Help us meet our fundraising goal. Thanks to NewsMatch, your donation will be doubled.

$4,755
$40,000 goal

Overlooked by Venture Capitalists, Underserved Entrepreneurs Find Support from Local Governments

(Photo by NESA by Makers on Unsplash)

When it comes to attracting seed capital to start a business, entrepreneurs like 28-year-old De’Sha Bridges, founder of De’Shade Designer Eyewear, are at a clear disadvantage. Now living in Long Beach, California, she’s a young black businesswoman originally from Chicago. And while the number of startups founded by black women — about 270 in 2017 — has doubled since 2016, and their tiny share of venture funding is increasing, a majority of black women-led startups still aren’t able to raise any money.

“It’s tough to be taken seriously,” said Bridges. “When I go to business events, people often ask me if I’m in the right place. It’s clear that when they look at me, they don’t always see a person who could have a thriving business.”

Women from all backgrounds don’t fare much better. In 2018, venture capital investments soared to $130 billion, of which women received only 2.2 percent, the same percent as for the previous year, according to a report in Fortune. In 2017, just 1 percent of venture-backed founders were black — men and women — and 1.8 percent were Latino. Yet these groups make up 13 and 18 percent of the U.S. population, respectively. The legacy of discriminatory redlining and lending policies also means that many entrepreneurs of color have no generational wealth to draw on to kickstart their businesses. Instead, they have to rely on restrictive — and often hard to get — bank loans.

In stark contrast, more than 75 percent of the founders who received nearly $85 billion in venture backing were white and more than 90 percent were men in 2017. Most were from middle- and upper-income families, over a quarter were Ivy League alumni, and nearly half of venture investments went to startups based in Silicon Valley.

For “non-traditional” entrepreneurs like Bridges, the difficulties associated with accessing capital are compounded by other challenges. They typically have a harder time breaking into professional networks, which also tend to be white and male. Some lack formal business training. Others operate in distressed neighborhoods that suffer from crime and blight, all of which limits foot traffic. In fast-gentrifying cities, skyrocketing rents can make it difficult to set up shop at all.

In recent years, a number of foundations have established or proposed programs to fund women and minority entrepreneurs. At the same time, local governments — such as California’s Long Beach, Los Angeles and Oakland — are driving change, as well. Whether by expanding access to capital, investing in distressed neighborhoods, or reducing administrative red tape, these cities share a commitment to ensuring that every aspiring entrepreneur has a chance at success.

Alternative Sources of Financing

Nearly 70 percent of residents in Long Beach are black, Asian or Latino, and these residents are disproportionately poor compared to white residents. Recognizing that its long-term economic prosperity is closely tied to the prospects of its large minority and immigrant communities, the city has made economic inclusion a key priority. In 2017, Long Beach adopted a 10-year strategic plan to support entrepreneurs, create well-paying jobs and improve quality of life. As part of this vision, the city seeks to increase the number of women- and minority-owned businesses and strengthen investment in low-income commercial areas.

FUSE fellow Daniel Han is working with the city on one of the most pressing challenges facing its minority business owners: gaining access to capital. When small business owners seek capital, they are often directed to one of the big banks to apply for a loan. But that model doesn’t always work well for people who are immigrants, unbanked, English-language learners or new to entrepreneurship. “One of the standard big bank requirements that I’ve seen is that the business has to be at least two years old,” said Han. “But a lot of the small businesses that I’m working with, especially from underserved communities, have been around for less than a couple of years.”

As an alternative, Han is working to take advantage of Responsible Affordable Inclusive Lenders (RAILs). A RAIL is a nonbank lender willing to provide safe and affordable capital to small business owners, especially those who are underserved or early in their business life cycles. RAILs include local governments, community development finance institutions, Small Business Administration (SBA) lenders or certified development companies, nonprofit lenders, and faith-based lenders. The typical RAIL offers more competitive terms than big banks, such as credit and flexible payment terms, and access to business advisory services.

“There’s an entire community of lenders that can actually serve these small businesses,” Han said. “But the small business community here doesn’t necessarily know that such a community of lenders exists.” Understanding the different loan products offered by RAILs can also be confusing, particularly for Long Beach’s sizable immigrant community. “The biggest issue here is a communication barrier,” Han said.

To actively connect RAILs with those who need it the most, Han created a resource guide that maps the landscape of nonbank lenders, including loan size, eligibility requirements and interest rates. It also lays out pros and cons, such as the breadth of the lender’s product offerings and whether advisory services are available.

Since Cambodians make up a large share of Long Beach’s immigrant community, Han partnered with a community-based organization called United Cambodian Community of Long Beach (UCC) to host a workshop in both English and Khmer for Cambodian business owners. “The organization is the one that has the trust,” he said. “If we partner directly with them, we can actually have a more sustainable impact, because they have that rapport.”

The plan is to expand this partnership model to organizations working with black, Latino and women entrepreneurs, as well. “The city wants to empower community organizations to be the voice of their respective small business communities,” Han said.

Key to these efforts, said Han, is a willingness to do things differently in order to lift up the city’s underserved entrepreneurs. “Just because the city is providing resources to the entire small business community does not necessarily mean that the resources we’re offering are being made accessible to the underserved,” he said.

Investing in Distressed Neighborhoods

For many entrepreneurs, finding a good location is one of the most fundamental steps to starting a business. For the mostly black and Latino entrepreneurs on Oakland’s east side, that can be particularly challenging. The commercial corridor along International Boulevard, which runs almost the length of the city, is smattered with vacant lots and blighted facades. Residents complain of illegal dumping, and the street has long stretches of “retail deserts” — areas with few grocery stores, banks and other retailers of basic goods and services that might attract customers.

