The Politics of Access to Capital

The Politics of Access to Capital

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President Barack Obama yesterday demonstrated the fine balance between being a national policymaker and addressing the granular issues facing everyday Americans.  Yesterday’s issues dealt with the problems that small business owners have with access to capital.

The president artfully, and I would say skillfully, answered questions from the audience during a forum at Cleveland State University.  He managed to describe the administration’s initiatives, whether it was making improvements to loan guarantees provided by the Small Business Administration and the Treasury Department, or training for jobs that will supposedly be in demand over the next decade.

His comments were upbeat and positive during the new media and entrepreneurship break out sessions.  No surprise there. Given the state of our economic recovery and the possibility that jobs as we know them will not be coming back, Mr. Obama had no choice.  My only problem with his remarks was his failure to bring out one very important point when he offered his diagnosis of what is ailing the access to capital process:  maybe we are not presenting any potential business underwriters with business plans that they would want to run home and tell mama about.

For example, living in a predominantly African American section of Atlanta, it’s unnerving to see our preference for establishing restaurants, salons, and barber shops.  In general, there’s nothing wrong with these establishments.  I like my hair short and I like to eat. But when it comes to businesses that will hire employees and generate higher revenues, the industries we are pursuing are not getting to that point.

For example, on February 8, 2011, the U.S. Census Bureau released the Survey of Businesses: Blacked Owned Businesses 2007.  According to the report, 19% of black-owned firms provided health care and social assistance services; 18.6% provided repair, maintenance, personal, and laundry services; and 11.3% provided administrative, support, waste management, and remediation services.

The problem with these services is that barriers to entry for the markets these services operate in is low.  Low barriers to entry mean lower profit margins and lower wages.  Underwriters are more excited about services facing lesser competition with a greater bundle of services based on technical innovation.

Unfortunately, the current politics of our economy has us focusing on the micro aspects of the capital dilemma. The participants in the forum raised their individual concerns with Mr. Obama.  To address the flow of capital, maybe it is time for us to take a more macro approach. We should start viewing our communities as potential emerging markets, and as such, we can sell our communities, and the labor and businesses that drive them, as places where investors can reap high rates of return.

For example, suppose the West End of Atlanta, the neighborhood that I live in, were to view itself as a distinct economic community.  It would attempt to window dress itself as a place for private equity to seek out businesses that could provide a high rate of return or identify the necessary infrastructure within the community that would support, say, high growth niche industries.

Once a district redefines itself along these lines, and puts in place the infrastructure to support high growth niche industries, like high tech versus another mom and pop restaurant, we may then have the impetus for capital flow.

Bottom line, capital flows to the area that provides the highest rate of return. We need to start repeating this rule over and over again if we expect the politics behind the access to capital to be truly effective versus continuously rhetorical.

6 COMMENTS

  1. The most significant challenge facing predominantly 'minority' communities and capital isn't a dearth of sound investment opportunities — however defined — but a severe lack of sophistication, skill, and talent for capital formation. For example, many Rust Belt cities have surpluses of physical, intellectual, and material capital, especially in their most economically underdeveloped neighborhoods. Very little coordination of these resources is taking place in these areas. The infrastructure of these cities is also in a state of advanced decay. So, the economic opportunity for building (or rebuilding) housing, utility grids, roads, etc., is plainly evident. But conventional financial institutions aren't loaning the money. Those same financial institutions are even less inclined to invest in high-risk ventures, as many technology firms represent.

    It's therefore incumbent upon those of us in the private sector with the know-how to form microcapital pools by which small-to-medium sized durable goods and housing manufacturing along with light construction… even urban agriculture… can take place.

  2. I think part of the problem is confining plans and expectations for minority entrepreneurship to bricks-and-mortar shops. Using broadband to get online lowers – and in many cases eliminates – many of the barriers that have held minority entrepreneurs back in the past. A new era requires a new mindset. Once again, the President failed to tie his vision for innovation and high-tech to jump-starting economic development in areas that continue to struggle.

  3. I think that we need to focus on broadband adoption and digital literacy. To show these existing minority-owned businesses how to incorporate broadband into their business as an essential function and to continue to train employees in how to use broadband. I also think we need to set up more high tech minority incubator programs.

  4. ~ We should start viewing our communities as potential emerging markets ~ Is to me the single most important thing you stated in the post… Thanks for the Post.. I'm on it…

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