Are community banks the answer?

It’s a commonly held belief one of the best ways to reduce violence in any community is to provide economic opportunity. The best way to create economic wealth is by starting businesses. However, these businesses need access to markets and capital.

Addressing the access to capital first. A common preached mantra is that communities need to start banks inside their community. While banks are important I don’t hold this as the most important change.

Starting a business is a risk filled activity. There’s a fairly high chance of losses the first several years of both development and operations. There are three different sources for start up capital — Personal savings, debt/loans and investors. In economically distressed areas, personal savings isn’t a likely source. The next source is credit card debt which have oppressive interest rates or bank loans.

The common theory is that community banks loan to the community. The concept works for small scale projects. But what if you want to create the next Uber, FB or Google. You need a “burn rate” that’s going to last a few years as you build up business. Banks are not viable options for this model. Remember it’s the FBs & Googles of the world that bring about real power.

I believe the real need is for a mature Angle/Venture Capital (VC) models focused on specific communities. Investors bring two things to the table. The first is time. VC’s are much more patient than banks on seeing a return on their capital. The other is access to markets. VCs can make introductions and provide guidance on building a company.

It’s this access to markets that also needs focus. The difference between someone with a great idea and someone with a successful start could very will be access. VCs have the relationship to introduce business founders to influencers within a market. VC can help get exposure for a new product or service. These are services that banks, especially small community banks, can’t provide.

Of course there are considerations for taking VC money. One such risk is control. As the business grows and founders take on more capital, founders give up some control. There’s the risk that a board of directors will replace the founder with a seasoned leader. See Apple and a slew of other technology companies.

So, where are these VCs? VCs come in all forms. Angle investors such as grandparents or parents is a start. However, at some point there’s a need for deep capital that only comes from funds, corporations, non-profits or wealthy individuals. I’d argue instead of putting money into community banks, the money should go into venture funds focused on community startups.

BTW… community is a code word for Black. But, this applies across virtually any community.