Opening Opportunities, Building Ownership: Fulfilling the Promise of Microenterprise in the United States E LAINE L. EDGCOMB J OYCE A. KLEIN FEBRUARY 2005 This publication was made possible by a grant from the Charles Stewart Mott Foundation. FIELD (The Microenterprise Fund for Innovation, Effectiveness, Learning and Dissemination), is a research and development organization dedicated to the expansion and sustainability of microenterprise development efforts, particularly those aimed at low-income Americans. Its mission is to identify, develop and disseminate best practices, and to broadly educate policy makers, funders and others about microenterprise as an anti-poverty intervention. To learn more, visit: www.fieldus.org. © 2005 by FIELD, a program of the Aspen Institute Published in the United States of America 2005 by the Aspen Institute All rights reserved Printed in the United States of America ISBN: 0-89843-430-0 PAGE C Opening Opportunities, Building Ownership: Fulfilling the Promise of Microenterprise in the United States E LAINE L. EDGCOMB J OYCE A. KLEIN FEBRUARY 2005 Acknowledgments riting this review of the microenterprise development field in the United States Whas been a challenging undertaking. It is not easy to capture the dynamics of this highly complex and intriguing strategy used by a wide array of community development organizations to alleviate poverty, build ownership and assets among many who have had limited opportunity to develop either, and revitalize local communities. We hope that we have been able to do it justice in seeking to both point out its accomplishments and identify the challenges that lie ahead. The Charles Stewart Mott Foundation has provided critical and long-term support to the microenterprise field in this country. In its funding and leadership, the Foundation has always recognized the importance of assisting the field’s efforts to learn, innovate and raise performance, in addition to funding program services across the country. We are grateful for the Foundation’s ongoing support for our work and for this publication. In particular, we extend thanks to our program officers Jack Litzenberg and Sue Peters for their encouragement and insightful perspectives on the industry. We extend our appreciation to all the microenterprise development programs that participate in MicroTest, our performance data collection project, and whose data and experience forms the basis for many of the findings included in this report. Too numerous to mention here by name, these institutions have provided a great service to the industry by contributing their data to create an aggregate view of both institutional performance and the outcomes of program clients. We also want to acknowledge the insights and contributions of the many reviewers who commented on earlier versions of this paper and were generous with their time and advice to help us improve it. They include: Bill Burrus, ACCION USA; Bill Edwards and Jason Friedman, Association for Enterprise Opportunity; John Else, ISED Solutions; Robert Friedman and Andrea Levere, CFED; Yma Gordon and Anna Wadia, the Ms. Foundation for Women; Mark Greenberg, Center for Law and Social Policy; Kathy Keeley, consultant; Cynthia Sanders, Boise State University; Margaret Sherraden, University of Missouri at St. Louis; Mark Schreiner, Microfinance Risk Management; and Lisa Servon, New School University. Our equal thanks go to members of the Aspen team who commented on drafts, helped gather and check data and assist with its interpretation, and offered valuable advice on the framing of the paper’s argument and conclusions. These team members include: Ilgar Alisultanov, David Black, Jerry Black, Laura Casoni, Kirsten Moy and Tamra Thetford. We also extend appreciation to our communications team at Aspen who PAGE II helped bring this document to its final published form. Thanks go to Carol Rugg who served as our editor and prodded us to ever greater clarity with respect to the messages we were seeking to convey; to Greg Landrigan for yeoman’s work in checking footnotes, organizing our bibliography and providing other production support; to Colleen Cunningham for assisting with production of the text; and finally, to Jackie Orwick for managing the electronic dissemination of information associated with this project. Of course, in any project of this nature, there are bound to be errors and these are solely our own. Elaine L. Edgcomb Joyce A. Klein PAGE III Foreword hen I spearheaded the Mott Foundation’s interest in funding microenterprise in Wthe mid-1980s, I was motivated, in part, by recognition that structural changes in the overall economy were leaving a segment of the workforce out in the cold. As individuals and organizations sought new ways to help those excluded from a growing global economy, self-employment was viewed as a viable prospect. Indeed, even today, there are forces at play in our economy that are propelling people into entrepreneurship full or part time. Those forces include a decline in the number of livable wage jobs, erosion of the social