional lending institutions to place a more prominent role in funding the “idea economy”? In this article we look at the shifts in thinking that need to take place to spur innovation and entrepreneurship.

Let preface this article by saying that this is not the result of a “Jerry Maguire” moment, where a lack of sleep and rising stress gave way to an outpouring of wistful thinking and pie-in-the-sky ideas. Rather it is a result of being a willing participant in this thing called entrepreneurship and wanting to see more join in.

As an attendee of many of the One Week KC events going on here in Kansas City this week, I am filled with a great sense of excitement and spirit. For those who don’t know, this is a series of events designed to teach, motivate, inspire, and build networks for the entrepreneurs within the Kansas City region. It also coincides with one of the Big 5 Ideas for KC of making Kansas City “The Most Entrepreneurial City in America.” As a hometown boy, I am looking forward to seeing this happen and playing any role I can, which currently is that of entrepreneur. But I think that when we say “Most Entrepreneurial City” we need to add in parentheses “Most Willing to Take Risks City” and “Most Willing to Fail City” because as any entrepreneur knows, they go hand in hand.

As I looked at the itinerary for One Week KC, I noticed a definite slant towards the “Idea Economy”. There are programs about software development, digital storytelling, UX design, and mobile media. There are not programs, however, about how to build a factory, open a restaurant, or start a flower shop. And in terms of moving into the future, that’s how it should be. It is those idea companies that will drive growth in a local economy and with that will come the more traditional small shops and services needed to serve a growing, prosperous population. And it is also with the most successful and innovative  idea companies, where the hope of creating local manufacturing and industrial jobs resides.

When we say “idea companies” who do we mean? Well, while a clear definition is not agreed on, I define them as businesses whose primary function is creating new products and services that solve everyday problems, or finding ways to improve existing products and services to meet the needs of a modern world. Most utilize information technology, digital technology, science and engineering. But there are many who find ways to turn traditional, old-line industries on their heads as well, meaning having a central focus on technology is not always necessary.  Now most of these small “idea companies” will fail multiple times before they succeed, and a lot of us will fail outright and slink back to our cubicles for a life of isolation, with regret of failure, but also pride for taking the chance.

The Problem.

There is one issue that is not unique to KC, which hangs over any attempt to spark innovation and startups–funding. When it comes to funding I think the adjustment needs to come from the realization that these companies can’t be put into those traditional boxes of risk analysis and loan worthiness. There are some realities that come with the idea economy that make it a unique funding situation:

1) There is never only one entrepreneur trying to solve a certain problem. The problems we idea companies are trying to solve are being tackled by smart people in other cities around the country and by people all around the world. Those who can find the solutions first will have a big competitive advantage and so too will the community where they are located.

2) This means the old school idea of working a full-time job for a year while stockpiling some money and working on their idea in their free time will not work. First, as was just shown, speed in this economy is a necessity. Secondly, from personal experience I can say, to make ends meet these days it often takes two full-time jobs, leaving little time or energy to devote to our ideas. Again, in a world of rapid innovation, this delay can prove deadly to a startup.

3) For many of these startups, there is not much capital needed for land or big equipment or office space. Rather their need for capital is to give them T-I-M-E. Time to develop their ideas for solving problems, time to test, time to make prototypes, time to present them to the marketplace, time to take that research and tweak their ideas more.

4) And the relatively small amount of money they do need is to cover life expenses. Rent, food, bills, things that still need to be paid while they huddle over computers in a loft or create a mock-up of a new solar battery in a garage, or have meetings with potential buyers. From experience I am confident that going to a traditional lender and saying this is what I need money for would get me laughed out the door, but it’s reality.

 

The Idea.

If we as a city are going to make entrepreneurship a goal, then as a city we have to take the risk. We as the entrepreneurs can risk our time, our life-savings, our reputations, but that can only go so far. Those with the resources must take a risk as well. Here’s a suggestion:

  • Put a call out to all entrepreneurs, let them know they are wanted to express their ideas. Make it clear they are not expected to have an actual product developed or that they must divulge an idea they are trying to protect. Rather they are to express the problem they are trying to solve, to show the work they have and are willing to put into it, and the passion they have for making it a success.
  • Choose 200 hundred startups. Yes, TWO-HUNDRED.
  • Make it clear that the amount of money they can expect is capped at an amount reasonable for giving them time to work on these ideas enough to bring them to a point where they can offer them to the marketplace or present them to investors willing to take the idea further. There is no time limit for success or failure; the amount of money being lent will create its own deadlines. A good sum of money would be around $35,000 per startup, in the form of a LOAN, for a total outlay of $7M.
  • Pool capital from all of the major lending and investment resources within the region and disperse the money so they share risk in each startup.
  • Create loan terms that require payment upon a successful launch and revenue generation or successful capital round. There are no personal guarantees required, and if the business fails to launch or find additional investment to continue then the debt is written off.
  • Create a central place, where the entrepreneurs are required to give updates as to their progress and file financial statements from their company. This place will also give them guidance and access to people who can keep them on track and help them avoid costly mistakes. This office should be easy to deal with and supportive, making sure the entrepreneurs are encouraged and not feeling pressured. We are trying to foster creativity and not an environment where they should feel ashamed if they don’t succeed. Here in Kansas City we are very lucky to have the Kauffman Foundation and KCSourceLink. These organizations are perfectly suited to administer this endeavor.
  • In the spirit of our new idea-pitching event in KC, 1 Million Cups, I have dubbed my idea 200 Starts.

Now even with all of this support and accountability, will a few of these entrepreneurs burn through their money foolishly? Yes. Will a few take the money and no longer feel the sense of urgency to make their ideas happen? Maybe. That is the risk I submit must be taken. But I truly believe that the vast majority will take that money and respect it for what it is, a chance to change their lives and those of the world around them.

The Ask.

Yes there are new ways to fund startups such as Kickstarter, incubators, and angel networks, and to be sure they are creating a shift in what it means to be an investor in a company. But what I am proposing here is a way for the funders within a local economy, specifically here in Kansas City, to take a share of the risk, and a share of the benefits, in making this the Most Entrepreneurial City in the country.

Now to be clear this is not an attack on traditional banks and lending institutions, rather a call to arms. I would submit to you that if the CEOs of our local financial institutions stood at their shareholder meetings and told their shareholders that they were on the hook for a share of that $7M investment into two hundred local startups and 197 had shown no promise, one is teetering, and two are showing a lot of promise, there would not be a shareholder revolt.

No, in an age of default swaps, bailouts, job losses, and apprehension about the future, I believe that CEO would instead get a standing ovation.

I know I would be clapping.

If you think this article is worth sharing please share it. If you think I am off my rocker, share that too. Either way, let’s get this conversation going and find a way to make the thinkers and dreamers come out of the shadows and into the light.

Robert Westfall

Robert is a writer, behavorial researcher and decision-making consultant. He is the founder of Instinct, a firm specializing in helping organizations be more human focused and planet conscious.  You can learn more about his work at www.TheHumanInstinct.com and follow him at twitter.com/WeAreInstinct

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