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Are Small Businesses America’s Most Overlooked–And Valuable–Charity Case?

See what happens when philanthropy funds the people re-building our Main Streets.

Are Small Businesses America’s Most Overlooked–And Valuable–Charity Case?
[Photo: RiverNorthPhotography/iStock]

In late 2016, the New Economy Initiative, which is the largest philanthropic funder of regional economic development in the country, announced that it would be distributing half a million dollars to 32 small businesses around Southeastern Michigan. Two winners received $100,000 while 30 others got $10,000 each. The awards came out the group’s third annual NEIdeas competition for small companies to pitch their own ways to grow stronger and more stable.

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In total, NEIdeas has distributed $1.5 million in grants to about 100 businesses in Detroit, Hamtramck, and Highland Park, and this was supposed to be the last year of competition. But the group, a special project the Community Foundation for Southeast Michigan, decided it wasn’t quite done yet. They’ll hold another competition in 2017, funded by what they project to be $28 million in new capitalization, about 50% of which is aimed at ways to improve small businesses. That should bring group’s total funding to just over $160 million.

NEI started in 2007 and is backed by 13 local and national funders, including the Kresge, John & James L. Knight, W. K. Kellogg, and Ford foundations. While the group initially invested heavily in ways to build the region’s high-tech sector, which was viewed as a viable replacement engine for the sputtering automobile industry, it’s slowly learned to split investments more evenly with neighborhood-level businesses.

“The one thing I always like to drive home is if we can get to a place here and across the country in terms of who we value as an entrepreneur we’ll all get a lot further,” says Pamela Lewis, NEI’s director. Philanthropically, the goal is to make the same level of support, from funding, to marketing, operations, and legal guidance available to both the big and small players in cities, who exist interdependently. “We had this evolution but also believe it can’t be a one-for-one trade. It’s an ‘and’ proposition not an ‘or’ proposition because they reinforce each other,” she adds.

[Photo: suesmith2/iStock]

BUILDING SMALL TO GROW BIGGER

On a national level, small businesses are crucial to the U.S. economy. They employ nearly half the country’s workforce and account for 45% of the GDP, according to research by JP Morgan Chase. But on a city-level, they’re crucial in another way too. As NEI sees it, no major company is going to be comfortable settling into an area if the neighborhoods don’t have the goods and services to support them and their employees, who might want to live nearby. Locating emerging industries alongside such neighborhood outposts can also boost their business.

When done correctly, this so-called “cluster development” can help metro economies grow anywhere from three to six times faster than the national average, according to another Chase analysis. In fact, research shows that if all the existing small businesses in Chicago, Los Angeles, Detroit, Dallas and Washington, D.C., hired between one and three additional employees it would practically eliminate unemployment in those areas.

None of that happens organically in an economic downturn because small businesses are inherently fragile: Over half fail within their first five years, Chase reports. Half don’t even have enough cash on-hand to survive a particularly disastrous month.

Projects like NEIdeas should help counteract that. One of the big winners, the Detroit Training Center, will buy new tractor-trailers for students to test drive en route to earning Commercial Driver Licenses. The other, Louisiana Creole Gumbo, is an iconic Detroit eatery that’s funding a fleet of mobile food trucks.

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Both ventures will secure or create more jobs. But those jobs should also enable bigger companies thrive by, say, making it easier to transport things, or giving employees better access to good and affordable food for lunch. Smaller winning proposals included the purchase of playground equipment for a childcare center, and employee training at a tech retailer and repair shop to enable Detroit’s first minority-owned Apple Authorized Service Provider. Both provide the sort of services city dwellers and urban professionals expect.

Equally important is who’s getting the money: a variety of people who already live in these areas. Seventy-five percent of this year’s NEIdeas recipients were minority business owners, and 60% owned by women. NEI reports that it’s funded in at least nine different sectors: construction, education, farming, manufacturing, retail, service, technology, and transportation.

[Photo: Flickr user Gerry Dincher]

FUELING MORE FUTURE CHANGE

With NEIdeas, even businesses that don’t win receive something in return. By applying, they gain access to NEI-funded small business support services offering things like document translation, and workshops with free legal, marketing, hiring, and financial advice. NEI has worked with the Detroit Economic Growth Corporation to identify “ambassador” groups—those organizations and institutions that already exist within communities—for more coaching. To date, 1,700 businesses have applied to the NEIdeas program. One-third of this year’s winners were previous applicants.

“Can I tell you a secret? One of the major reason for doing this was to get these 600 businesses a year to identify themselves so we could connect them to a supportive ecosystem,” says Don Jones, NEI’s associate director. Lewis agrees: “The free capital through winning is great, but connecting so many companies to resources that they didn’t know where there is really the beauty of it,” she says.

At that same time, the fact that so many foundations teamed up to work together is unique. By their own assessment, these groups are generally dissatisfied with the impact their sector is having but have been reluctant to collaborate. “In this case, they saw the need to grow the economy above all was something that cut across all their areas,” Jones says. “For each of them to subsume their organizational egos and look at this for the collective impact is very important and very powerful.”

Overall, the split-focus approach appears to be working: By the end of 2015, NEI reported $96.2 million in grants through various programs that have supported more than 4,400 companies of all sizes. That’s generated 17,000 jobs and nearly $3 billion worth of goods and services. “There’s really not a strong connection to say, ‘Yes we did X and this company moved in,” Lewis says. But NEI is proving that there’s a definite demand for the sort of services they’re providing and keeping a track record of what business owners seem to like the most.

NEI may not exist forever, but those lessons should enable ground level groups to keep up what’s working while other public and private organizations figure out if there are other ways to fund it. “We are seeing this . . . idea that the young man opening the coffee shop is just as valued in terms of receiving resources as the young woman opening the tech company downtown,” she adds. It’s time to devise more ways to support that.

About the author

Ben Paynter is a senior writer at Fast Company covering social impact, the future of philanthropy, and innovative food companies. His work has appeared in Wired, Bloomberg Businessweek, and the New York Times, among other places.

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