safety net, an increase in the number of contract employees who receive neither benefits nor job security, and the growing number of immigrants who find it easier to start a business than find a job. Given that these factors aren’t likely to disappear any time soon, the trend toward self-employment surely will grow. And to help those new to self-employment is an industry with some 20 years of experience now behind it. To examine that industry – its past accomplishments, as well as the challenges ahead – the Mott Foundation commissioned this report. The pages that follow offer a comprehensive look at the field’s strengths and weaknesses. But this publication goes well beyond that to clearly articulate a set of directions the industry must embrace to ensure stability and sustainability into the future. From my perspective, the industry must become more efficient in delivering credit and training, and meet the test of performance standards. Microenterprise, the movement, grew because it allegedly could lead to the American Dream and help ordinary people achieve extraordinary things. Now it’s time to prove that the movement can and will continue to live up to that legacy. Embedded in this report, too, is a call for all of us who care about this industry to work collectively to build a better case for how microentrepreneurs are, indeed, creating the “ownership society” that the current administration in Washington is now embracing. In my 20 years of grantmaking in the microenterprise field, I’ve met literally hundreds of entrepreneurs in communities across the country. I’ve visited garages, sheds, storerooms, studios, basements and plenty of other places where industrious entrepreneurs were carving, cooking, concocting or creating – all in the name of microenterprise. The stories I’ve heard – and the passions expressed in the telling – have stayed with me. It seems to me that these individuals were, indeed, the forerunners of the newly coined “ownership society.” After all, their expressed goal was, more often than not, to grab hold of their future, control their work life and invest whatever time and money they could muster in a small business they could call their own. What strikes me as I reflect on the Mott Foundation’s long-term commitment to microenterprise is not only how many low-income entrepreneurs have managed to create thriving businesses and build critical assets, but also how many of these businesses PAGE IV grew out of communities decimated by structural unemployment. In such cases, I’ve often wondered whether microenterprise wasn’t, in fact, the only intervention that could have provided jobs and incomes to a population hit hard by a cruel economy. Moreover, in some places, microenterprises have provided livelihoods to enough individuals that, in effect, they’ve created a new economy in a regional labor market. And yet microenterprise must continue to prove itself worthy of support, from both the public and the private sectors. Overall domestic discretionary spending is getting thinner for many social programs, including such long-standing ones as Medicaid, education, job training and, yes, business development. As I write this, there is talk in Washington of eliminating all funding for the Small Business Administration’s Microloan program, and of making substantial cuts in several other SBA programs that help low-income, minority, female and rural entrepreneurs. In the face of such cutbacks, the challenges to keeping the microenterprise movement vibrant going forward will certainly grow. And yet, I remind myself that microenterprise has typically relied on local momentum to keep going and growing. Microenterprise programs – whether seated in the cornfields of the Midwest or our nation’s inner cities, in border towns or coastal communities – have arisen not because of government fiat or philanthropic will, but because they offer realistic opportunities to aspiring entrepreneurs. Surely there is a message in that for advocates, policy makers and funders alike. The microenterprise industry has been sustained, in no small part, because local people wanted it to continue. This same local energy should now be harnessed to carry out the recommendations herein. I am heartened by the fact that the microenterprise movement has lasted for 20 years. This report provides the road map for navigating the next 20 years. Jack A. Litzenberg Senior Program Officer Charles Stewart Mott Foundation PAGE V Table of Contents Acknowledgments . II Foreword . IV Executive Summary . .1 Introduction . 5 FIELD and the State of the Field . 6 Chapter 1: The Context and Scope of Microenterprise in the United States . 9 The Economic Context for Microenterprise and Self-Employment . 9 The Scope of Microenterprise in the United States . 13 The Market for Microenterprise Services . 14 Conclusion . 16 Chapter 2: The Evolution of the Microenterprise Industry . 19 The Growth of the Industry . 21 The Methodological Landscape . 25 Conclusion . 29 Chapter 3: The Institutional Performance of the Industry . 31 Outreach to Underserved Populations .