I currently work for LEAF, the Local Enterprise Assistance Fund, a Community Development Financial Institution(CDFI) based in Boston. This is going to start out as a shameless plug for what LEAF does and has been doing for small businesses in the Boston area and subsequently turn into a bit more about why it’s important. And it is important - Small business. If you don’t understand why, hopefully you will by the end of this. Allons-y
Cooperatives - What are they? Watch this video so that you’re on the same level of lack of understanding as I am. Great, you didn’t watch it yet, so stop reading and go watch it. Woo, you did it - hopefully. So, right, shameless plug. LEAF has been around since 1983 as one of three CDFIs that lend to cooperatives - it was born out of the needs of the Industrial Cooperative Association (ICA Group), its sister organization. Yeah, I’m gonna keep backtracking. The ICA Group is a non-profit that promotes the growth of worker cooperatives, democratic Employee Stock Ownership Programs(ESOPs), and other social purpose ventures - it was inspired by the Mondragon experiment in Spain. For reference, the Mondragon Experiement(Mondragon Corporation) now employs over 74,000 people in 268 companies with a total revenue of a little over $12 billion. So, the ICA group was created with the intention of pushing towards the same goal of encouraging employee ownership, management involvement, and participation in the business’ profit. Every lender has a loan underwriting process(think getting a mortgage), and because the rules and structure of cooperatives don’t fit what standard banks are looking for when they make a loan, it's very hard for cooperatives to find funding through them. So, as I mentioned before, LEAF was created to fill this need. LEAF has been a bank for cooperatives for a bit over 30 years. The ICA group helps with the setup or transition into a cooperative model while LEAF provides the funding by taking in funds from variety of sources. Hopefully you get the idea, but, if not, feel free to explore the LEAF and ICA Group sites.
So, I give that background to explain that encouraging and supporting the growth of cooperatives as a means of promoting human and economic development - especially low-income people, minorities, and women - has always been LEAF’s mission. However, supporting cooperatives is only one piece of a much larger tapestry of work that needs to be done. The title implies that I have something to say about small business, so don’t worry. I’ll get there.
I’m there. I’ll start with a report that is critical to understanding why small business. You can read the entire report if you like, but there are three main findings that I find the most impactful:
In spite of the steadily declining rate of new business formation, 117,300 more firms opened than closed on average each year from 1977 to 2007. Since 2008(the Great Recession), however, firm deaths have actually outpaced firm births on average. This is 20 years ahead of trend.
Companies at least 16 years old are increasingly dominant in U.S. industry with nearly three out of every four American workers on their payrolls in 2014.
The four largest firms now capture at least 25 percent of the market in nearly half of U.S. industries. Meanwhile, corporate profits have climbed to a record 9.4% of GDP
There are a lot more findings within the report that I consider important, but I’m just going to stick to the three for now. If those three bullets that you may or may not have read/understood/cared about didn’t connect some dots in your head, here’s my take. The financial crisis in 2008 hurt a lot of people. In the case of small businesses - they were hit hard because small businesses don’t have the same financial padding that large businesses do. When you lose 40% of your savings because the stock market tanks, you’re likely to stop at the Mom n Pop deli a few less times per month because Wal-mart has extremely cheap prices on everything and you have to save your pennies. It’s no one’s fault, per se, but the bottom line is that small businesses got hurt. You can see it in the change in wealth of the working and middle class or you can see it in a drastic shift in the birth and death rates(churn) of small businesses. Churn is strongly correlated with expanding local economies. But we’re in a market where the trend is towards being employed by larger firms(firm size vs % of employment). Employment is good - right? Eh…
That last bullet point that I added should finish the picture. Employment by larger firms is fine and dandy, but the issue comes when you think about where corporate profits go. That graph that references the change in wealth by quintile should have made it rather clear where those profits are most likely to end up. Being employed by a large firm is a salary, but, by and large, it can’t be expected to help you generate wealth. Wealth inequality is a term that’s thrown around a lot, but I’m not convinced that it’s always clear what that means exactly. I don’t think it’s worth my walking through exactly what wealth is besides saying that wealth basically refers to net worth, which is total assets minus total debts(If you want a slightly better explanation, watch the video here). So, what it comes down to is that more and more people are being corralled into a business ecosystem that does not set them on a path towards moving very far past living check to check, if at all. This is a major issue. The velocity of money in the economy - the cycle of spending that spurs economic growth is at the lowest it’s been since the early-mid 1970s, after peaking towards the end of 2007. It’s a huge contributor to why the recovery period after the Great Recession has been so underwhelming. If you include the velocity of things(M2 for you economists) like savings accounts, CDs, and money market accounts, the velocity is the lowest that it’s been since the Great Depression. The moral of the story is that the majority of the population is not being put in a position to spend - furthermore, the portion of the population that is in a position to spend is not spending enough. I’m not interested in asserting that big business is evil and is out to crush the little people. I’ve never been in a position where I can blame someone or something for looking to its own self-interest. It’s a problem. Instead of crying about it, we need to work towards fixing it.
