Anybody who creates a successful business on the first try got lucky. The path to success is always marred by missteps, mistakes, and failures; and the savvy entrepreneur will hit these pitfalls, learn from them, and keep pushing on.
There’s a reason why the majority of innovation occurs in geographically discreet communities like the Bay Area, New York or Boston. What separates these and other innovation hotspots from the rest of the country is that they represent a culture that regards failure as a positive experience to be embraced and learned from, not shunned and avoided.
Almost every successful founder has a few notches in their belt from companies they have run before. Most of them failed. They’re almost worn like a badge of pride; and these highly decorated veterans are respected for the wisdom and experience they have learned from their past endeavors.
And this is how we learned that the banking world is completely out of touch with this culture of innovation.
Yesterday Tom and I went to a meeting in San Francisco held by the U.S. Small Business Administration (SBA) to learn about options for raising money for our business. As we grow larger, we find we need more money to finance the new products we want to make.
At the meeting representatives of the government, banks, and microlenders discussed a variety of government-backed loan devices to encourage banks to lend to small businesses which normally wouldn’t meet the standard loan criteria (which is almost never met, considering banks won’t loan more than 5% of the three-year trailing average of annual receipts. A growing company looking to finance a $25k inventory expansion would need to be making half a million dollars a year to even qualify for the loan—at which point they probably don’t need the loan).
The SBA changes this bank calculation by guaranteeing funds for a large percentage of a bank’s loan to a small business in the case of default. But it has a condition: the borrower must secure the loan with a personal guarantee. What this means is that if the business goes south, the bank’s collection agency can seize the borrower’s home, their car, their wedding rings—anything of value.
When I asked about this provision, and how it might affect the ability of a manager to run a business effectively when their capacity to take calculated risks is influenced by the fact that their home is on the line, one of the banking representatives responded “How can you morally ask somebody to lend you money when you won’t be personally responsible for it?”.
It is unclear which party in the chain is responsible for requiring the personal guarantee in SBA-backed bank loans– it certainly benefits both lenders and backers immensely. But for the banks and the SBA to try to frame this as a moral issue is disingenuous. Their decision to require the borrower to be personally responsible for the debt is as moral as the banks tendency to sell-short and bet against the very investment packages they are trying to sell you for your retirement fund, or as moral as the government’s practice of giving millions to anti-smoking campaigns while backing tobacco growers with billions in subsidies.
It is not a moral decision on behalf of the lenders, it is a strategic one. The more hardworking people they can convince to put everything they own on the line for a dream, the easier they can pad their bottom-line with the short sale of repossessed homes and dreams. When a bank loans you money, the individuals giving the speech on morality aren’t breaking open their own personal piggy banks to finance the loan; they have nothing at risk. In 2008 when major banks pushed bad businesses practices and went under, there were no CEOs losing the wedding bands off their fingers. In terms of high ground to stand on, there’s not a lot of room for the lending institutions to talk of morality.
The SBA is nation-wide, yet we only see innovation routinely originating from some very select and discrete areas of the country. We are lucky enough to live in a country with a mature and robust enough society that there is room for private-sector financing through venture capital, most prevalent in communities that embrace failure as something positive and to be expected as part of the long road to success.
If all investment was given by banks–and failure resulted in individual bankruptcy–then we’d have no Mark Zuckerbergs, no Bill Gates, no Steve Jobs or Jeff Bezos or Elon Musk. We’d have a bunch of bureaucrats and bankers sitting around wondering where the innovative engines of the American economy went.