As I have been facilitating the discussion on incubator business models and thinking through our experience so far with 1M/1M and the roundtables, one nugget that has come through for me is that 1M/1M needs a bank of sorts attached to it … some combination of a Grameen Bank (micro finance) and American Express Bank (credit cards).
As you know, the two cornerstone tenets that we have established in 1M/1M are: (1) idea validation and (2) bootstrapping. We push these two values hard as philosophical essentials in the program, and as part of the EJ Methodology that we teach every week at the roundtables.
Even so, there are small chunks of working capital financing that are necessary during the aggressive bootstrapping phase before revenue really starts to flow. This could be $10,000, $50,000, $150,000, or $250,000. Small amounts of credit, that today, entrepreneurs largely do not have access to.
It is my assessment that if a bank would offer this sort of working capital financing only on validated business ideas to bridge the entrepreneurs to a steady cash flow state, it would add a great deal to the probability of the ventures becoming successful.
The very early stage cash crunch is significant. Today, with so many entrepreneurs who are so very young and without any savings or assets that they can offer as collateral against loans, bank loans or any substantial amount of credit card financing is impossible for them to access. This puts a huge cap on what they can take on as entrepreneurs.
WSJ had a great piece last week called When Just One Desk Will Do which provides an important statistic: “According to the 2010 Index of Silicon Valley, an annual economic study of the area, the number of nonemployer firms in the San Jose–Sunnyvale–Santa Clara region rose 24.6% between 2002 and 2007 to 124,561. Over that same period, the number of jobs in the region fell 1.5%, according to the study.”
Conceivably, this trend is more universal at the moment than just regional to Silicon Valley. And if these ~125,000 entrepreneurs harbor the ambition of becoming larger companies at some point, they may need to access some level of liquidity.
If these ~125,000 firms were to get to $1 million in revenue and 10 jobs each, we’re talking about 1.25 million jobs, and $125 billion in GDP. But I suspect, these firms are all extremely cash-strapped, which limits the pace of their growth.
Against this backdrop, my analysis is that a bank is needed that can offer a juxtaposition of micro finance and credit cards for up to $250,000 in collateral-free, non-equity, working capital financing.
This segment is a part in the series : 1M/1M