America has a crisis that much of philanthropy and the social sector writ large isn’t registering. Our job creation machine, largely built after World War II, is broken. It turns out that it is really hard to get un- and under-employed people into good jobs—even if they are trained for them—if those jobs don’t exist.
For the past 40 years, the entities that create 90 percent of all new jobs—start-up companies less than five years old—have been on a steady downward trajectory. A recent Economic Innovation Group (EIG) report, “Dynamism in Retreat,” paints a frightening picture of this long-term decline. The data tells us that the number of start-ups fell by nearly half between 1978 and 2011, and start-up rates were lower between 2009 and 2011 than they were between 1978 and 1980 in every state and Metropolitan Statistical Area except one. If we aren’t producing new businesses, we aren’t producing jobs and opportunities for people of color and low-income Americans.
On top of that, the people we have long relied on to create these companies and grow jobs, no longer do so. In 1996, 77 percent of all new start-ups were founded by whites; by 2014, that percentage had dropped to 59 percent. And while start-ups by Latinos and Blacks rose over that period percentage-wise, they did not increase in sheer volume. The EIG report shows that if we had generated the same number of start-ups in 2014 as in 2006, only eight years earlier, we would have generated almost 1 million more jobs that year.
If we really want to re-invigorate the American economy and grow jobs today and in the future, we need to understand why America’s fastest-growing populations, people of color, aren’t starting and growing companies. A December 2016 report from The Kauffman Foundation, “Including People of Color in the Promise of Entrepreneurship,” casts a spotlight on the unique challenges faced by entrepreneurs of color when launching and growing businesses—including a lack of wealth and networks, and a history of being denied capital from traditional institutions. Nothing in that report is new really, yet we haven’t even come close to solving these problems.
What if we had $1 trillion to invest in America’s underserved entrepreneurs over the next decade, with the aim of returning US business dynamism to where it was 40 years ago, but this time driven in representative measure by people of color and other historically underserved populations? That was the question posed by the Kauffman Foundation at a recent two-day gathering of 45 diverse leaders from around the country in Kansas City, Missouri. The conversation was framed as a “moonshot,” in reference to President Kennedy’s big, hairy, audacious challenge to get us to the moon in a decade, when we had no idea how to make that happen.
To succeed, we need philanthropists and other social change actors to expand our aperture from primarily focusing on mitigating the damage capitalism can cause—through efforts such as workforce re-training for jobs lost to globalization or advocating for environmental protections—to affirmatively building a new capitalism that creates shared prosperity. And while those of us at the convening didn’t identify definitive moonshot ideas after just 48 hours, there were a number of important takeaways:
1. Now is time to transform the face of entrepreneurship in America.
Our current institutions—the banks, and private equity and venture firms that provide capital, as well as the technical assistance providers that help companies grow—have a pitiful track record of serving people of color and women successfully. After controlling for education, credit score, experience, number of owners, and firm age, firms owned by people of color on average received loan amounts 35 percent lower than those offered to white-owned firms. The denial rate for women-owned firms—both white and of color—is twice that of white male-owned firms, according to the 2003 Survey of Small Business Finances.
We need to build new institutions and strengthen existing ones owned, run, and managed by people of color and women if we really want to capture the full potential of this population for our collective future. Kiva Zip loans offer a good example. In the 18 months since it began operations in Oakland, California, the program has helped crowdfund 800 new small business loans for underserved entrepreneurs at 0 percent interest and no fees.
2. Capital, both loans and equity, for all types of businesses, at every stage, must be more readily available.
This is surely a familiar refrain for entrepreneurs launching social-impact ventures, but the broader field of entrepreneurs shares the same burden. Participants at the convening discussed the current favor many lenders and investors show technology companies; constantly looking for the next Facebook or Uber, they ignore the vast majority of businesses that create jobs and make money. Two non-technology businesses described how their revenues had doubled year over year to more than $1 million. Yet the challenges that they faced raising capital at the early start-up phase didn’t get any easier when they sought loans from traditional lenders. Meanwhile, a technology start-up described how it raised $9 million in venture capital but earned less than $50,000 in revenue.
We need to attract many more actors and investors to this work to not only stimulate competition, but also expand the number and types of products on offer. Steve Case’s Rise of the Rest, which highlights all types of businesses in US markets that are repeatedly overlooked by venture capital in particular, and Accion International, a community development financial institution that provides loans at different stages of business, are examples of ways to overcome these challenges.
3. Lenders and investors must expand existing definitions of risk, return, and exit.
The vast majority of capital providers assess risk in traditional terms—FICO credit scores, value of collateral, and so on. But these indicators end up leaving many entrepreneurs, even those with track records of successful operations and profits, out in the cold. In addition, too many capital providers are fixated on finding the next Tesla, with expectations of returns to the tune of 25-50 percent. What’s more, the constant pursuit of an “exit” within 3-5 years makes building a long-term sustainable business that much harder, especially for smaller companies that don’t expect to grow into a billion-dollar entity.
We need to not only push existing lenders and investors to change and diversify their definitions of these concepts, but also create new and different institutions willing to use more flexible investment parameters. These are all areas where philanthropy, with its more patient and risk-tolerant capital, can continue to intentionally innovate and experiment as we build out the impact investing field.
4. We need to connect the dots.
While there are many gaps in the current system, it’s worth noting that we have a lot to build on. Social enterprise-building organizations like Village Capital and Endeavor, for example, are working effectively to help companies grow in many places; over three years, Endeavor Miami, has supported the growth of 15 high-impact, local companies expected to generate more than $100 million in revenue and more than 1,500 jobs. Services like these can and should be everywhere. They also should be better integrated into local ecosystems once they land in a place, something that rarely happens today.
5. The entrepreneurs we hope to benefit must be a part of the process.
Human-centered design—listening to and co-creating solutions with the communities we are trying to help—is becoming the status quo approach to social change. We must design interventions to break down barriers that stifle entrepreneurship based on the insights of those who have encountered those challenges first-hand.
One way to help facilitate that process is to ensure that very different entrepreneurs are the room. During our discussions at the convening, for example, there was one entrepreneur local to Kansas City, one based in a rural location but with a national product, and one primarily focused on online financial services. All three kept the discussion grounded and served as a reality check during our bluesky brainstorming by articulating what the field really needs.
Ultimately, investing in underserved entrepreneurs has everything to do with social change in America. We simply can’t grow an inclusive economy and address income inequality in a meaningful way if we aren’t growing jobs. Data from the last 40 years shows us that we won’t grow jobs at the pace and scale we need to unless we eliminate the barriers that are keeping us from harnessing the entrepreneurial talents of America’s fastest-growing populations, people of color. To succeed, our efforts need to reflect these five realities.