Venture Capital for Mom and Pop Shops
This guest post is the third in a series by Kauffman Foundation grantees and other partners sharing insights on entrepreneurship diversity and inclusion. These timely topics will be discussed at this year’s Mayors Conference on Entrepreneurship, Dec. 1-2, in St. Petersburg, Florida.
“Founded by Marc Andreessen and Ben Horowitz, the firm provides entrepreneurs with access to expertise and insights in innovation, executive and technical talent, market intelligence, policy and regulatory affairs, business development, and marketing and brand-building.”
Andreessen Horowitz company website, September 2016
When a venture capital (VC) firm invests in a startup, it doesn’t just provide money, it also dispenses advice and uses its extensive networks to make invaluable connections for the entrepreneurs in which it has invested. VCs strengthen entrepreneurs’ social capital as well as their financial capital.
In so many ways, America’s 25 million microbusinesses, mom and pop shops and “Unsexy Entrepreneurs” are at a perpetual disadvantage compared to larger corporations or the hockey-sticking startups that subsume our attention. (And which are overwhelmingly run by privileged, white entrepreneurs.)
Large and established businesses can access loans at very cheap interest rates. But the “Unsexy Entrepreneurs” that we are proud to fund on the Kiva team are not interesting to conventional lenders because they are seen as high-risk and high-cost-to-serve. Even when they can get loans, they are often at exorbitant APRs.
Tech startups can access huge sums of equity investment, but mom and pop shops don’t have the growth potential to unlock that form of capital. Hyper-cool products can raise a million dollars on Kickstarter, but your average plumber or barber sadly cannot.
Under-capitalized small businesses cannot unlock economies of scale, which puts them at a further financial disadvantage.
And the exacerbated inequity faced by minority entrepreneurs is painfully apparent—for example, while 12 percent of the U.S. population is African-American, only 2 percent of SBA loan volume and less than 1 percent of VC funding goes to African-American entrepreneurs!
But one of the biggest examples of the “un-level” playing field is in the realm of social capital.
I studied at the University of Cambridge, worked at Oliver Wyman for six years, have been leading Kiva’s U.S. program for the last five, and have 4,503 connections on LinkedIn. Out of the biggest 50 companies in America, I have second-degree LinkedIn connections at 49 of them (I just counted. It took a while. If you know anyone at Archer Daniels Midland, let me know). This network that I have built up over my career is incredibly valuable. And it’s a result of my privilege.
But the recent Vietnamese immigrant looking to open a restaurant in inner-city Detroit doesn’t have that network.
And that’s what I mean by the title of this blog post.
It’s (unfortunately) not that I’m optimistic about VC firms investing in that Vietnamese immigrant any time soon. But it’s that, if we want to get entrepreneurial activity going again in America, we have to enhance microbusinesses’ “access to expertise and insights in innovation, executive and technical talent, market intelligence, policy and regulatory affairs, business development, and marketing and brand-building”—as VC firms like Andreessen Horowitz do for the companies they invest in.
At Kiva, we are not only looking to level the “financial capital” playing field—by empowering that aspiring Vietnamese restaurant owner with a 0 percent interest microloan to invest in their business. But, through our unique, truly peer-to-peer lending model, we’re also trying to level the “social capital” playing field—by connecting her to hundreds of individual citizen lenders that are now (Micro Ad) Venture Capital investors in her business.
Over the last few years, we have witnessed countless examples of lenders becoming customers of the borrowers they made loans to, promoting their brands on social media, dispensing business advice, or making valuable connections to potential suppliers, customers or business partners. We are still in the early stages of developing these lender-to-borrower connections, but we are excited about the potential of crowdfunding—whether it be equity-based, perks-based or our debt-based flavor—to significantly strengthen our borrowers’ social capital over time.
“Getting an interest-free loan was wonderful. But it was the connections I made, and the doors that were opened for me that really made me into the biggest cheerleader for Kiva”.
Kiva borrower, Columbus, OH, July 2016
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