By Dale Fickett (Originally published on Medium)
A recent article in the New York Times is the latest among recent reports, highlighting the homogeneity of the venture capital industry and the entrepreneurs they fund. These firms exist to provide investors the highest return possible, typically 8–10% annually according to Cambridge Associates. The accelerator to angel investor to venture capital pipeline is designed to achieve this outcome, and increasingly venture capital deals are becoming bigger as investors seek out more mature companies. Only 1–2 % of founders will attract equity investment, and the big question is “What about the other 98%?”
The creation of the other 98% of businesses is vital to the American economy, and in many countries around the world, family business is a way of life. The founders who create these businesses vary in terms of ethnicity, gender, education level, income level, and the industry in which they compete. They also vary in the growth rate of the firm that they are building. Some founders seek outside equity investment and must demonstrate the prospects of achieving the required levels of growth. Other founders are building these important small businesses which may stay small, will support a family and improve a community.
How do I find an Inclusive Community for my business?
There are support organizations (i.e agencies, nonprofits and associations) which have a culture that prioritizes inclusion. For the founder this means identification of the right organization is vital, and then determining which organizations are best positioned to provide what you need. A great starting point is considering, “Is this a community where I can be supported by other founders, and in which I can lend a hand? Unfortunately some organizations have a different agenda. If it feels wrong, keep looking.
Navigating the choice of support organizations can be difficult, and in some locations there are tools to help identify the organizations which provide the most relevant resources. Traditionally women- and minority-owned businesses in the U.S. have found a soft landing through municipal and state agencies. In fact, this is a great starting point in many locations. In some rural areas, it is the only option for a program provider with a physical presence. These offices provide training related to developing a business model, market intelligence, mentorship from seasoned executives, workshops on particular business skills, clarifications on registration requirements, preparation for selling to the government, and assistance securing loans and tax incentives. At the federal level, the U.S. Small Business Administration has a national network of SCORE chapters, Women’s Business Centers and Small Business Development Centers. There are also a range of veteran benefits for founders who have served in the United States armed forces, including some grant programs.
International organizations such as the OECD, UN Development Partnership, USAID and others maintain affiliations with local microfinance institutions and other technical service providers. In particular, the World Bank has created an inventory of over 1000 microfinance organizations, and contacting the crowdfunding platform Kiva may help in identifying another local resource provider in your community.
When making an initial approach to request assistance, be clear. Do your homework and specify the type of business that you’re starting, where you’ll do it, and the information that you’re seeking. It also helps if you can articulate the stage of your business. If the agency doesn’t have the right information or resources to assist you, then they will typically have some good ideas about where to go next. Just remember the onus is always on you. It’s your business, and your responsibility to keep things moving ahead. If you are based in a rural area, it will be your responsibility to inquire about ways in which you can participate a distance basis.
What are the potential barriers?
Historically corporate led efforts to foster innovation and entrepreneurship have focused on the extent to which the corporation would directly benefit through acquisition, or in other words how the sponsoring corporate would purchase the new technology under development, or hire the people developing it. The corporate may also be actively investing in Corporate Venture Capital, investing a portion of their capital in external projects with a strong likelihood of a high IRR (Internal Rate of Return). University programs have focused on the commercialization of research, the creation of innovation-focused internships and practicums, and other learning experiences which provide student-executive interaction such as on-campus pitch competitions. Increasingly incubator facilities and co-working spaces have been forced to justify their existence based on their ability to negotiate leases with business owners and they have been less subsidized than in the past. Investors interested in early stage equity deals, have served as sponsors for technology-focused accelerator programs to help foster a stronger pipeline of potential deals. Unfortunately these application processes can feel like the exclusive domain of those already well connected through academic and professional circles. The net result? There is a disproportionate focus on headline-grabbing competitions and entrepreneurs which are targeting venture capital, yet unlikely to secure investments.
In the public sector, you may not find agencies staffed by people who have actually started and led a prosperous venture. The staffers in your local technology incubator building or innovation center, may not be interested in your industry. Your local accelerator program is unlikely to engage unless they can see a pathway for you to attract team members, launch a product quickly, and achieve notoriety and a strong valuation in a growth industry.
How can I join the discussion?
Fortunately, there is a significant change underway — a focus on amplifying the efforts of diverse business founders. The creation of “Innovation Clusters”, “Entrepreneurial Ecosystems” or “Startup Communities” have tended to focus more on the high-growth firms, and in fairness many technology programs are seeking more proactive ways to find women- and minority-founders who meet their entry criteria. One of our partners, the TechStars Foundation, is working with local nonprofits (like us) to help increase the diversity of its applicant pool.