So, what are the solutions? The background that I gave before - the promotion of cooperative business models that distribute corporate profits to workers equitably rather than allocating higher percentages to upper-level employees - is one method of approaching this issue. Cooperatives are a great way to counteract the trends that I’ve mentioned thus far. But, there are others. After the Color of Wealth in Boston report came out in 2015, LEAF was inspired to expand its focus in its own backyard. Despite being specialized in co-ops, LEAF has, more accurately, been specialized in finance since it’s creation. So, the time came to transition this experience to the broader market of small businesses. The LEAF Technical Assistance Program(L-TAP) was started to begin providing development support to small businesses free of charge. The funding for the program has been through grants and contracts from the Small Business Administration, The City of Boston, Wells-Fargo(recently), and hopefully other institutions in the near future.
Technical Assistance is a rather ambiguous term, and ironically doesn’t refer to anything related to tech - at least not directly. Technical Assistance is a fancy term for development support which is a fancy term for consulting. In LEAF’s case, it’s primarily Financial and Strategic consulting. We don’t do marketing. What we do do is help businesses transition themselves from one state of being to another. At a high level, I’d say that the businesses that we work with fit into three categories. The seed and development stage, the startup stage, and the growth and expansion stage. In a nutshell, many entrepreneurs have a strong intuitive understanding of the product and their business, but lack the financial experience to keep a handle on the financial ramifications of what they’re doing - more importantly, they lack the financial knowledge to put themselves in a position where they can be connected with the money that they need to transition to a new state of being.
If you crack the nutshell, the majority of the time, it comes down to one thing - bookkeeping. It’s costly to hire bookkeepers, not to mention that they’re becoming rare. It’s in their best interest to find employment as consultants to CFOs of businesses with >5 million in revenue per year. It pays better - it’s that simple. Does that sound familiar? It’s a direct example of the transition of the share of employment moving to larger companies. What’s left behind is an unfilled need. The demand for the type of work that LEAF has done in the last two years is evidence of that need. But, it’s not just bookkeeping. As I said before, LEAF’s specialties are within finance. The next two biggest needs of small businesses are tightly connected - modeling and investment banking(IB).
Modeling first. When I say modeling, I’m referring to putting together a picture of how much the ingredients that go into a product cost, how much the process of combining them together costs, how long that process takes, and how you choose to package and sell that product. Inputs. Production. Sales. They’re the core of what every business is. They’re the core of what allows the construction of financial statements. The unfortunate reality is that, even if the books are in order, without a sense of what should be driving purchasing, production, and sales decisions, a business is flying blind. You can’t afford to fly blind against large corporations with entire teams of people dedicated to the tasks that a small business owner has to take care of themselves...in addition to everything else. You can’t afford to not have benchmarks to tell you how you’re doing. I think about it like a bedroom. Your mom tells you that it’s a mess. You clean it up - a bookkeeper. You spend time rearranging things so that it makes the most sense - a business decision making model. What’s next?
You find a better room. In the business world, finding that better room means finding capital. Money - money money money money. As with co-ops, banks do not like to lend to small businesses. The alternative is things like Venture Capital(VC) funding which generally involves giving up an ownership stake in exchange for the money. It’s not the worst thing, but giving up ownership is not always ideal for a business. I’ll cherry pick an example, Dell. Dell transitioned from being a publicly traded company(1988 IPO) to privatizing in 2013 at a value of $24.9 billion. Why? “To allow it to focus more on its long term-strategy without having to answer to Wall Street and shareholders”. That’s about as entrepreneurial and american as it gets. Investment banking(IB) is the business of securing capital for other companies. LEAF is in the business of creating capital for small businesses where previously they would have been unable. More recently, LEAF has expanded its capabilities to be able to lend to small businesses rather than exclusively to co-ops. The bottom line is that LEAF is in a position where the technical assistance side of its operations creates a pipeline of businesses to be fed into its lending operation. But more importantly, it’s a pipeline of businesses that can be invested in by other institutions - ones with bigger pocketbooks. The due diligence process that makes loans from banks inaccessible is done as part of the Technical Assistance process. It’s done by putting the financial side of businesses in order so that there’s an accurate picture of their cash flows. It’s done by putting together tools to maintain and improve that business. It’s done by putting together conservative projections for where the business will be if it’s able to use capital to purchase equipment, hire staff, open a brick and mortar location, etc.
I started this by saying that Small Business is important. I’ve given a bunch of reasons why - mostly in the middle - but I have one more reason why. Historically, new companies create an average of 2.9 million jobs per year, while established companies tend to be net job destroyers. Because established companies are more likely to have stakeholders that are disconnected from their workers, it makes sense to cut costs(jobs) where it’s possible. It’s business. It’s optimization. It’s capitalism. It’s two truths and a lie. The lie was optimization. Our economic system as it stands is not optimal. There are several parts to that problem, but promoting and developing the small business ecosystem is a critical push in the right direction. I have an iPhone and I go to McDonalds occasionally, but I also buy lunch from a family owned sub shop three times per week. Back home, I go to a deli where they know what I order and start making it when I walk through the door. I don’t think it’s reasonable to ask people to give up their stable jobs with big corporations to “fight back” against Wall Street. Everyone needs to do what they have to - to survive. But, when you’re in a position to do it. Support local businesses a bit. The money goes farther, even if it means that it’s not making it into the pockets of the employees of big businesses. It’s a trade-off that I'm willing to live with.