The pandemic has made it more difficult than ever for small businesses — many of them run by Americans of color — to get access to capital. That lack of capital is killing many of them. It also doesn’t help that it’s also creating obvious inequity — there are half as many community banks that are owned by black people in this country as there were 20 years ago, something the COVID-19 pandemic has put into stark relief.
We talked to two of the country’s smartest people on what we need to do to help entrepreneurs survive this crisis. Yes, part of it’s access to capital. But there’s more. We welcome you Inside the Minds of Bruce Katz, director of the Nowak Metro Finance Lab at Drexel University, and Melissa Roberts Chapman, an expert on kick-starting entrepreneurship for the Ewing Marion Kauffman Foundation.
CityAge: You are two of the most passionate people we’ve ever met about the importance of small business and entrepreneurs. How are they doing during this pandemic?
Bruce Katz: Since March, I feel like I’ve been living in a witness protection program to some extent, intensely focused on how to help cities respond to a massive collapse in small business, and particularly black and brown owned business. And I think what we saw from the federal government was a crisis led response that mostly favored small businesses with several hundred employees that had friendly relationships with traditional banks. And overlooked very small, underbanked, under-resourced, under-networked main street businesses.
We are going to be set back by the federal government using a one-size-fits-all relief package, when we really needed to harness all the energies, and all the talents, and all the capital to fit a broader continuum of businesses. So we’ve been helping cities respond.
We’ve been advising federal policy. We really hope that Senator Booker’s RELIEF for Main Street Act, which would have sent $50 billion directly to cities and counties to help start up very small businesses, particularly those around main streets and business districts, would have passed. The federal government is pursuing a level of malpractice that we have not seen in a very long time.
Melissa Roberts Chapman: The capital sources that we have right now are not meeting entrepreneurs’ needs as they start and grow businesses.
When you look at concepts like the vast wealth differential that we have in this country between white households and black households — and you also say that to get a business loan, you’re required to put up collateral or to have a great personal credit score — those requirements are mutually exclusive.
We can’t possibly build a healthy ecosystem when at the same time we’re putting rules and regulations in place that prevent more than half of the people in our ecosystem from even having the opportunity to access the very earliest stages of capital.
CA: OK. What would you do?
MRC: I think the first thing is to recognize is that right now, not all sorts of businesses have the same capital needs. And I know that sounds very basic. But to really start to build an ecosystem that serves all entrepreneurs in our city, we first have to understand the continuum of business growth and the experience of entrepreneurs on the ground. So like any great community-building activity, this one ought to start with listening to entrepreneurs. As we have gone through that process, what we have found is that there are a lot of different sources of capital today, but for a number of reasons — regulatory, bias, structural inequities, etc. — entrepreneurs struggle to access that capital.
When we think about building a healthy capital ecosystem, it includes questioning a lot of the basic parts of the system that exist today. The first kind of question I think that we would pose is, what is the right form of capital? What’s the right capital model? Is it debt? Is it equity? Are there new forms of capital that we should be focused on that can be more equitable? Things like revenue-based financing, which we’ve really dove into lately through the work of our Capital Access Lab project.
BK: We really need different forms of capital that fit the purpose here. And when we talk about small business, we have a one-size, depth-focused model that really doesn’t work for large numbers of entrepreneurs and enterprises.
We’ve built a very sophisticated model on the venture side, and frankly, in most parts of the US, we’ve built very sophisticated ecosystems; research institutions, recurrent companies, startups, scale-up accelerators, incubators, etc. We don’t have that on the small business side. We don’t have intermediaries with the capacity, capital and community standing to source new entrepreneurs and help lead them and to help enable them to realize their dreams with the right kind of capital that fit the purpose. There’s an enormous amount of capital out there, but it’s not harnessed to really fit.
CA: It seems like we need a blueprint to fix this. Does anybody have one?
BK: Myself and 10 other colleagues have put together a report called Big Ideas for Small Business, which calls for a complete reimagining of our whole federal and national infrastructure; capital, supply, demand, support, data, research. So this is a time for radical reinvention, both on the private side and on the public side, and I think there are some early green shoots and nascent, fledgling initiatives that we can build from, but we should use this period to construct a completely different system.
MRC: What are the requirements around getting or directing capital? Is it required to have wealth in order to build wealth? And so often, the answer is ‘yes’. So I think if we can start to pose those critical questions to the systems, I think we’ll all be better off, and I think if you are someone who is starting to have these conversations, I’d encourage you to start by listening to the entrepreneurs in your own city to understand the barriers that they see.
CA: We’ve heard about “Community Banks”. What can they do to help entrepreneurs during this pandemic?
