#175-176 Fall/Winter 2013-14 — Jobs

Focus on Scale Up, Not Start-up

To truly transform local neighborhoods, we must shift our attention to invest in enterprise scale, not start-ups, as a long-lasting solution for creating good jobs.

Photo courtesy of Inner City Advisors

Entrepreneurship, with all its headline-grabbing power, is misunderstood and overstated as a liberatory force when it comes to solving the challenges of economic growth. Start-ups get a lot of love and attention. There’s excitement and intrigue at the outset of a new venture, and the same goes for big buy-outs, acquisitions, and billion-
dollar valuations. But the growth that takes place between start-up and exit—the scale—is what matters most right now. We need to look at the entire lifespan of a business, not just the birth, and support entrepreneurs through the most critical stages of growth. We must shift our attention toward scale in order to create and retain good jobs in the long term.

Start-Ups Closing Down at Higher Rate

According to the SBA Office of Advocacy, small businesses, defined as an independent business having fewer than 500 employees, have generated 65 percent (or 9.8 million) of the 15 million net new jobs over the past 17 years. U.S. micro-businesses (one to four employees), many of which are start-ups, created a net of 5.5 million jobs from 2004 to 2010.

It’s clear that start-ups are excellent job creators. But what happens when we zoom in on the survival rate of these firms? What happens when we examine the sustainability of the jobs they create?

Research from the U.S. Bureau of Labor Statistics suggests a majority of American start-ups do not make it past four years of operation. This data, which is supported by the U.S. Census Bureau, shows a 66 percent survival rate after two years and 44 percent after four, and a fairly consistent exit rate over the first four. In other words, only 4 out of 10 businesses survive after four years. This is too high of a failure rate for comfort.

Additional data further reveals that start-up failure is on the rise. Dun & Bradstreet, a large business credit bureau with a giant archive of records, recently examined 23 million U.S. small businesses in its databases, and used bankruptcy statistics and other information to determine business failures. Its report found that “across the United States, small business failure rates rose by 40 percent between 2007 and 2010.”

This increase in small business failure rates has been driven by continued instability in the housing market, a decline in tourism, and a lack of demand attributed to the massive loss of wealth in the downturn of our economy.

The main reasons businesses fail, according to most sources, are not understanding their customers, not differentiating themselves in the market, not being able to clearly and compellingly articulate their value proposition, or leadership breakdown.

Especially under these conditions, entrepreneurs need more technical assistance, quality advice they can trust, and capital to serve their most critical needs and help them overcome their biggest barriers to growth. If we don’t increase our investment in the scale of high-impact small businesses, the majority of jobs that micro-
businesses create will disappear, and entrepreneurship, as a job creation strategy, will fail in the long-term to generate enough employment opportunities to put our nation back to work.

A Scale-Up Example

Inner City Advisors, the organization I lead, is focused on supporting high-impact small businesses by providing them with access to practical entrepreneurship education, strategic advice, pro bono management consulting, capital, networking, and national visibility.

Revolution Foods is an example of the kind of business we work with. Revolution Foods was founded by a team of two moms who believe that all children should have access to healthy, affordable, fresh food on a daily basis. Co-founders Kristin Richmond and Kirsten Tobey met at the Haas School of Business at University of California–Berkeley and shared a vision of creating a social venture that would make this idea a daily reality for schools nationwide.

Revolution Foods joined the ICA portfolio in 2005 with six employees operating out of a 1,000 square foot facility. Richmond and Tobey needed capital to grow their production operations. Through the guidance of several ICA advisors, they gained access to capital that helped them scale up their product and service offerings. ICA also provided financial management assistance to ensure the best use of that capital. Along the way, Richmond and Tobey have shown a proficiency in managing complex operations, managing public/private partnerships, and attracting the right people to get things done. From their humble beginnings, by leading with their value system and with a strong commitment to their employees, they’ve grown into a 17,500 square foot headquarters in Oakland, Calif.; created and retained over 1,000 good jobs; and serve over 1 million freshly prepared meals every week to k-12 schools nationwide.

As fighting child obesity became a national priority, Revolution Foods gained the attention of the White House, and on December 14, 2010, President Obama selected Richmond to be a member of the White House Council for Community Solutions, which advises the president on the best collaborative ways to solve specific community needs.

Revolution Foods has proven that ICA’s strategy to accelerate equitable business growth can have a significantly positive effect on the people a business employs, the surrounding community, and the world at large.

A Model to Accelerate Business Scale and Create Good Jobs

ICA’s mission is to create good jobs for people with high needs by accelerating the scale-up of existing small businesses. We do this by serving as a backbone support organization coordinating public and private partners who can deliver a tailored set of high quality services that help entrepreneurs get over their biggest barriers to scale. These services can include practical entrepreneurship education, high-caliber strategic advice, pro bono management consulting, capital investments, and talent management.

In choosing businesses to work with, we select sustainable, responsible businesses with strong values built into the core of a business model that has the potential to scale. We support exceptional emerging entrepreneurs who we believe have the potential to drive innovation and maximize job creation, and who are willing to commit to hiring people with high barriers to employment from the local region. As part of every engagement, we establish and hold each portfolio pompany accountable against specific goals about hiring local residents. We also give them the tools and support to address their hiring needs through our new Talent Management Initiative. We are best equipped to work with businesses that are earning $100,000 to $1 million in annual revenue, have excellent business plans and growth strategies, and are committed to our larger mission.

Here’s what we’ve learned about how to accelerate business scale as a broader job creation strategy over the past nine years of fine tuning our model:

To support businesses in the early stages of growth, it’s important to deliver practical, action-oriented tools that entrepreneurs can use right away to better manage their business. Whether you are starting a business or trying to grow a business, there’s always room to improve business acumen. Every spring, we host an eight-week intensive Business Growth Strategy Series, featuring Michael Bush’s 8 Factors business framework. We supplement this course with two tailored workshops, one focused on branding to drive a bigger bottom line, and the other on financial preparation to accelerate access to growth capital.

It’s critical to uncover each business’s biggest barriers to scale. Entrepreneurs face critical decisions every single day, and despite being some of the smartest people we know, they still need quality, industry-specific advice they can trust to figure out what’s best to lead, stabilize, and grow their business. We’ve found that support services work most effectively when they’re designed to provide entrepreneurs the resources necessary to think strategically and execute tactically with a long-term view. This means taking a “hands-on” approach by building tailor-made work plans that meet the entrepreneur where they are. Our engagement with small business owners leverages the expertise of our internal management consultants along with a council of proven entrepreneurs, experienced executives, and industry experts who volunteer as advisors to each business. Together, we provide pro bono strategic advice to our portfolio companies.

It’s also important to leverage pre-existing resources in the ecosystem of entrepreneurial support. This means building strategic partnerships with firms—we call them professional service providers—who offer pro-bono or substantially reduced rate value-add services to high-impact small businesses when the need is beyond the scope of what a single organization or set of advisors can provide. These needs most often include accounting, legal, marketing, or design services, but it’s important to listen closely to what challenges entrepreneurs are experiencing and adapt with agility to serve their needs.