States are About to See a Historic Infusion of Funding to Help Entrepreneurs

Stimulating economic recovery starts with supporting local entrepreneurs.

Stimulating economic recovery starts with supporting local entrepreneurs. iStock.com/ANDRESR

 

Connecting state and local government leaders

COMMENTARY | The federal stimulus package provides $10 billion for states to boost the capital available to new businesses. If they don’t invest the money carefully, it will be a missed opportunity.

Entrepreneurs are the front line of economic recovery in America, since young businesses create almost all job growth. Yet, capital to grow emerging businesses is unevenly distributed. Over 83% of businesses don’t access venture capital or traditional banking, and 73% of venture capital is concentrated in just three states: California, New York and Massachusetts. That leaves out most of the nation and all but the best-connected entrepreneurs.

To address that gap, the recently passed $1.9 trillion federal stimulus package contains $10 billion for the State Small Business Credit Initiative (SSBCI), which will offer states and territories a once-in-a-generation opportunity to transform the capital landscape for entrepreneurs. SSBCI isn’t a new program. It was used from 2010 to 2017 to provide $1.5 billion to states to spur private capital investment. But the new version is about seven times bigger, setting up major investment potential for states.

Previously under SSBCI, for example, Missouri received $27 million. This time the state could receive over $110 million. Eric Cromwell, an expert on state venture capital programs, estimates that other states could receive anywhere from a minimum allocation of roughly $55 million to several hundred million dollars, depending on the allocation formula. These amounts have the potential to transform America’s entrepreneurial capital landscape.

But transformation is only possible if states structure the SSBCI capital in the right way. As Cromwell says, “A critical success factor is for states to design programs that meet underlying market conditions and focus on capacity building.” If SSBCI is treated like just a shot of adrenaline—a temporary infusion of money into a few businesses—the moment will be wasted. If it’s used to build long-term capital infrastructure, it could greatly expand the availability of capital for years to come, helping countless businesses grow and create jobs. Therefore, it’s crucial that states start planning now for how to ensure that these funds provide the most impact for their local economies.

Based on my two decades of experience in helping governments create capital systems and support entrepreneurs, here are some design principles for states to adopt to maximize the impact of their incoming SSBCI funds:

Capital should make more capital. Most people think about government-supported business capital as money that goes directly into businesses. But that approach is inadequate if the need is too great—you can’t use a tiny shovel to fill a massive hole. There is a better way to multiply the availability of business capital, and that’s by creating investment funds charged with the specific goal of creating more investment funds. These vehicles are often called “funds-of-funds”—pools of capital that help make more pools of capital—and every state could have its own. It’s how Israel built the most successful venture capital industry per capita on the planet, through a government-sponsored fund-of-funds called Yozma. It’s how most of Latin America’s venture capital industry was spawned, through a multinational government-sponsored fund-of-funds called the Multilateral Investment Fund. Only a few states created funds-of-funds with their last round of SSBCI money, and most of them put heavy constraints on them. Done well, these funds-of-funds can build entire capital markets to grow a multitude of businesses. In addition, the proceeds from these funds-of-funds can be recycled, so they become “evergreen” institutions.

Create many flavors. Unfortunately, capital for entrepreneurs is usually offered in only two ways: venture capital and banking. Only those who fit specific financial models are served, which amounts to less than 17% of entrepreneurs having access to those forms of capital. But businesses come in a wide range of varieties. States should, therefore, use SSBCI to foster a diverse spectrum of capital models to serve entrepreneurs’ needs more effectively. There are many new innovative and rigorous investment models emerging today. SSBCI funds could help boost these models to expand their capacity to invest in more businesses.

Examples of alternative funding models include:

Be the anchor. The lack of an anchor investor is one of the key reasons new funds fail to launch. Being the anchor investor can jumpstart activity. But government funding tends to be highly risk-averse and not proactive at filling persistent market gaps. SSBCI presents a rare opportunity for states to lead the way to catalyze new early-stage fund formation to fill gaps in the capital markets and provide businesses help where it’s needed most. States should avoid placing too many artificial constraints like rigid geographic boundaries.