MRC: There are really two kinds of banks in the world. There are financial institutions, investment banks, and then there are community banks, which are the branches that you see as you drive down the street in your own community or you don’t. And that’s really the core of the problem.
I live in Kansas City, a region that is deeply reliant on community banking. We don’t have major financial institutions or investment banks that are based here in Kansas City. So when we think about the importance of community banking, traditionally, I think it’s been based around a couple of main things. The first is the relationships that community bankers hold in their communities. If you think back to things like It’s a Wonderful Life, people knew who George Bailey was … The fundamental relationships, which are the strength of community banking, are really important. Secondly, the changes in the regulation of banks, especially small banks, have put a greater regulatory burden on those banks and have forced consolidation in the market.
CA: What’s the impact on the ground?
MRC: That consolidation has not only impacted the number of banks that exist in our community, but also where those banks are.
In the last 20 years, the number of, for instance, black-owned community banks in this country was cut in half. So, when you think about how focused we are today on what our networks look like, our networks tend to look like ourselves, and when you think about the fact that there are half as many community banks that are owned by black people in this country as there were 20 years ago, that has a massive impact on the access of relationships that people have to a community banker.
CA: How did that work in Kansas City?
When the Community Reinvestment Act was passed in the 1970s to combat some of the traditional banking ills that we know have changed the face of our communities — quite literally, things like redlining — there was also an alternative bank that emerged from that called a Community Development Financial Institution. And in the age of COVID, these CDFIs have become so important in communities across the country in providing access to microloans.
We have a great CDFI here locally called AltCap … that was really the core of our response to the foundation, to the shutdowns that came with COVID-19 in Kansas City. We worked to help de-risk capital in this CDFI that had a huge impact on the pool of microloans available in our community and also, the entrepreneurs that had access to capital, because what we found here during COVID-19 and the PPP lending that followed was first off, there was very little great information. And secondly, the loans were not equitably available.
CA: Bruce, how would you remake US institutions after this pandemic?
BK: Well, we’re going through a process right now in Cincinnati. If you think about the collapse of small businesses and black owned businesses, brown owned businesses, it’s going to have a domino effect on downtowns, midtowns, commercial corridors, main streets. We all know this; these are ghost towns right now.
The question is, how do you regenerate these nodes of commerce and centers of civic life? Because if we don’t do that, the confidence that people will have to renew the economy will be greatly circumscribed.
In Cincinnati, we’ve been working with Fifth Third Bank, The Port (which is the urban land bank), CDFI, the major foundation groups of Eds and Meds, large corporations and main street business organizations, to say we need a new kind of regeneration alliance that can quickly, nimbly and seamlessly match procurement and purchasing of services coming out of universities, hospitals or corporations, with small businesses located in business districts. Then they take those small businesses and walk them through a business plan so they can access the right kind of capital to scale up and provide those goods and services, and also connect small businesses with the right real estate options and help small landlords fill their buildings.
The bottom line is, we have lots of different kinds of institutions, entities and organizations, but it’s no one’s job waking up every day at the city level, county level, metro level, to connect the dots. And I think we’re going to need a lot more dot-connecting in the aftermath of this crisis and as it proceeds. There are a whole bunch of entities, but we need to have the matching function — the linking between supply, and demand, and capital, and real estate — happen faster.
CA: What specific work are you both doing to create accessible urban opportunities?
BK: We’re working with Accelerator for America, a nonprofit network led by Los Angeles mayor, Eric Garcetti, that Kauffman’s a member of, to help cities a) Understand their starting point on small business given the magnitude of the crisis, by creating a small business scorecard, and b) identify the strength of their ecosystem; procurement, supplier, diversity, business, support, access to capital, business district regeneration.
And finally, what are the two or three strategies that cities can undertake by themselves and then use to deploy federal resources if and when they come? Small businesses are the lifeblood of cities and we are going to come out of this crisis with a need to restart and reimagine their role.
MRC: In this time, in this year, to think about a smart city really requires a different view. We work at the Kauffman Foundation with communities in entrepreneurship and education to ensure that everyone has the opportunity to make or take a great job in their lifetime. I lead a team that’s focused specifically on building an entrepreneurial ecosystem in what we call ‘the Heartland’, but you could think of that as our own backyard. It’s what we call the MINK states: Missouri, Iowa, Nebraska, and Kansas.
And our work is really focused around three pillars.
The first is inclusive prosperity, making sure that everyone has a real opportunity to make a great life for themselves and their families.
The second is developing the 21st-Century workforce that has the skills they need to make or take those jobs, and the final piece is really promoting an entrepreneur-centric view of economic development in the 21st-Century.