Jul 1 2021

Calling Financial Innovators

The Kauffman Foundation published an article last week that my New Builders co-author, Elizabeth MacBride, and I wrote about the inspiration for writing the book and – related – about how our systems of finance and support need to evolve to meet the needs of today’s entrepreneurs. One of our biggest inspirations and favorite New Builders is Danaris Mazara of Sweet Grace Heavenly Cakes. Sweet Grace was born in 2008, as the Great Recession ripped through the United States, particularly affecting working-class communities like Lawrence, Massachusetts where Danaris lives. She can identify the exact minute the bakery was born. She had $37 in food stamps to her name. “What are you going to do with $37 in food stamps?” Danaris asked herself. Danaris believes in God, and at that moment a divinely inspired thought came into her head: “Make flan.” From that beginning, her business was born.

Based on our research and the conversations we had in the course of writing our book, we believe there are countless potential Denarises out there. We need to find them and support them.

There’s a forgotten history of entrepreneurship in America, which includes many more women and people of color than is generally recognized. And the rates today at which women and people of color are starting businesses have accelerated to the point that, today in America, white men are now the minority of business owners.

The demographic shift is due to the growing diversity of our country, but also reflects some special conditions that make startup life and small business ownership especially appealing to women and people of color. Given the economic needs driving them, we’re seeing a surge in business starts post-pandemic.

Lacking the entwined systems of finance and mentorship that supported past generations of (white, male) entrepreneurs and that still over-index in support of a tiny subset of businesses in the tech world, today’s entrepreneurs face almost insurmountable obstacles. Entrepreneurship in America has been on a slow decline for the past 40 years but very few people in the mainstream notice this trend.

But it is the decline in the broader world of entrepreneurship that is a crack in America’s identity as a land of opportunity and innovation. Innovation doesn’t come soley from white men educated at Ivy League schools. Innovation comes from giving a broad swathe of people the opportunity to create businesses that drive economic growth.

We believe the fastest lever to give people like Danaris the wherewithal to start companies is a well-designed system of finance that provides capital, as well as the emotional and social support entrepreneurs need. According to Kauffman Foundation research, beyond the 1% of startups receiving venture capital financing, only about 17% take any outside financing at all. The key is getting the same level of robust financing to the remaining 83%.

There are four promising directions in finance innovation that would help the vast majority of entrepreneurs who aren’t getting funding. There are many more to consider, but these would be a good starting point.

  • Financing at scale. Large technology platforms, like PayPal and Stripe, have the potential to touch many businesses but the rates charged are higher than those found at banks, and they fail to offer the kinds of other support that are arguably even more important to success. If they were to become leaders in the movement to help New Builders, it would have to come about because of a mindset shift among their executives and the largely white men in their networks: that businesses started by women and people of color are not inherently riskier than the companies created by men, and that New Builders are not environmental, social and governance (ESG) investments. And these executives would need to accept their responsibility for creating a more inclusive and equal society.
  • Create a new capital class. Empowering more people to see themselves as investors and lenders would unlock more capital at the grassroots level. How could this function in communities and Main Streets in America? It’s not clear yet but we believe there are innovations to be had in enabling more people to invest in startups. If more people think of themselves as investors, they will create demand for new financial products.
  • Connecting investors with Main Street. Community loan funds have existed for decades, enabling community-minded institutions and wealthy individuals to put money into funds that in turn provide capital and support for businesses. Are there ways to scale these funds or turn them into an asset class? There are already signs that technology is at work in this space, as a handful of new companies, like Mainvest outside Boston, build platforms that help people who aren’t necessarily wealthy, invest in companies in their communities. The regulations in this space are still onerous, however.
  • New Builders helping New Builders. One of the most promising developments coming out of the increased social justice awareness in 2020 has been a focus on getting more capital into the hands of Black and brown innovators in finance. The $100M fund-of-funds partnership between the Kauffman Foundation and Living Cities is one example of this.

The New Builders is in many ways a call for people who now control capital in our country to do what they do best: innovate new financial products to create and serve a new market. We should be asking ourselves how we can adapt to the new generation of people who are starting businesses today. 

There are hopeful signs. While the most powerful members of the capital class can seem short-term and indeed are often deeply motivated by profit, they want to be ahead of the game. The future of the economy clearly lies with New Builders, who are more diverse in terms of their background, but just as capable and lofty in their dreams as any generation of entrepreneurs before them. I have faith that we’ll find new and creative ways to help them succeed.

Also published on Medium.