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BIG IDEAS for SMALL BUSINESS 2 Lin, Emmett Witkovsky-Eldred, Leah Ferentinos, and Allen Xu Big Ideas for Small Business A Five-Step Roadmap for Rebuilding the U.S. Small-Business Sector, Reviving Entrepreneurship, and Closing the Racial Wealth Gap Peter Bassine Bruce Katz Della Clark Nate Loewentheil Gary Cunningham Jamie Rubin Benjamin Della Rocca Mary Jean Ryan Bulbul Gupta Luz Urrutia Marie C. Johns ISPS Working Paper October 19, 2020 ISPS20-21 www.bigideasforsmallbusiness.org Acknowledgments The authors are grateful to the many people who reviewed early drafts of the report. Special thanks go to Beth Bafford (Calvert Impact Capital), Ross Baird (Blueprint Local), Agnes Dasewicz (Kauffman Capital Access Lab), and Tim Ferguson, Charisse Conanan Johnson, and Spencer Lau (Next Street). We would also like to thank the many individuals that provided expertise, insights, access to proprietary data, market feedback, or were simply kind enough to serve as a sounding board over the past six months, including Michael Barr (University of Michigan Law School), Kurt Chilcott (CDC Small Business Finance), George Farah and Derek Peebles (American Independent Business Alliance), Amias Gerety (QED Investors), Philip Gaskin, Larry Jacob and Melissa Roberts (Kauff- man Foundation), Eric Groves (Alignable), Jared Hecht (Fundera), Michael Kades and Heather Boushey (Washington Center for Equitable Growth), Marshall Lux (BCG), Brayden McCarthy (Stripe), Rumi Morales (Outlier Ventures), Antoinette Schoar (MIT), John Shoraka (GovContract- Pros), Chris Slevin (Economic Innovation Group), John Friedman (Brown University), Esther Lee (Refraction), Jeni Britton-Bauer (Jeni’s Ice Cream), Byron Auguste (Opportunity@Work), Paul Healy (Yale Law School), Stacy Mitchell (Institute for Local Self-Reliance), and Brett Taxin (BlueRidge Bank). The report would not have been possible without their help. We also spoke on the condition of anonymity to dozens of executives at major banks, credit card companies, fintech lenders, venture capital firms, small-business counseling organizations, CDFIs, and other institutions in addition to nearly one hundred small-business owners, and would like to thank all of them for their time. The authors are also grateful to the teams at Drexel University (Ryan DeBold, Michael Greenle and Mary Tredway) and Yale’s Institution for Social and Policy Studies (Alan Gerber, Limor Peer, Jacob Hacker, Tory Bilski), as well as a group of dedicated students and fellows at Yale Law School that assisted with research, formatting citations and copy editing, including Kyle Bigley, Ya Sheng BIG IDEAS FOR SMALL BUSINESS 2 Lin, Emmett Witkovsky-Eldred, Leah Ferentinos, and Allen Xu. This paper would not have come together without their support. Special thanks go to Ben Preis for providing thoughtful insights at key stages of the research and writing process, Colin Higgins for his late-game assistance, and to Roni Lagin & Co. for his compelling design. The views expressed in this report are those of its authors and do not represent the views of the above-mentioned individuals, their institutions, Yale’s Institution for Social and Policy Studies, or Drexel University. BIG IDEAS FOR SMALL BUSINESS Acknowledgments • 3 Executive Summary SMALL BUSINESSES IN AMERICA ARE IN CRISIS. Since COVID-19 hit in February, 2020, almost 25% of all U.S. small businesses have closed at least temporarily. In the hardest hit sectors, like restaurants, hotels, and retail, the numbers are far higher. In September, Yelp reported that for businesses on its platform, 60% of closures were permanent. Those closures have left millions of Americans out of work, transformed lively neighborhoods around the country into retail graveyards, and destroyed the wealth built by many families over generations. The devastation of COVID-19 has forced the country to take stock of our small-business sector. Small businesses drive our economy, employing 47% of the U.S. workforce, generating two-thirds of new jobs, and serving as a critical path to economic self-sufficiency. Small businesses animate our neighborhoods, reflecting, embodying and sustaining the unique cultural fabric of their communities.But notwithstanding their critical role, small businesses have never been a central focus for federal policymakers. As a result, the federal government did not have the expertise or resources to meet the exigencies of the COVID-19 pandemic, as evidenced by the troubled launch and execution of the Paycheck Protection Program (PPP). The storms of COVID-19 were a fierce blow to an economic sector already battered by the unrelenting winds of economic centralization. Since the late 1990s, more than two-thirds of all U.S. industries have grown more consolidated, from dog food to airline travel. Even more strikingly, the rate of business