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How cities, states, and tribes can boost entrepreneurship via the American Rescue Plan

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Editor's Note:

This analysis is part of the American Rescue Plan: Strategies for Local Leaders series, a feature of the COVID-19 Metro Recovery Watch.

Eric Cromwell and Dan Schmisseur were the authors of Treasury’s 2016 official evaluation of the original SSBCI program, and were involved as advisors on large-scale state venture capital programs, including Invest Maryland and Innovate in PA. They are also founders of Cromwell Schmisseur LLC, a for-profit company focused on initiatives that improve diversity—geographic, gender and racial—in the venture capital industry.

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The COVID-19 crisis has put thousands of small businesses, from high-growth startups to Main Street employers, out of business. Importantly, the economic impacts of COVID-19 have not been equal. Minority-owned businesses and very small businesses are disproportionately concentrated in the industries most heavily impacted by the COVID-19 crisis such as restaurants, retail stores, and personal services. As a result, encouraging entrepreneurship, making it more equitable, and improving access to the financial resources needed to start and maintain a business must be a priority for policymakers as the economy recovers.

While a significant amount of attention has rightfully gone to the $350 billion in flexible funding provided to states, counties, cities, and tribes in the $1.9 trillion American Rescue Plan (ARP), this historic bill also contains an important separate investment aimed at supporting entrepreneurs and small businesses. The ARP’s reauthorization and expansion of the State Small Business Credit Initiative (SSBCI) can not only bolster business creation, but also rectify many of the longstanding entrepreneurship inequalities that exist by race, gender, and place in the United States. SSBCI provides $10 billion to states and tribal governments, providing them flexibility to design a portfolio of small business financing programs that meets the unique needs of local entrepreneurs and considers the conditions of local capital markets. Different than prior federal small business policies focused on relief, such as the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL) program, SSBCI will enhance recovery by providing states and tribes more flexible, patient capital to spur an inclusive entrepreneurship-fueled rebound.

SSBCI incentivizes capital access across the small business spectrum

Originally established by the Small Business Jobs Act of 2010 in the wake of the Great Recession, SSBCI provided $1.5 billion in federal funds at that time to states to restore small business lending and investing activity by sharing in financial risk. Recognizing that small businesses are a vital part of the U.S. economy and that different types of small businesses have different financing needs, SSBCI supported a range of eligible state programs: capital access, collateral support, loan participation and loan guarantee programs for credit support, and state-sponsored venture capital programs for equity support.

SSBCI-supported lending programs work with mission lenders such as community development finance institutions (CDFIs) and community banks to address the systemic market needs of socially and economically disadvantaged individuals. Venture capital (VC) programs work with non-profit venture development organizations (VDOs) and private investors to mitigate capital access challenges for high-growth startups resulting from the extreme geographic concentration of the venture capital industry.

Fig1

A 2016 evaluation of SSBCI prepared by the Center for Regional Economic Competitiveness and Cromwell Schmisseur LLC (note: Eric Cromwell and Dan Schmisseur are the founders and owners of Cromwell Schmisseur LLC) found that through 2015, states expended $1.04 billion of the available $1.5 billion in funding, thereby leveraging nearly $8.4 billion in new lending and investing. Importantly, the evaluation found that SSBCI expanded entrepreneur and small business financing programs that addressed local objectives, and also found that Treasury’s role providing technical assistance helped build capacity for business financing at the state level. In other words, a well-executed SSBCI program has the potential to jump-start entrepreneurship in communities across the U.S. while addressing local economic needs.

How states, territories, tribes, and cities can take advantage of this once-in-a-generation opportunity

ARP reauthorizes SSBCI with a significantly larger $10 billion appropriation. The program allocates $6.5 billion to states by formula, disbursed in three separate payments, with a minimum total allocation of $56.2 million for each state. From there, the program will allocate an additional $1.5 billion to states to support small businesses owned and controlled by disadvantaged individuals, a set-aside that didn’t exist in the original SSBCI program. States that demonstrate “robust support” (as defined by the Secretary of the Treasury) for disadvantaged individuals will then be eligible for an incentive program that will provide a total of $1 billion in additional support to qualifying states by increasing the second-third and last-third funding allocations.

In parallel, the program has dedicated $500 million to help Native American tribal governments support entrepreneurship and business development through their own lending and venture capital programs. Finally, the program provides $500 million for technical assistance to support very small businesses and businesses owned and controlled by disadvantaged individuals. States and tribes have until September 30, 2030 to distribute all of their SSBCI money to entrepreneurs and small businesses (though the funding is distributed in thirds and states must allocate 80% of their first two distributions within three years of receiving them). This longer time horizon distinguishes SSBCI from other sources of state and local funding in ARP, which must be spent within two years.

