A small business applying for a $50,0000 government loan in Missouri is required to supply financial statements, a business plan and character references, among many other things. A tech company looking for $500,000 in financing needs merely a good idea and a completed four-page application.
Is it a coincidence that most small businesses are owned by women and people of color, and most tech businesses are owned by white men?
That’s one of the questions raised by experts looking at a recent report about government incentives for entrepreneurs across the country. The report is important because the Biden Administration’s economic plan would direct $10 billion, to state and local programs nationwide. The report paints a picture of a wildly haphazard system of incentives for entrepreneurs as unprecedented amounts of money barrel toward the programs.
“These systems are structured to favor the wealthy and the generationally wealthy,” said Fay Horwitt, president and CEO of Forward Cities, a Durham, N.C.-based nonprofit that offers training and support for communities that want to build equitable entrepreneurship. She noted the bias enters into systems as people, sometimes well-meaning, unconsciously or consciously replicate the patterns of the past. “Because of the way they view underrepresented communities, they see them as riskier investments. … They keep women and BIPOC entrepreneurs, and immigrants, behind the curve.”
But “there is an opportunity to change the paradigm by investing differently,” she said.
Until now, government programs, which exist at state, county and local levels, have been too small to make much of a difference for any kind of startup or small businesses, according to the report, called “Incentives for Entrepreneurial Firms.”
Little consensus on success
Government incentives and support programs for small businesses have multiplied as entrepreneurship in the United States has declined over the past 40 years and the private system of finance has collapsed. The number of banks in the United States has shrunk to fewer than 5,000 from 14,400 in the 1990s, with most of the decline in the community banking sector critical for local small businesses.
But the programs were adopted in different communities to serve different and particular community needs – sometimes to rejuvenate downtowns, sometimes to boost small businesses, sometimes to produce jobs, sometimes to replicate Silicon Valley-style tech ecosystems.
The report pointed out that across the wide spectrum of incentive programs, there are few common definitions or measures of success, leading to little consensus about what works. For instance, is the right metric, jobs, individual happiness, or equitable economic development?
Programs for small businesses have trouble even finding small businesses to help, possibly because of lack of promotion or because of the high barriers to entry – or because a growing number of small business owners have concluded they would rather remain tiny, with one or two employees. The report estimates that only about 1% of small businesses receive help from incentive programs.
Meanwhile, the state-subsidized programs to promote tech companies rarely report outcomes beyond dollars. With limited data, the report suggests some efforts to boost the innovation economy, which mostly benefits white people, are expensive. The Colorado Advanced Industry Accelerator Grant Program reported, in 2018, 63 active grants totally $12.2 million and 55 jobs created. Since 2013, $50 million had been allocated with 763 jobs created, or about $65,000 per job.
A different metric could be the number of companies created, said Ellen Harpel, one of the authors, in an interview. Darrene Hackler was the other author.
Their firm, Smart Incentives, identified three different kinds of incentive programs: financial – such as grants, loans and investments for small companies; fiscal – such as tax credits for angel investors; and services—such as education and networking. The Ewing Marion Kauffman Foundation commissioned the report. (Disclosure: The Kauffman Foundation is also a sponsor of Times of E.).
Smart Incentives covered programs such as MassVentures, which invested in 150 companies in the innovation economy over 40 years, and the Community Wealth Building Business Accelerator in Atlanta, which helped 21 businesses with a growth curriculum. About 15-20% of programs explicitly mentioned helping disadvantaged small business owners.
Perpetuating old patterns
The most striking part of the report details the stark difference between programs that aim to boost “small businesses” and programs aimed at promoting high-tech firms suitable for equity investment. That’s increasingly seen as a false dichotomy, as tech innovation makes its way into every sector of the economy. Rather, what may be happening is that women and people of color are steered to define themselves as small businesses, where capital and support is harder to access, and a small segment of the population is steered toward building companies that would attract investors.
Horwitt, whose organization offers training and strategy for communities that want to focus on equitable entrepreneurship, took a dim view of the dichotomy. She previously worked with startup communities aiming to replicate Silicon Valley style tech hubs, which are built on an ethos of emotional support, fast experimentation and protection from failure. It’s an approach that has worked to produce tech giants, but in practice, it’s mostly been reserved for white men.
“If you looked the part, they made you think all you needed was an idea – you could parlay that into millions,” she said.
As an illustration of one instance among a number, the report described two state programs without naming the state. Further reporting revealed it to be Missouri, but governor’s office did not return a call for comment. The report described the two programs:
Small business loans
“To be eligible for a loan up to $50,000 at a 3% interest rate, applicants must have 15 or fewer employees, be 100% owned and located within the state and receive tax clearance from the state. … The application is 13 pages long, and companies must provide financial statements, a business plan, a certificate of insurance, character references, tax clearance certificates for the owner and the business and three years of personal and business tax returns,” wrote the report authors.
“To be eligible for equity or matching or convertible debt up to $500,000, applicants must be based in the state, fit into one of the state’s industry focus areas, be in the seed financing stage, and have proprietary or protectable intellectual property. The application is four pages and requires basic business data, a funds request and a state tax identification number,” wrote the report authors.
Most tech companies nationwide are founded by white men – probably about 85%, based on the latest data. Though venture capital has been diversifying, it is also dominated by white men; only about 13% of decision-makers at VC firms with more than 25 million in assets are women, according to the organization All Raise, which promotes women in the field. Meanwhile, many investors in venture capital – those who ultimately reap the returns on government-subsidized investments — are large institutions and wealthy families.
The new $10 billion American Rescue Plan funding could potentially replicate those structures, which Horwitt labeled as systemic bias.
The American Rescue Plan sets aside $1.5 billion to support businesses owned by socially and economically disadvantaged people, with an additional $1 billion incentive-based allocation for states that demonstrate they can reach underserved populations. “Treasury continues to explore additional steps to ensure funds reach communities of color and to provide technical assistance and support to them,”said a spokesperson in an emailed statement.
But the bulk of the money, $7 billion, is left to the states to allocate.
During a similar Obama-era $1.5 billion program, states decided to use two thirds of the money for venture capital style programs, which resulted in an additional $8 billion of follow-on investment, according to Eric Cromwell, whose firm, Cromwell Schmisseur, worked with others to do the evaluation.
But the program was never evaluated for the number of jobs or widespread economic development it produced.
One of the cases for venture capital-style programs has been that they can spur investment in communities outside Silicon Valley, Boston and New York, which traditionally have seen the greatest share of job creation in the high-tech economy. Yet, there is increasing evidence that venture capital is already diversifying geographically, with high-tech hubs developing in Austin and Miami, for instance.
“The expectations for what economic development is change,” Harpel noted, pointing out that many of the current programs were built with an eye toward reversing the decline of downtowns in the 1970s and 80s. “A lot of economic development organizations were tasked were rebuilding downtowns. Those programs got stale, but they remain in place.”
Horwitt is hopeful that the new funding will help communities “build back better,” and recommends that communities focus beyond finance, offering support and networks, and adopt a long-term strategy for supporting small businesses. But, she’s cynical.
She expects that in red states, the old systems will replicate themselves. In blue states, she said, there may be change.