By design, MIT’s launch of “The Engine” last October gave aspiring entrepreneurs new hope. The venture offers startups funding, space and expertise. For companies in the scientific and technological sector, in particular, The Engine aims to put innovation ahead of profits by providing support to young companies with transformative potential.
MIT’s program is a bright spot in an otherwise bleak funding landscape, but its scope is limited. And it’s only a blip in terms of what’s needed overall. Because the reality is that the banking system is broken, and it’s keeping many entrepreneurs from turning their ideas into businesses.
Fewer banks mean fewer entrepreneurs.
The numbers are dramatic. Since the 1980s, the United States has gone from 15,000 banks to just 5,000, according to the Federal Deposit Insurance Corporation. Of the ones remaining, just 12 megabanks control nearly 70 percent of banking assets, former Federal Reserve Bank of Dallas President Richard W. Fisher noted in a 2013 speech.
What’s more, big banks tend to favor big business. Reliant on traditional (but outdated) underwriting models, these institutions find it difficult to assess the potential and risk entrepreneurial companies pose. And that’s posed a hardship for those small companies, because instead of prompting banks to adapt, the consolidation trend has actually had the opposite effect: Banks simply aren’t lending to many startups.
Need proof? Look no further than the declining entrepreneurship rate. Trending downward for decades, the percentage of new businesses fell below an important threshold in 2008. That year, more businesses closed down than new ones were created, for the first time since tracking began, according to Gallup. The decline has continued ever since.
For any new company to survive, then, it must explore the road less traveled.
The curious case of Amazon
While Amazon hasn’t seemed like a “startup” or a “young company” for quite some time, the retail giant offers an interesting case study in current financing realities for new businesses that challenge the status quo. The company has a history of favoring growth and has spent years creating significant asset value, but not earning a profit.
The traditional financial underwriting model just wasn’t able to appropriately assess an opportunity like the one Amazon represents. So, as a result, initial funding didn’t come from a bank.
Obviously, Amazon found other avenues to execute its vision. And that…