creation has fallen by half since the 1970s. Entrepreneurs of color, meanwhile, have continued to struggle against structural constraints. While Black Americans are 12.3% of the U.S. population, they own only 2% of U.S. small businesses. Latinx Americans are similarly underrepresented. From the challenges of finding equity to launch a new venture to the difficulties in accessing bank credit for expansion, minority entrepre- neurs must climb a far steeper path than their white counterparts. Because minority businesses operate with less capital, they are also more suseptible to the financial pressure of COVID-19. The Federal Reserve of New York reported that from February to April the number of Black businesses declined by 41 percent. Given current market conditions, it is clear that abesent major federal interventions, whole swathes of the small-business sector will never return, minority business owners will suffer more than their fair share of the burden, and entrepreneurship levels will remain depressed for a generation or more. But the collision of these forces—COVID-19, economic consolidation, and deep racial inequality—also create a window of opportunity for significant reform.This report provides a five-step roadmap towards a more inclusive, dynamic, and productive small-business sector. We break down the five steps into ten major policy recommendations. While the federal government must take the lead for many of our recommendations, we also suggest how it can galvanize the full energy of public, private and civic institutions. Importantly, we do not believe that federal small-business programs need to be consolidated into a single agency. What matters is the focus, scale and scope of small-business programs across the federal govern- ment. That said, the U.S. Small Business Administration will be critical for executing on this roadmap and needs significant investment. BIG IDEAS FOR SMALL BUSINESS 4 Step Action Policy Recommendations Address the COVID-19 I. Provide loan and grant products at scale, tailored to meet 1 Crisis in the Small- the unique needs of small businesses during the COVID-19 Business Sector crisis Unleash America’s II. Spur entrepreneurship among minority, female, and other 2 Entrepreneurial Spirit disadvantaged founders III. Reduce barriers to entry and strengthen antitrust law and enforcement IV. Replicate proven organizations and models that help small businesses scale Shape a Financial Sector V. Create a new generation of federally backed debt and equity 3 That Works for Main products to meet diverse market demand Street VI. Strengthen a national network of financial institutions that support local business formation and growth Harness the Power VII. Set ambitious new targets for federal procurement and push 4 of Public and Private state and local governments to match these efforts Procurement VIII. Establish new private-sector Environmental, Social and Governance (ESG) standards for minority- and women-owned business procurement Measure to Manage: IX. Collect more and better data on federal programs and the 5 Evaluate for Continuous small-business sector Improvement X. Use data to rigorously evaluate impact and refine programs over time Many of our proposals build on existing programs, like the Obama-era State Small Business Credit Initiative (SSBCI). In other cases, we advocate for bills currently in Congress, like the RELIEF for Main Street Act. We also advance a number of novel ideas, including: • A federally-backed, first-loss loan program for fintech lenders that operates at the portfolio level to enable disadvantaged entrepreneurs to access right-sized, federally subsidized loans without the onerous paperwork required under current law; • The development of a private sector Environmental, Social and Governance (ESG) standard for procurement from disadvantaged business owners, around which the private sector could mobilize to bring the benefits of contracting set-asides to a broader market; and • A new federal Small Business Ecosystem Demonstration Project to catalyze and evaluate ways of driving transformative small-business outcomes at the metropolitan level. There is no question that the COVID-19 crisis is a turning point for America’s small businesses. Absent a ExecSummaryTable.inddbroad 1national commitment to rethinking how we support those businesses, it will be a turn for the 10/16/20 8:55 PM worse. But if we come together and follow this roadmap, over the next ten years we can: • Create 1.5 million net new small businesses • Grow the small-business share of employment by 25%; • Triple the number of small businesses owned by Black & Latinx Americans; and • Grow average minority household net worth by 20%. Our hope is that this report serves as a rallying point for all those who care about small business in America.
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