The SSBCI is a federal-state partnership (or in the case of tribes, a federal-tribal partnership) where a state agency is designated to participate in the program and implement approved program strategies. States signaled their intent to participate in the program in May, while tribes are being given until July 30, 2021 to decide whether to participate. State officials are now turning their attention to program design decisions in preparation for the release of the application forms in June, with the state application deadline set as December 11, 2021.

To make the most of the unique opportunity provided by SSBCI to improve capital accessibility and address market inequalities, we outline three considerations for state and tribal decisionmakers:

  1. Establish a team and draw on expertise from past SSBCI officials

State administrative leaders should establish a team that has responsibility for reviewing information, engaging with diverse stakeholders, developing the framework for a conceptual program portfolio, and making recommendations to state policymakers for SSBCI funding allocation decisions. State teams should be headed by senior officials such as the state secretary of commerce, with support from the governor. States should aim to hire program managers with commercial lending or investment experience, as well as employ a group of dedicated compliance officers. Wherever possible, states should draw on officials, employees, and contractors who were involved in the original SSBCI program and reach out to peers in other states for mutual information sharing. The objective should be to lead a collaborative and transparent planning process for assessing small business needs, engaging partner organizations, and marketing programs to private sector participants.

On the lending side, large financial institutions, community banks, credit unions, and community development financial institutions (CDFIs) can provide a realistic assessment of demand for capital across the full small business spectrum. Entrepreneurship support organizations, chambers of commerce, and community-based small business groups can organize and translate feedback from small business owners themselves. To ensure planning processes are inclusive, state officials should prioritize outreach to minority-serving small business organizations, and use their technical assistance resources to compensate them for their advice and planning support.

On the venture capital side, most states have existing venture development organizations with either statewide or regional service areas. These economic development partners were integral to the success of the original SSBCI program in both lending and venture capital programs and should be included in the design and implementation decisions for the relaunched initiative. Larger states with population and economic clusters spread across multiple areas are best served by strategies that build local investment capacity, like the Ben Franklin Technology Partners in Pennsylvania or JumpStart, Rev1 Ventures, and CincyTech in Ohio. In smaller or less populated states, engaging with venture development organizations with a statewide mandate and service area is a smart strategy. For example, state-supported entities such as i2E in Oklahoma, TEDCO in Maryland, and Connecticut Innovations have a proven track record of investing in and providing technical assistance to entrepreneurs statewide. Again, states should ensure this outreach is inclusive of Black- and brown-led venture funds, accelerators, and incubators in addition to those entities that led SSBCI strategies a decade ago.

  1. Split funding between lending and VC based on state (or tribal) capacity and business needs

In the prior iteration of the program, most states allocated funds to both lending and investment programs, but some allocated all of their SSBCI funding to either lending programs (19 states) or venture capital programs (5 states). With the significant increase in funding provided to each state, we expect states to allocate funds to both lending and investment programs, and in doing so balance the need to move significant amounts of capital quickly, inclusively, and via channels that satisfy Treasury’s expectations that each $1 of state-funded support should leverage $10 of private capital.

Fig2

A reasonable starting point for states might be to consider an equal capital allocation split between lending and investment programs, with adjustments made during the collaborative review and planning process. For states that implemented only one type of program during SSBCI, it will be important to carefully review program experiments from other states and access credible information and technical assistance.

During the program design and application phase of SSBCI, there are two important types of capacity to analyze and understand. The first is administrative capacity, where the planning team evaluates existing small business financing programs and personnel—including programs funded by SSBCI between 2010 and 2017—to better understand where the state does and does not have program management expertise. For this analysis, state agencies, state supported quasi-governmental entities, and other partner organizations like CDFIs should be recognized for their contributions and program management capabilities related to statewide economic development.

The second type is investment capacity, where the supply and demand of both credit and equity-based investment in the state should be evaluated before program design decisions are made. States should conduct a detailed and candid market analysis that includes reviewing data from independent national sources, gathering information from regional venture development and support organizations, and inviting private lenders and investors to comment on financing gaps and proposed solutions. Again, building a diverse advisory process will ensure that programs reflect on-the-ground market realities.