Many localized programs are providing a mix of resources, including workspace, classroom training, networking opportunities, consulting, mentorship, and access to debt-based capital. More innovative programs are complementing these traditional services with procurement and sales-based promotional support, pro bono professional services through affiliate partners, and Mastermind type forums for peer learning. Here’s a short list of several groups that convene discussions for support organizations, and which may help point you to a local support organization in your city:
· 1 Million Cups — A national meet-up series of the Kauffman Foundation, focused on founders connecting with, inspiring and educating one another
· Association for Enterprise Opportunity — Research, insight and advocacy to advance microbusiness in the United States
· Emory Univesity’s SE@G Initiative — Atlanta based small business accelerator, related academic research, and forums for service providers intentionally including founders from lower-income communities
· GrowInclusive — International initiative of the World Economic Forum, the the World Bank and the International Development Research Centre, focused on sharing best practices for inclusive business models as a part of global sustainability
· Opportunity Finance Network — National association of Community Development Financial Institutions (CDFIs), organizations chartered to increase capital access in marginalized communities
Many other notable U.S. programs have been successful in providing diverse founders access to relevant resources for starting and growing a profitable business. These programs have national and international reach: Goldman Sachs’ 10000 Small Businesses, JP Morgan’s Entrepreneurs of Color Fund, and the Initiative for a Competitive Inner City. Internationally, we have identified hundreds of stakeholders, including national governments, international development finance institutions, private foundations, corporate social responsibility programs, Impact Investing fund managers (representing $114 billion), microfinance institutions, and other nonprofit and faith-based program providers. Initiatives such as those at the Aspen Institute, Grameen Foundation, Devex, CGAP and others provide direct microlenders the research, data, and advocacy which help advance best practices in the inclusion of microbusinesses, or those firms with 1–4 employees.
What’s Next?
Changes in the area of Entrepreneur Inclusion naturally occur within the broader economic landscape. Among many economic trends we’ve studied, the globalization of cross-border data flows provides new opportunity for microbusinesses to connect with potential customers outside of their home market and gain access to new information that was previously out of reach. According to a report by McKinsey & Co., a consultancy, this flow of data is increasing at rates approaching 50 times those of the last decade:
· Almost a billion social-networking users have at least one foreign connection
· 2.5 billion people have email accounts
· 200 billion emails are exchanged every day
· 250 million people are living outside their home country
· 350 million people are cross-border e-commerce shoppers
Cross-border data flows are now translating into opportunities for greater economic inclusion — for greater numbers of lower-income founders to access required resources, and for them to sell into markets which they could not previously reach.
Open Trellis, a new technology venture for entrepreneur inclusion, is now developing an online platform which will connect localized groups of microbusiness owners, providing founders access to a community of peers, and relevant digital content. By forging distance-based connections, founders will broaden their pool of customers and professional connections while also opening doors for accessing new capital.
What’s the big picture benefit?
Including more founders in communities of startups is a vital aspect of ongoing efforts to promote greater economic sustainability. Aside from the moral imperative, a more inclusive economy helps address ongoing risks related to automation and changes in work patterns, declines in economic productivity, and reductions in cross-border trade and capital flows. In fact, some studies have shown that loans to microbusiness are recession-resilient, meaning even in the midst of a downturn these business tend to be better positioned to weather the storm when they provide local essential services.
All of this is aligned with broader efforts to achieve the United Nations Sustainable Development Goals, and to create new economic levers that help address social and environmental concerns. A range of related initiatives is helping to amplify the discussions to create new norms related to social impact and economic inclusion. These discussions include: Impact Investing, new measurement systems (e.g. IRIS, GRI, ESG, GDP+), business models such as Benefit Corporations and other social enterprises (e.g. opportunity hiring, donate back, worker-owned cooperatives), as well as the development of other socially beneficial product innovations. Supporting microbusiness is another key facet of these discussions on Social Impact.
New businesses play a vital role in discussions on inclusive economic growth, and a more sustainable future. In a recent Stanford Social Innovation Review article, our colleague Peter Roberts states, “Some of the benefits of microbusinesses are already well known. These small enterprises provide, on average, 38 percent of their owners’ household incomes” and in these households this is incredibly important. His and other research has demonstrated several benefits:
· Job creation (Kauffman)
· Reduction of inequalities (Entreprenur Magazine)
· Correlation with poverty reduction (Forbes)
· Diversity creates higher quality innovation (Harvard Business Review)
· More entrepreneurship and innovation leads to economic productivity and dynamism (Strategic Entrepreneurship Journal)
Despite these benefits of entrepreneurship, and in particular cultivating founders from lower income communities, there has been long-term decline in U.S. new business formation as a percentage of the economy, startup rates per 100,000 people has been declining, and the Gini Coefficient (a measure of income inequality) is on the rise.
Our 2017 series on economic problems highlighted issues occurring withinperiods of economic growth, including: poverty, unemployment and under-employment, personal income reductions, and a lack of sustainability. We could add many issues to this list, including rising inequalities, government indebtedness, declining productivity growth, automation and the workforce, gender disparities, climate change, and financial market vulnerabilities. Inclusive Entrepreneurship is not the panacea, but it is a vital part of the solution. What are you starting?