APPROACH AND METHODOLOGY
AEO's approach to Unlocking the Power of One in Three integrates three mutually reinforcing elements:
- Organizing and coordinating an alliance and public will-building campaign
- Innovating to extend the reach and reduce the costs of promising services and products by piloting new business models and product innovations
- Capitalizing a fund that combines carefully structured performance-based grants, low-cost loan capital and capital to invest in pilots of product and service innovations
The One in Three Alliance will represent a network of organizations around the country working to enable Main Street micro-business owners to grow profitably, employ others and contribute to vibrant communities. The alliance will be staffed by a national director and dedicated support team. This team will facilitate interactions across the partners and will manage data collection, communication, reporting and meeting logistics. The public will-building campaign and advocacy will include local, regional and national events executed with and by partners across the country. As one example, AEO will collaborate with Women Impacting Public Policy (WIPP) and American Express to promote One in Three as a core part of the 'Small Business Saturday' program in November 2011.
Several pilot programs are under development at present. As one example, AEO and its partners are pioneering a web-based marketing and matching utility that will enable commercial banks, community development financial institutions, not-for-profit service providers and others to efficiently and effectively match business owners and aspiring entrepreneurs to information, capital and services. Another pilot will offer at least 500 business owners around the country a service presently delivered in Oregon that provides low-income entrepreneurs low cost, high quality market research services. At the same time, AEO relies on a systematic approach to identify and prioritize additional pilots. Programs are prioritized based on factors including potential for impact, interdependence with other opportunities, and demand.
The investment vehicle will combine a mix of incentive-based grant dollars with investment dollars. Preliminary projections and discussions with potential funders suggest a $10 million fund could unlock more than $50 million in low-cost loan capital and reach one million presently underserved.
IMPLEMENTATION, TIMELINE, AND DELIVERABLES
AEO will announce its commitment at the Clinton Global Initiative America. The alliance and the first pilots are expected to launch in the fourth quarter of 2011.
Following the announcement, AEO will hire a director for the One in Three Alliance along with an analyst. This team will design and build the website and tools for the alliance, recruit leadership and manage partner sign up. Alliance members will engage in 'Small Business Saturday' events in November and will participate in a national walk-a-thon across Main Streets in May 2012 punctuated by AEO's national conference. Other complementary outreach and media opportunities will be secured continuously throughout the commitment period.
At the same time the alliance gets going, AEO will prepare to launch the pilots. The matching system will be piloted in three to five geographies. It will test the viability of a shared utility model to connect underserved business with actionable information, local services and capital. Every business or aspiring business owner that participates in the pilots will receive an actionable, tailored report assessing personal credit, cash flows, and other key indicators along with referrals to local services. Initially at least 30% of the businesses previously denied capital will have access. In time, products will be developed and tested so that all business owners or aspiring owners are able to secure some form of appropriate financing.
To achieve these objectives, several milestones must be met, including securing commitments from at least 3 national banks to participate in the pilots, engaging with the leadership of not-for-profits in the pilot geographies, developing matching algorithms and any needed tools; and securing funding to ensure that not-for-profit technical assistance /service providers are able to respond effectively to the leads generated by the system.
The market research pilot will provide services to 500 business owners in at least 3 geographies. Demand will materialize: to date, more than 10 non-profit organizations have indicated strong interest in offering the service to their clients. AEO must secure funding and in-kind resources (e.g. marketing databases) for the pilot. As funds are being secured, AEO will prepare to scale the Oregon program by reviewing the current program infrastructure, making necessary tweaks, and identifying a manager for the pilot.
Upon completion of each pilot, AEO will work with all relevant stakeholders and partners to assess the findings and agree to a path forward.
In addition to the design of pilot programs, work is underway with multiple partners on the structure of an investment vehicle. AEO expects to deploy initial tranches of capital in the fall to coincide with the launch of the first pilots.
According to the Bureau of Labor Statistics, 9% of Americans were unemployed at the end of April 2011. That's 13.7 million people. Another 2.5 million were not working but wanted employment. Faced with these staggering numbers, the single most important issue of this decade is 'bounce back.' It's imperative. The economy must continue to show signs of rebound so confidence can return, demand can grow and businesses on Main Street can recover and flourish.
