Bringing a Policy Focus to Building an Economy that Works for Everyone
I attended a virtual briefing from the Ewing Marion Kauffman Foundation for the recently released America’s New Business Plan for 2022. The briefing provided an overview of the entrepreneurial policy priorities in ANBP 2022, and suggested ways that Start Us Up Coalition Members can get involved in amplifying them.
Start Us Up is a diverse coalition of organizations (including Santa Fe Innovates) working to level the playing field for entrepreneurs in America. The coalition spans the entire nation and includes entrepreneurship support organizations, nonprofits, university centers, and more.
ANBP 2022 is a nonpartisan, policy roadmap with strategies for creating a more inclusive economy by building a prepared workforce and concentrating on entrepreneur-focused economic development. Key to this strategy are tactics to nurture entrepreneurs from diverse and often underrepresented backgrounds.
Addressing Entrepreneurial Inequity
Entrepreneurship can be a path to sustainable growth and prosperity, but only for those that can navigate its barriers to entry. The path is much more accessible to those who are white, male, and wealthy. Ensuring equal opportunities for all entrepreneurs require actions that address the underlying and entrenched systemic barriers.
As discussed in the business plan’s executive summary, being “pro-business” has come to represent favoring big business in today’s politics. And when the government does act to help American enterprise, support is heavily focused toward established businesses – not struggling startups, new business owners, and entrepreneurs. The irony is that new businesses created by entrepreneurs are the primary source of almost all net new jobs.
Our nation’s wealth gap is especially evident throughout the process of starting a business. Black households hold a median net worth that is one-tenth of typical white households — with Latino households facing the similar disparity. With less personal wealth, minority business owners must seek outside funding, except black entrepreneurs see their loan requests approved three times less than those of white entrepreneurs — a difference that persists even after accounting for credit scores and net worth.
These inequities continue for women and those who live in rural geographic areas. The gender pay gap puts a disproportionate strain on female entrepreneurs, and more than 80% of all venture capital continues to flow toward the three coastal states of California, Massachusetts, and New York.
The Four Pillars at the core of this new business plan include: Access to Opportunity, Access to Funding, Access to Knowledge, and Access to Support. For this blog post, we will review one policy recommendation from each of the Four Pillars. Please read the additional policymaking issues and proposed solutions in the Four Pillars sections within ANBP 2022.
Four Pillars of the New Business Plan
1. Access to Opportunity – Establish a level playing field that reduces barriers (Content from ANBP 2022)
For startups, entrepreneurs need a level playing field to compete with established businesses, which have better access to policymakers. Among other things, this means economic development efforts should support local business owners and not just offer incentives to attract outside businesses. Policymakers should prioritize the development of supportive ecosystems that help everyday Americans start businesses and they should cut red tape that holds people back.
Streamline the process of starting a business – The regulatory requirements of starting a business are confusing, especially for immigrants navigating cultural and language barriers. To open a restaurant in Boston, for example, entrepreneurs must endure a grueling 92-step process that requires 22 forms, 17 in-person visits, and 12 separate fees totaling over $5,000.
Federal, state, and local governments should support the following policy solutions:
- Create federal and state monetary incentives for local authorities to reduce barriers to starting businesses, including reducing paperwork and restrictive fees. Funding could be made available, for example, to local governments to create and distribute a single resource or website listing all requirements to start a variety of businesses, with easy-to-understand guides that walk entrepreneurs through the permitting process.
- Incentivize coordination across agencies to simplify all federal, state, and local procedures, forms, licenses, and permits required to start a business.
- Shift policymakers’ focus to think in terms of age of a business, not size. Accordingly, the federal government should measure business performance and outcomes by age cohorts in addition to size, reporting this data publicly and using it to guide policymaking. Codifying the distinction between the age and size of a business and providing policy support for new businesses across each stage of the entrepreneurial journey will better enable everyday Americans to start businesses and, in the process, employ millions.
Supporting Evidence
- In response to the COVID-19 pandemic, San Francisco adapted their local rules and regulations around starting a business. This includes allowing all applications for storefront use to be reviewed within 30 days (compared with the months it would previously take), ensuring parallel cross-department application reviews to speed up the application process, and relaxing zoning ordinances and regulatory rules. San Francisco is also modernizing zoning restrictions to allow businesses to open more quickly by making more businesses eligible for streamlined approval in neighborhood commercial zones.
2. Access to Funding – Create a holistic, accessible, and innovative approach to capital (Content from ANBP 2022)
Capital remains among the most impactful ways to strengthen access to entrepreneurship. Today, at least 83% of entrepreneurs do not access bank loans or venture capital when launching a business. The ongoing impact of past discriminatory policies, such as redlining, must be countered and new investments made to ensure we are supporting entrepreneurs of color as well as women and rural Americans who have less access to funding in the private market. When business owners do not have access to personal funds or quality capital, they are less able to take the risks necessary to grow their businesses, artificially stifling the marketplace.
Invest in Local Financial Institutions
As evidenced by the initial distribution of Paycheck Protection Program loans, a variety of factors, such as bias and lack of preexisting relationships, led to racial disparities. Community development financial institutions (CDFIs) and minority depository institutions (MDIs) are important sources of capital for new and small businesses, and they have stepped up in recent years to fill the capital gaps further exposed in the COVID-19 recovery programs. Yet these local financial institutions face issues of capitalization, regulatory complexity, and organizational capacity.
To improve access to capital, policymakers should:
- Expand the U.S. Treasury Department’s CDFI Fund’s impact by allowing CDFIs to apply for both technical assistance (TA) and financial assistance (FA) in the same cycle. Currently, non-Native CDFIs have to apply for either an TA or FA award each year. They cannot apply for both even if they have both programmatic and capacity-building needs.
