Many thousands of people in think tanks, finance circles and academia, line up to help “gazelles,” those fast-growing firms that, it’s said, produce most of the job growth. The question is, who steps up to help the oxen, the non-sexy small businesses, from Main Street to suburban office parks, that are responsible for nearly half the jobs?
I thought of this last week, when Joe Biden released another plan to get more capital to underserved small businesses. The plan repeated a common fallacy among well-intentioned people who want to get capital to small businesses.
Our small business finance system is terribly broken. Entrepreneurship has been falling in the United States for three decades, in part because people can’t get capital and don’t have personal savings. Black, Brown, and women founders have a harder time than White men getting money to start and grow. And millions of small businesses will not survive the pandemic because they were undercapitalized.
But the idea that venture capital is an important part of fixing this problem is a fallacy — a very common one. Biden said he wanted to allocate $50 billion for venture capital investment. During the Obama Administration, the federal government allocated $450 billion to the states for state level public/private venture programs.
Last October, I was at the Global Impact Investing Network conference, talking with Nicholas Colloff, executive director of Argidius, a foundation based in the Netherlands that promotes the growth of small and medium sized enterprises “in order to improve the lives of the poor through increased income generation.”
In a fine foreshadowing of the world we find ourselves in, he pointed out how many people want to find and help innovative companies, nicknamed gazelles. But, he asked: “How do we help the oxen?”
A few people are creating new solutions for this space. This week, we profiled MainVest. Last week, we looked at LOUD Capital. The Kauffman Foundation started a Capital Lab with support from the Rockefeller Foundation.
More venture capital is an appealing idea – and I’m not saying that it might not help. But I think it’s mostly a distraction from the real problem: How to help the oxen, the vast swath of entrepreneurs who have Main Street businesses, service firms and the like, including women and people of color, and immigrants.
At least 83% of entrepreneurs do not access bank loans or venture capital at the time of startup, according to the Kauffman Foundation. Almost 65% rely on personal and family savings for startup capital, and close to 10% carry balances on their personal credit cards. Only .5% of entrepreneurs accessed capital from venture firms. (Disclosure: Kauffman Foundation is a sponsor of Times of Entrepreneurship).
Venture Capital Is Sexy
If venture capital is so unimportant to most American businesses, why does it capture so many headlines? That’s easy. Venture capital evolved as sort of the fine spear-tip point of capitalism, able to finance a few companies, mostly software companies, so they could grow really big, really fast. Overnight millionaires and billionaires are sexy – exactly the kind of instant business gratification our entertainment needs.
I have a darker theory as well – one of the reasons venture capital gets so much love is that people are afraid to talk about it critically. There’s a general reluctance right now to criticize Joe Biden, because so many people want him to win. And some people are strangely afraid that a reasonable discussion of venture capital will be taken personally by Silicon Valley venture capitalists. Are the streets of the West Coast capital of American finance really lined with eggshell egos? I don’t know.
In either case, because we love venture capital or are afraid to criticize it, the focus on venture capital is a distraction from the big statistic in that Kauffman Report. Some 83% of entrepreneurs receive no financing at all. Is venture capital a good solution for those entrepreneurs? Maybe a few of them. Adapting the venture model to other kinds of innovation and to help women and people of color who have their own fast-growth big ideas is a cool idea that could help a few founders.
But most American small businesses are restaurants, hair salons and accounting firms, and the like. Service firms. The most common reason founders start their companies is not to get rich: It’s to be their own boss.
Getting them venture funding is sort of like putting rocks into your lawn mower.
Enter The Oxen
Last year, I went to the Montgomery County, Md., Chamber of Commerce dinner. I was invited by a friend. One of the companies on the stage was Boland, a family-owned HVAC company. I sat there listening to the number of ways the company was tied to its community. Volunteer days. A structure that gives employees a voice. Holiday season giving.
It was the very definition of an oxen. It was started in 1960, when our community banking system was a lot healthier. So the question is, what happens to the restaurants and Main Street businesses, now struggling so hard in the economic wake of the pandemic. What happens to those entrepreneurs of the future, especially women and people of color, who might have the skills to start the next Boland, but not the support or capital?
They account for nearly half the jobs in the United States – and much more, if you include the intangible value, and values, that they bring to communities.
Starting or funding, or getting associated with a venture-funded gazelle is fun. But the question is, who will do the unsexy work of fixing the finance system to help the oxen?