Shaulablog

I attended a webinar last week on Rural Entreprenurial Development Systems or “EDS”s.
It showcases a report funded by the Kellog Foundation and describes a three-year project to work with six sites on creating “Entrepreneurial Development Systems”. The report summaries those experiences and draws lessons on structure and strategy. The webinar introduced the concepts and had presentations from two of the EDS participants.

For this study an EDS should aim to create three key situations:

• a pipeline of entrepreneurs
• a system of support
• a culture of entrepreneurship

These precepts rang familiar to me from a report my friend Mina Yoo did in 2006 with folks from the University of Washington Business and Economic Development Center: Regional Economic Development for the North Central Washington Region. That was my first exposure to the idea that entrepreneurship is a bit of a mindset that can be supported by a local culture – things like emphasizing calculated risk-taking and acceptance of failure. How? In the kinds of stories reported in the local papers, or examples discussed in education and training programs. They also suggested identifying success stories and recognizing them at a community level; and building a culture that embraces newcomers and takes advantage of what knowledge and outside resources they can bring. The UW group posited culture as a foundation that the rest of entrepreneurial support builds on.

In the FIELD webinar we heard from John Parker who leads a project supported by the North Caroline Rural Development Center. They have defined a set of 5 Pillars of Support needed to build a supportive community for entrepreneurship. Their five pillars resonated with my experience in urban entrepreneurial development as well. They are:

• Education – teaching folks to make informed business decisions
• Technical Assistance – business services and information. I’ll categorize education as more towards the theory side and TA as more towards the practice side of business.
• Access to Capital – from a systems perspective an EDS should work to identify gaps, as well as educate entrepreneurs
• Access to Networks – help folks identify service providers, collaborators, mentors
• Leadership & Policy Development – again at a systems level, look at tax and regulatory policies and how they can support entrepreneurship.

The work being done in North Carolina is at a state level, working to connect many disparate systems and services. One comment that interested me: John reported that entrepreneurs are often shy about asking these resources for what they need. He said they emphasize to these owners that such services are provided with their tax dollars, so they certainly have a right to use them!

The other presenter on the webinar was Mary Matthews from the Greenstone Group. They are focused on a region of Minnesota and have a targeted approach. From their website: “The purpose of the Greenstone Group is to increase the number and skill levels of entrepreneurs and thus build business wealth and employment through the growth of successful locally owned companies.” Some of their activities focus on building the pipeline. Further, they have a clear focus on moving businesses through the pipeline. The businesses they work with need to have been in business for several years already. For Greenstone, their areas of focus are:

• Entrepreneurial development via coaching and training
• A professional service provider network to help Entrepreneurs access the right services at the right time
• Campus connection to community colleges, again building that pipeline
• Civic engagement to foster a supportive environment

Greenstone seeks to create “entrepreneurial transformation” and see change in their targeted businesses as Operators start acting more like Managers, Managers learn to be CEOs, and perhaps beyond the program CEOs will develop themselves beyond – into investors and managers of multiple companies. It’s a leadership program focused on developing the skills of the entrepreneurs rather than the broad bucket of creating opportunities for supportive transactions that address needs like financial planning or marketing help.

The webinar was presented by FIELD, the microenterprise-focused sub-section of a larger Economic Opportunities Program that “focuses on advancing strategies that connect the poor and underemployed to the mainstream economy”. The programs are part of The Aspen Institute, a national organization in DC. I’m somewhat familiar with FIELD because they run the Microtest program that Washington CASH has participated in for several years. Microtest uses a summer-long intern and does a deep evaluation of the program and over the last several years has consistently shown that Washington CASH reaches a lower-income population than any other microenterprise org in the country, and yet shows solid income improvement for more than 75% of clients after a year.

All in all, some great system-level thinking on how to support entrepreneurship!

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9-9-09 has come and gone. A friend’s birthday and a couple Hollywood movies with 9 in the title were the biggest events I noticed, perhaps it had the disadvantage of being a Wednesday. The 9 on my mind recently is Ice-Nine: a fictional form of water invented by Kurt Vonnegut for the book Cats Cradle. Ice-Nine is a lab engineered crystalline form of water that is “frozen” at Earth ambient temperatures. When it comes in contact with any other water, those molecules quickly align onto the Ice-Nine structure, also now becoming frozen. As you might imagine, Ice-Nine was a fairly deadly substance and by the end of the book the world pretty much ends, frozen.

That’s a bit melodramatic, but the concept that Ice-Nine has this structure that it communicates to any additional water molecules it comes in contact with is brought to mind for me as I study banking and think about it as a core part of how our economy works. Bankers have a lot of rules – perhaps a little bit like the FAA – each rule added after some deal or series of deals crashed and burned. My banking instructor has a great saying that you should not “take ownership risk for loan-ership rates”. It’s in banking that the concept of a risk-return curve truly makes sense to me – you have a loan pool, you build a loan portfolio to a specific return profile, you can afford to lose a specific number of dollars and still make your numbers, period. There is no unpredictable equity upside that makes the whole thing a bit of a gamble. Lenders do an insane amount of verification, as anyone with a business loan probably already knows, because it’s all about managing that downside risk.

I find myself thinking that lending institutions are like Ice-Nine – that in order to interface with them you have to conform to their structure. Their structure is driven by minimizing downside risk and unsurprisingly has a narrow interpretation of what a successful business looks like – ratios like the quick ratio and the current ratio, debt-to-equity ratios and turns on payables and receivables are all expected to fall within industry norms. Businesses who need credit will find themselves shaped into a box where success is known to have been achieved before.

There is recognition that businesses will vary across industries and so norms are by industry. The RMA is a national association for banks that has existed since 1934. One of its services is that every year member banks submit the (anonymized) financials of their borrowers and RMA compiles them and produces Annual Statement Studies that summarize key ratios by NAICS code, broken down into buckets of company sizes (by sales or assets) and split out into top quarter, median, bottom quarter values. Most libraries have a copy in the business reference section, and it’s a way to see how successful businesses (that use bank credit) are structured financially. It includes things like gross & net profit margins too.

Understanding high-probability success is a great thing, particularly because the flow of value internally in a business is complex. Small businesses by their nature of having few employees have more generalists than specialists so roadmaps are helpful. However roadmaps will only take you the same way everyone else is going. If you want to run your business differently – having stronger relationships with your supply chain and perhaps carrying more than industry standard inventory or paying your employees more than industry standard wages and benefits, you’ll need to find specialized partners willing to hear you out on why your differences are better.

To some extent community development lenders fill this gap – as non-depository institutions they can take a little more risk in the name of supporting the local economy. A few creative banks are in this space as well, but they’re so few that while looking at a socially responsible investment, when they mentioned they had some traditional bank debt I was able to name the bank on the first guess. Building confidence in different models is another system change that needs to expand to support community stakeholder businesses, and perhaps building examples of financial models, and new ratios to watch will be part of that. Better yet, we need lenders that aren’t just be open to different models, but can also mentor to them.

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