- Simplify the Capital Magnet Fund (CMF) program to expand access to affordable housing. Currently, CMF recipients are forced to comply with different sets of rules for different years of awards In addition, the program’s reporting complexity artificially limits the number of CDFIs that can successfully deploy these dollars. Additionally:
- Consider adding prioritization or incentives for for-sale affordable housing within the CMF program to emphasize wealth-building.
- Make the 30% allowance for economic development the default option in the application.
- Provide more funding to Small and/or Emerging CDFI Assistance (SECA) CDFIs. Normally, SECAs have to demonstrate matching funds to receive CDFI Fund grants, similar to the larger “core” CDFIs, but unlike Native CDFIs. This is a significant resource drain on smaller and emerging CDFIs, which also tend to be minority-led and/or closest to their communities.
- Encourage the capitalization of local financial institutions by backstopping “equity-like” investment in CDFIs and MDIs and strengthening investor tax credits.
- Work with philanthropic organizations to create funding pools that reduce risk and interest of CDFIs’ short-term lending to businesses not eligible for SBA loans.
- Establish community deposit programs or expand existing community deposit programs to facilitate greater lending to new and small businesses.
Supporting Evidence
- While only 22% ($1.8 trillion) of bank loans in 2014 came from community banks, these local financial institutions accounted for more than 50% of all small business loans.
- Analysis of early lending through the Paycheck Protection Program (PPP) found that more PPP loans were made in states where small, local banks have a bigger share of the market.
- From 1994 to 2019, the CDFI Fund awarded nearly $3 6 billion to CDFIs. With an annual budget of $250 million in 2019, the CDFI Fund helped spur the financing of more than 19,000 businesses in underserved areas that lacked access to traditional lending.
3. Access to Knowledge – Real world experience for the workforce and to start a business (Content from ANBP 2022)
The fast-paced advancement of technology and the globalization of our businesses and economy require that our workforce and our future generations are well prepared to make or take a career. To have a prepared workforce and support entrepreneurs, we need to expand our education systems to include real-world learning experiences and hold systems and institutions accountable, preparing the next generation to be problem solvers and creators of change.
Corporations and education systems need to work together to develop the pathways that make these experiences easier to find and inclusive of all students regardless of race, gender, or geography. Finally, communities need to work at every level to democratize access to the connections and networks that build social capital.
Develop Inclusive Entrepreneur Support Mechanisms
Entrepreneurs value support from skilled professionals through avenues such as strong networks, cooperative platforms, co-working hubs, and high-quality incubators and accelerators. Government should support the growth and development of those methods and others to connect entrepreneurs with helpful people and tools. Policymakers should:
- Incentivize local mentor resource partners – both nonprofit and governmental – in funding packages intended to increase the number of underrepresented entrepreneurs.
Supporting Evidence
- Individuals with a mentor are five times more likely to say they are planning to start a business than those who do not have a mentor.
- Business owners who have more hours of mentorship report more revenue and employment growth than business owners with fewer hours.
- The introduction of accelerators to a region has a significant impact on the number of early-stage deals for new businesses, and these deals are driven primarily by the emergence of local, new venture capital firms.
4. Access to Support – The ability for all to take risks (Content from ANBP 2022)
Becoming an entrepreneur can mean leaving behind the stability of a traditional job and steady income or starting from scratch through gig work or while being unemployed – a daunting proposition for anyone, but especially for the many Americans living paycheck to paycheck or with little savings.
Having access to a safety net makes risk-taking far more viable. Policymakers can ensure the next generation of entrepreneurs is not locked out of opportunities to improve their economic situations by helping all Americans build stable, mobile, and – eventually – prosperous financial futures.
Provide Health Care Options for Early-Stage Entrepreneurs
The need for health insurance can prevent entrepreneurial risk-taking, contributing to “job lock,” a situation in which employees stay at their current jobs because leaving would result in the loss of benefits they value. To reduce the effects of job lock, policymakers should:
- Facilitate the development of a system of portable benefits that follow workers as they move across jobs or out of the workforce to start a business.
- Provide tax incentives to new businesses to offset health care costs.
Supporting Evidence
- Among those who have seriously considered entrepreneurship but ultimately decided against starting a business, 20% cited the need for health care coverage as a reason.
- A 2010 study found that increased tax deductions for health insurance for self-employed workers increased the likelihood of new business creation.
- Research found that prior to the passage of the Affordable Care Act (ACA), self-employed workers were twice as likely to be uninsured, and workers who had employer health insurance were 2.5 to 3.9 percentage points less likely to create a new business.
- Research shows the ACA has led to a 3% to 4% increase in self-employment.
Conclusion
As a country, we have yet to create a level playing field for all our communities. This requires a new collaborative approach that provides entrepreneurs the opportunity, funding, knowledge, and support necessary to reduce barriers to entry and spur more startups across the country, and an approach that provides access for students of all ages to gain the skills necessary to succeed.
ANBP 2022 offers a new, nonpartisan policy roadmap to create a more inclusive economy by building a prepared workforce concentrating on entrepreneur-focused economic development. The four-part plan focuses on creating new, good jobs and rebuilding an economy that works for everyone, with practical and achievable ideas that can be implemented starting now.
The specific policies outlined in this business plan are aimed at helping federal, state, and local governments close gaps on race, gender, and geography while increasing opportunity for all and growing the economy. Both policymakers and business leaders benefit from meaningful engagement with each other. Reaching out to better understand entrepreneurs’ priorities and roadblocks to growth helps policymakers create programs that can act as accelerants to economic opportunity.