If the economy is going to bounce back, it must happen on Main Street. 'Micro' - or very small businesses - represent more than 80% of all businesses in the United States (US Census). Last year, more Americans became entrepreneurs than any time in the prior decade and a half (Kauffman Foundation, Index of Entrepreneurship). Regardless of their business, these individuals are everywhere.
In fact, if just one in three microbusinesses hired a single employee, the US would be at full employment.
In spite of this sizable potential, most Main Street business owners and aspiring business owners don't get what they need to succeed. It's not because of lack of effort. There is no shortage of determined and committed entrepreneurs who need to be appropriately capitalized and coached. However, there is an availability, access, and impact problem - not just access to capital but access to opportunities.
The twin challenges of availability and access are a consequence of both high costs to serve these businesses and capacity constraints. Cost structures prevent commercial banks, other companies and non-profit organizations from developing and delivering services, products, and opportunities that meet the unique needs of Main Street businesses and their owners.
For example, last year alone the major US commercial banks turned down roughly one million applications for small business financing (AEO analysis). This is primarily a result of the relatively high costs of their business underwriting models. Rigorous and thus expensive processes to evaluate small loans manage risk but eat into profitability, often leaving Main Street business owners without the financing they need.
In many cases, commercial banks partner with non-profits to fill gaps in their ability to offer financing since non-profits tend to have trusted relationships with business owners and aspiring business owners in communities across the country. These organizations are on the ground and in the trenches. They can and do take risks that others are not able or willing to take. However, even high-performing non-profit community lenders struggle with the costs of their current operating models. Moreover, in spite of often high impact collaborations, bank executives raise concerns about the capacity of non-profits as well as the system's ability to absorb the capital and other resources that banks could deploy.
Fortunately, this is not the end of the story. It doesn't have to be this way.
Current products, services and programs could reach more people: Operating model innovations - such as outsourcing and aggregating back office operations - can reduce the costs to serving business borrowers - including low wealth entrepreneurs - by more than 65% without necessarily sacrificing personal touch. Product innovations can push opportunities to businesses and business owners who previously lacked access.
Yet adopting these innovations at scale will require coordinated actions among individuals, companies, non-profits, foundations, and government. No single actor or group can solve the complex challenges that Main Street business owners must overcome to thrive.
Focusing on Main Street businesses is a high-impact, less risky path than simply betting on the next new, VC-backed game-changing innovation. The odds of turning a venture-backed start-up into a billion dollar business are at best one in 20,000 (David G. Thompson, Blueprint to a Billion). Placing all of our bets on the rare mix required for the next new thing to succeed will not solve our unemployment problems.
By contrast, business models for Main Street businesses are well understood. Success is primarily a matter of execution. Of course, there are barriers and hurdles, but they can be resolved. It is not an easy problem to solve, but it is possible to do so and it and it matters because it's not only about job creation; it's about wealth creation. According to data from the US Census, the median net worth of business owners is almost 2.5 times higher than non-business owners. For a black woman, net worth is 10 times higher and for a Latino man, the net worth is five times higher.
Solving the twin problems of availability and access will increase the impact millions of business owners have on the economy and their communities, while unleashing the power of new markets. The Association for Enterprise Opportunity (AEO), a 20-year-old non-profit organization whose members and partners provide capital and services to underserved entrepreneurs, is committed to working with a broad range of stakeholders including corporate, not-for-profit and government partners to develop a suite of programs, products and services to unlock the potential of Main Street businesses.
AEO offers the following opportunities to participate:
Banks: refer business; finance micro and small businesses; engage and invest
CDFIs and Credit Unions: finance micro and small businesses; distribute and co-create products/services; invest
Private Sector Companies: refer business; finance micro and small businesses; engage and invest; distribute and co-create products/services;
Not-for-profits: refer business; distribute and co-create products/services
Other Public and Private Capital: finance micro and small businesses; invest
OFFERING: One in Three represents opportunities for high impact social investment, operating partnerships, and participation in the campaign. The campaign, which seeks to expand the lens through which the nation views microbusinesses, will include a marketing and matching website and a 'job clock' to track impact and tools for alliance members.