Professionalize. SSBCI funds in each state should be managed by people who comprehend entrepreneurial capital, like experienced investors and/or entrepreneurs skilled in capitalizing nascent, young and growing businesses. They should know how capital works at the earliest stages of a business and how to provide governance and diligence at professional levels. That’s easier said than done, as governments usually are weak at engaging the entrepreneurial private sector. States should emphasize recruitment of top qualified talent to ensure capital is invested in the best ways to serve entrepreneurs.

The renewal of SSBCI provides a generational opportunity to change how businesses are capitalized in places where businesses face the most gaps. States should get ready for SSBCI and stay ahead of the curve with thoughtful planning and design. Smart program design by states will stimulate young business success, and thus job growth, for many years to come.

Victor W. Hwang is Founder and CEO of Right to Start, a campaign to drive economic recovery by expanding entrepreneurial opportunity for all Americans building new small businesses.

NEXT STORY: Gallup: Americans’ Anxiety About Energy Prices, Supply Sharply Rises

X
This website uses cookies to enhance user experience and to analyze performance and traffic on our website. We also share information about your use of our site with our social media, advertising and analytics partners. Learn More / Do Not Sell My Personal Information
Accept Cookies
X
Cookie Preferences Cookie List

Do Not Sell My Personal Information

When you visit our website, we store cookies on your browser to collect information. The information collected might relate to you, your preferences or your device, and is mostly used to make the site work as you expect it to and to provide a more personalized web experience. However, you can choose not to allow certain types of cookies, which may impact your experience of the site and the services we are able to offer. Click on the different category headings to find out more and change our default settings according to your preference. You cannot opt-out of our First Party Strictly Necessary Cookies as they are deployed in order to ensure the proper functioning of our website (such as prompting the cookie banner and remembering your settings, to log into your account, to redirect you when you log out, etc.). For more information about the First and Third Party Cookies used please follow this link.

Allow All Cookies

Manage Consent Preferences

Strictly Necessary Cookies - Always Active

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Sale of Personal Data, Targeting & Social Media Cookies

Under the California Consumer Privacy Act, you have the right to opt-out of the sale of your personal information to third parties. These cookies collect information for analytics and to personalize your experience with targeted ads. You may exercise your right to opt out of the sale of personal information by using this toggle switch. If you opt out we will not be able to offer you personalised ads and will not hand over your personal information to any third parties. Additionally, you may contact our legal department for further clarification about your rights as a California consumer by using this Exercise My Rights link

If you have enabled privacy controls on your browser (such as a plugin), we have to take that as a valid request to opt-out. Therefore we would not be able to track your activity through the web. This may affect our ability to personalize ads according to your preferences.

Targeting cookies may be set through our site by our advertising partners. They may be used by those companies to build a profile of your interests and show you relevant adverts on other sites. They do not store directly personal information, but are based on uniquely identifying your browser and internet device. If you do not allow these cookies, you will experience less targeted advertising.

Social media cookies are set by a range of social media services that we have added to the site to enable you to share our content with your friends and networks. They are capable of tracking your browser across other sites and building up a profile of your interests. This may impact the content and messages you see on other websites you visit. If you do not allow these cookies you may not be able to use or see these sharing tools.

If you want to opt out of all of our lead reports and lists, please submit a privacy request at our Do Not Sell page.

Save Settings
Cookie Preferences Cookie List

Cookie List

A cookie is a small piece of data (text file) that a website – when visited by a user – asks your browser to store on your device in order to remember information about you, such as your language preference or login information. Those cookies are set by us and called first-party cookies. We also use third-party cookies – which are cookies from a domain different than the domain of the website you are visiting – for our advertising and marketing efforts. More specifically, we use cookies and other tracking technologies for the following purposes:

Strictly Necessary Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Functional Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Performance Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Sale of Personal Data

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.

Social Media Cookies

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.

Targeting Cookies

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.