  1. Develop more lender and entrepreneur capacity, with a focus on disadvantaged groups

In the original SSBCI program, states varied widely in how quickly they were able to deploy capital. In the reauthorized program, getting money to small business efficiently and effectively will be critical to accelerating an inclusive national economic recovery. As mentioned previously, Treasury is providing funding in three tranches, and states must transfer or obligate at least 80% of the first tranche of transferred funding to unlock the subsequent funding transfer.

However, it will not be enough for states to simply rely on their existing networks of lenders, investors, and entrepreneurs. Historically, both lenders and recipients of funding, particularly venture capital funding, have been overwhelmingly white and male. And when minority groups are involved with entrepreneurship, they tend to be disproportionally concentrated in so-called ‘Main Street entrepreneurship’, and less involved with higher growth tech and advanced sector firms. As a result, absent concerted state-level efforts, this new round of funding could inadvertently reinforce existing structural inequalities in the U.S. entrepreneurial system rather than begin to ameliorate them.

As noted above, ARP sets aside $2.5 billion in SSBCI funding for disadvantaged communities, and $500 million for tribes. If managed correctly, this funding has the potential to begin changing the biased nature of capital access in the United States. However, funding alone will not be sufficient. Federal, state, and tribal leaders will need to develop new lending and entrepreneurial support capacity for both high-growth and Main Street small businesses in order to take full advantage.

One recommendation is for Treasury to be creative and flexible with how the department allocates the $500 million in SSBCI technical assistance funding. For example, there would be great value in allowing technical assistance funding to help states and tribes develop new lending and investment capacity. On the lending side, Treasury could direct this funding in ways that help stand up new CDFIs and community banks. On the equity investment side, technical assistance funding could be used to provide legal, accounting and financial advisory services to very small investment management businesses so that they can apply to states to manage SSBCI funds, with the goal of spurring more women- and minority-led investment funds. Across the board, Treasury should encourage states to use technical assistance dollars to bolster funding into small business development center networks and other entrepreneur development resources that provide legal, accounting, and financial advisory services to very small businesses.

For their part, states and tribes could leverage a portion of the $350 billion in flexible funding contained in the ARP to put toward small business development centers, incubators and accelerators, and other entrepreneurial support. Indeed, recent guidance by Treasury makes it clear that “technical assistance, counseling, or other services to assist with business planning needs” are an acceptable use of that funding if put toward “businesses with less capacity to weather financial hardship, such as the smallest businesses, those with less access to credit, or those serving disadvantaged communities”—the exact businesses targeted by SSBCI. In Cincinnati, for example, Mayor John Cranley has proposed a $4 million investment to support the Cincinnati Minority Business Collaborative, a collection of local business development organizations invested in minority business growth, using the city’s federal relief funding.

Knowledge capture and information sharing must be a priority for the federal government 

In addition to partnering with states and tribes to get capital to entrepreneurs, Treasury should also capture information and best practices from this new phase of SSBCI. While the federal government did play that role during the original SSBCI program, it can take several additional steps to provide even stronger support for states and tribes in these areas.

First, Treasury should update its collection of best practices reports to reflect developments that have occurred since their publication in 2015. While many principles will remain the same, they could be revised to incorporate important lessons learned and best practice illustrations from states during the second half of the last decade, as well as during the COVID-19 pandemic recession. These reports could be an invaluable resource for tribal governments and programs designed to support underserved communities. As a result, any updates should solicit input from tribal leaders, Native American economic development experts, and lenders and community organizations supporting underserved groups. Once updated, Treasury should proactively distribute these best practices to states, tribes, lenders, investors, and community organizations.

In addition to maintaining state-level best practices for planning and implementation, Treasury should conduct both an interim report on the status of SSBCI in several years, as well as a final evaluation sometime between 2031 and 2033. The original SSBCI program ran until 2017, but because its evaluation report was published in 2016 using 2015 data, we don’t know the full extent of the program’s job and investment creation, particularly on the high growth venture capital side and for underrepresented groups. A program evaluation timed a full decade or more out, with robust demographic data by race, gender, place, and other important characteristics about who benefitted from the program, will allow policymakers to get a fuller sense of the economic effects of the reauthorized SSBCI program.

Like many other components of the American Rescue Plan, the SSBCI reauthorization represents a historic investment. However, the details of its implementation will be as important to its success as the sheer size of the investment. The federal government, states, and tribes have a shared interest not only in making sure that this money gets to entrepreneurs efficiently, but also in ensuring that entrepreneurs are prepared to leverage this new funding. If implemented smartly, SSBCI will be a critical part of a broader collection of programs designed to remake the nation’s economic geography and bring long-excluded groups more fully into its entrepreneurial ecosystem.

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