“We have women and entrepreneurs of color in East Oakland working out of their homes or in a coworking space who may be ready to take that next step into their own location,” said FUSE fellow Marsha Murrington, who is helping the city craft an inclusive economic development plan for East Oakland. “When they rent space, we want to make certain that the location will have the foot traffic to support their business.” She added that it’s also important to consider if there are complementary businesses close by so that more people are attracted to the area, and it becomes a destination or experience.

To attract businesses to the area, the city is working to revitalize ground-floor retail space on International Boulevard, an effort that coincides with a soon-to-be launched rapid transit bus line that will facilitate transportation to and from East Oakland. The city’s Business Development Division has introduced a business concierge approach to providing budding entrepreneurs with guidance, feedback and information to help them grow their businesses and access capital.

But perhaps what sets Oakland apart is its efforts to also engage property owners. “What we’re doing is looking at vacant and blighted properties along the commercial corridor that are not ‘lease ready’ for small businesses to potentially locate to,” Murrington said. To property owners, the city is offering free architectural design and matching grant funds for facade and interior improvements to properties that have been vacant for more than six months. It is also helping connect property owners with local entrepreneurs seeking retail space, while keeping in mind the retail mix and need for goods and services in neighborhoods.

Murrington is drawing from her experience working in the predominantly Latino Fruitvale neighborhood of Oakland. “We instituted a really robust facade improvement program that took off like wildfire,” she said. “By improving the appearance of the buildings, we were able to reduce the vacancy rate from 40 percent to virtually nothing.”

But facade improvement is only part of Oakland’s strategy. The city is looking to foster the construction and preservation of more affordable housing, improve lighting, increase park space, plant trees, expand bike lanes, commission art murals, create local jobs and more as part of a comprehensive community — and economic — development plan. “When we’re talking about underserved entrepreneurs, we need to think about things like access to capital and business education,” Murrington said. “But we also need to think about quality of life issues for the neighborhood, such as affordable housing, the cost of commercial space rent, whether there is a bank in the area — things that you wouldn’t necessarily think of but that are crucial to creating an ecosystem that allows entrepreneurship to flourish.”

Lowering Barriers to Entry

In 2014, as many as 50,000 street vendors were estimated to be part of the informal economy in the city of Los Angeles. Most of these businesses — fruit vendors, pop-up shops selling phone accessories, costume jewelry, stuffed animals, and more — are run by women and immigrants. Until recently, they were illegal in Los Angeles.

Ultimately, the city recognized the disproportionate impact of this policy on vulnerable communities, and food street vending has since been legalized. But even before that decision was official, L.A. was already developing a prototype for an app that would allow street food vendors to complete the entire licensing process on their mobile phones, rather than in person at multiple city and state government offices.

Expediting the registration process for food street vendors is just one of the steps L.A. is taking to make life easier for the city’s half a million business owners. Other efforts include simplifying business registration paperwork, translating those documents into other languages, shortening administrative processing times, making web content more user-friendly, and creating self-assessment tools that help owners determine their city business tax brackets and payments. The goal is to ease administrative barriers that might discourage people, especially those from historically underserved communities, from starting a business.

FUSE fellow Rafael Bracero was enlisted by the city’s Office of Finance in 2017 to help with this effort. After conducting a customer segmentation study to better understand the landscape of local businesses, he found that 70 percent of businesses that pay taxes in the city are C-corporations, large companies that typically have in-house legal and technical expertise. The rest are small- or medium-size businesses. That knowledge informed the creation of an online tool, available in multiple languages, to help business owners figure out what they owe in taxes.

“Not everybody knows the rules around filing,” Bracero said. “And that can result in a lack of equity.”

In Los Angeles, for example, a business owner who makes less than $100,000 in gross receipts and files before the end of the year can get a waiver. “They don’t have to pay any taxes,” Bracero said. “But if you don’t know that and you end up filing taxes in the spring — maybe you didn’t know the rules or the information wasn’t communicated clearly or in a language you understand — then you’ve essentially paid a penalty.” The city is working to improve communications so that more business owners know about the waiver and can take advantage of it.

Making sure that business owners who aren’t proficient in English or who don’t have intimate knowledge of how the system works can benefit more fully from city services has been key to Los Angeles’ approach. “We wanted to improve the level of service for the entire business community,” Bracero said, “but we wanted to make sure that, as we were doing this, nobody was left behind.”

This approach to policy can make all the difference for entrepreneurs like De’Sha Bridges. The first time she pitched her business to investors, she bombed. “It was so bad,” Bridges said. “My numbers were totally off, and my timeline was just completely unrealistic.”

That was in early 2018, and a lot has changed since then. Bridges has been taking advantage of Long Beach’s resources for small business owners. She recently participated in a six-week education series hosted by the city, which culminated in a pitch competition. The winners received a zero-interest crowdfunded Kiva loan vouched for by the city, as well as a free legal consult. Bridges was one of the winners. She plans to use the loan to market and manufacture her new line, which she hopes will be in 30 stores by next year.

And she’s still looking for investors. “Our focus is to just keep pitching, keep pitching, keep pitching,” Bridges said, “until we get someone to give us money.”

This story was produced by FUSE Corps, a national executive fellowship program that partners with local government agencies and produces solutions-driven journalism.

Rikha Sharma Rani is a Bay Area-based freelance journalist who writes about urban and social policy. Her work has been featured in the New York Times, CityLab, Politico Magazine and more.

Follow Rikha Sharma

Tags: small businesscaliforniaentrepreneurship