Zero Barriers Moonshot: Could $1 trillion restore the American Dream?
By Ross Baird and Bryce Butler
The Ewing Marion Kauffman Foundation’s Zero Barriers movement has forced the conversation around entrepreneurship to become more honest about the real barriers in the way of starting a business, including for minority communities and other demographic, socioeconomic, and geographic segments.
The Kauffman Foundation is committed to supporting efforts that remove barriers, level the playing field, and create supportive communities in which entrepreneurs thrive. Driven by the beliefs of its founder that anyone with an idea has a fundamental right to start a business to make it a reality, the Foundation’s focus is to empower the dreamers, the makers, and the doers to explore and act.
The Foundation recently hosted a design lab to address one key emerging barrier — early stage investment and services. The two-day event brought together more than 40 players from across the field — including Wall Street firms, community banks, microlenders, financial technology companies, and nonprofits — to rethink the entire finance system by directly engaging and working with entrepreneurs to overcome this barrier.
The two of us were in attendance, and below we’re sharing our perspectives on the design lab and the challenges we hope to ultimately solve.
Entrepreneurs can bring the American Dream off life support
The basic idea of the American Dream, that anyone who works hard and has a great idea can succeed, isn’t true for most people.
While big companies have never been more successful, new firm creation is at a 30-year low. In America today, more firms (and the dreams of the entrepreneurs that start them) are dying than starting every day.
According to the Kauffman Foundation, nearly 100 percent of net new jobs come from new businesses. Why are more businesses dying than starting every day?
- Most places are left behind: 78 percent of startup investment goes to just three U.S. states (California, Massachusetts and New York); in the other 47, more firms are dying than are born.
- Most people are left behind: Income inequality in America is at a 100-year high, and gains are wildly dispersed. Less than 10 percent of start-up investment goes to women, and less than 1 percent goes to people of color.
- And the businesses we invest in don’t solve these problems: Most of the entrepreneurs who are realizing success are creating perks for the well-off, rather than solving problems for the majority. A $400 juicer can raise $120 million in capital, but only 15 percent of “unicorns” — during the last fifteen years — are in the sectors that the everyday person spends the most money on (e.g. healthcare, education, food/agriculture).
To help entrepreneurs, we need to think bigger
A great group of “ecosystem builders” — people who recognize the need for networks, services and support — have evolved during the last decade. Nearly 1,000 accelerators and seed funds have started. But something’s missing: more firms are still dying than starting. What’s the problem?
An asset allocation problem seriously restricts the growth of entrepreneurs. Our teams have spoken with more than 300 leaders of local and regional funds across the country, from Nebraska to Hawaii; of 300 fund managers who are trying to raise $30 million or less, nearly all of them struggle to reach their fundraising goals.
At the same time, the largest investors in the country — from JPMorgan Chase to Morgan Stanley to BlackRock — are highly concentrated in startups on the coasts, and view entrepreneur support efforts as sub-scale (most investment management firms won’t consider a fund that is less than $100 million).
To restore the American Dream, the group at the Kauffman Foundation’s design lab started at the end and worked backwards.
Could $1 trillion restore the American Dream?
In mid-April, the Kauffman Foundation brought together a gathering inspired by President John F. Kennedy’s ambitious proclamation that America would be the first to land on the moon. The group that gathered worked to imagine solutions that might help make another moonshot possible — a trillion-dollar collective investment in entrepreneurs across the United States to restore the American Dream.
In the design and discussion, we had large asset managers from places like Morgan Stanley, JPMorgan Chase and Blackrock; foundations and individual investors such as the Ford Foundation, the Omidyar Network, and the Kauffman Foundation; ecosystem organizations from Venture for America to Kiva to faith community leaders; and community banks and microlending organizations.
When President Kennedy declared the U.S. would go to the moon by the end of the decade, he also set out short-term and medium-term goals. We took the same approach, discussing what it would take to get $1 trillion in new investment within the decade by first focusing on $1 billion during the next three years, and finally, $1 million in Kansas City in the next year.
To solve the problem, we focused on two core themes:
1. How do we get more potential entrepreneurs into the game?
Gallup CEO Jim Clifton often remarks that kids across the country, whether they grow up in inner-city Baltimore or rural Nebraska, have a chance at success if they have the potential to be a pro athlete. We spend billions of dollars cultivating and managing an athlete’s pipeline. What would the same investments look like for entrepreneurs?
A couple of compelling ideas emerged:
- Curating the right entrepreneur to the right resource. Not all entrepreneurs are running similar businesses — from growth trajectories to capital requirements, businesses vary. A working group from the gathering is now exploring alternative ways to assess entrepreneurial ability, whether it is a “Myers-Briggs”-like classification for business type, or a psychometric test for entrepreneurial potential.
- Recognizing, and changing, the notion that “entrepreneurship is a rich person’s game,” as one attendee said. The Kauffman Foundation estimates that it costs $30,000 to start a business. Entrepreneurs are often told to “bootstrap,” or raise money from friends and family — but what if your friends and family don’t have money? A substantial opportunity to find better companies is to develop creative ways to support entrepreneurs who don’t come from money.
2. How do we get past a “one size fits all” investment structure?
TV shows, pitch competitions and the promotion of entrepreneurship often focuses on high-growth venture capital, but fewer than 1 percent of businesses across the country raise venture funding. Most economic development policy focuses on Community Development Finance Institutions and micro-loans. While venture capital and micro-lending are critical tools to growing businesses, most businesses in the middle fit neither profile. A working group is following up on several ideas:
- Ensuring more effective economic development subsidy for small businesses and entrepreneurs. Economic development dollars often don’t have a job creation ROI and very often focus on big businesses rather than entrepreneurs. One idea that emerged was a “job bond” where private capital would provide upfront financing to businesses, and the public sector provides liquidity to investors based on jobs created or other increases in tax revenue.
- Creative investment beyond “one size fits all” structures. Microfinance debt and venture capital equity get the most attention but aren’t the right fit for most entrepreneurs. We discussed a potential capital pool that would fund innovation in new capitalization structures (e.g. revenue-share, dividend, royalty-based financing), or make a market by providing liquidity to investors.
- Aggregating existing efforts to reach more scale. As one attendee noted, when President Kennedy called for the moonshot, we got there using many existing technologies. We noticed a real asset allocation mismatch between large capital providers and valuable ecosystem organizations that are working. Whether it is a “super-regional” community bank (six across the country) that can better bridge the gap to financing, a “mega-fund” (a $1B fund of funds collecting 30 regional funds of $30M each), or a scaling up of successful in-city organizations such as Venture for America, Kiva or Village Capital.
Now, we’d like to hear from you. If we had $1T committed to America’s entrepreneurs, how would you deploy it? It’s always better to be specific and wrong, vs. vague and right, so whether it’s a project in your hometown or industry, or a big idea, we’d love to hear from you! (Also reach out with any thoughts at email@example.com or firstname.lastname@example.org)
Ross Baird is CEO of Village Capital. Bryce Butler is Managing Director at Access Ventures.