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As small businesses struggle, these U.S. cities are helping entrepreneurs thrive

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A new report suggests new business formation has hit historic lows; here’s how four cities are trying to help new owners open doors

Propeller, a small business incubator in New Orleans, operates with a social mission
Propeller

Whether it’s a single block of stores in an idyllic small town or the business district of a bustling urban square, every vision of Main Street America has something in common: a panoply of small businesses, symbols of American opportunity and success.

But in today’s economy, that vision often looks as realistic as a Rockwell painting. According to Dynamism in Retreat, a new report by the Economic Innovation Group, a bipartisan public policy think tank, small businesses aren’t just suffering—they’re in the midst of a striking, and historic, decline.

“We’re adding businesses at the most anemic rate in history,” says John Lettieri, cofounder and senior director for policy and strategy at EIG. “We’re five full years into the recovery, and you still see an inability to get anywhere near historic norms for business formation. It’s a structural shift.”

Lettieri and his colleagues have tracked national small business and startup formation rates since the 1970s, following the booms and busts of the economic cycle. But the shock of the Great Recession was a “perfect storm” so profound, Lettieri’s team discovered that it sped up the rate of decline by 20 years.

A telling graphic showing the shrinking areas of small business formation over the last few decades.
Economic Innovation Group

The collapsing market destroyed savings and home equity—which, despite the media frenzy around startups, provide a bulk of the funds for small businesses formation—while tech funding from angel investors and venture capitalists concentrated in the coasts. Compounded with record low levels of American geographic mobility, the crisis created a “straw that breaks the camel’s back” situation when it comes to realizing the dream of creating your own company.

“We’ve made it steadily harder to launch a business in this country for decades,” he says, “so one traumatic event can fundamentally change the economic dynamic of the country.”

Along with other structural changes in the economy, such as the way that retail is wrestling with the paradigm shift created by online shopping, the EIG data doesn’t paint a bright picture, pointing to a future where becoming your own boss is a distant goal.

This chart shows the number of metro areas in which the business death rate exceeds the business birth rate; backing up EIG’s analysis of the recession.
Economic Innovation Group

But the news isn’t all bad. According to Lettieri and other analysts, in the midst of this profound change, many cities and nonprofits are finding opportunity. Many progressive city leaders rightly see that small businesses are still the engines for local growth, and have responded with creative new ways to buoy small businesses and promote economic equity and success.

Kirstie Chadwick, CEO and president of the International Business Innovation Association, sees robust small business growth as a panacea for many of today’s issues with inequality and social mobility. And there are blueprints that work: cities that leverage educational assets to spur innovative research and entrepreneurship, such as Pittsburgh, are seeing big returns with startups and community growth, while those that focus on today’s service jobs instead of yesterday’s mom-and-pop retail can easily create niches in growing communities.

“Almost all of the net new jobs created since WWII come from small businesses,” she says. “That’s why cities and economic development groups are making an effort to invest in programs that help this part of the economy.”

While luring multinationals to town with tax breaks and incentives generate headlines, small, sustainable neighborhood programs often make as much or more difference over the long term. Here are some of the innovative ways cities across the country are building small businesses in a challenging climate.

Detroit: Looking beyond tech to the community

The recent surge of business activity in the Motor City been a stark reminder that an area that grew up on the fortunes of the big three automakers has turned to small companies to be a new growth engine. Sure, the city has benefitted from investments from wealthy businessmen such as Dan Gilbert. But one of the brightest signs for the city’s future is the blossoming of numerous business support organizations and incubators, which have created a web of new owners and operators that embody the “Detroit Hustles Harder” slogan seen all over town.

“Detroit is a very interesting case study, because they’ve leveraged entrepreneurship in a big way,” says Chadwick. “There was a methodical investment in the ecosystem, and the city really bet on small business as a way to bring the city back. It’s incredibly progressive based on where they were just a decade ago.”

The seeds of this growth were planted by economic development groups such as Build Institute, which trains entrepreneurs, and ProsperUS Detroit, which trains immigrants, minorities, and low-to-moderate income entrepreneurs to become small business owners and community leaders, or the Detroit Creative Corridor Center, which has helped birth design firms and fashion lines. Motor City Match helps brick-and-mortar retailers find great real estate opportunities. Tech may be sexy, but the restaurants, boutiques, small manufacturing firms, and shops promoted by this wave of community groups has helped rebuild neighborhoods. Build Institute

Providing holistic support, from loan counseling to translation, has helped a diverse cast of aspiring businessmen and women get off the ground. The impact of the New Economy Initiative, a group of ten philanthropies that came together to form a $100 million seed fund for small businesses, is indicative of this approach: a decade later, the group has helped start more than 1,700 businesses, 40 percent of which are owned by minorities, a rate twice the national average.

Seattle: Crowdfunding the next new business

Small businesses famously have a terrible success rate. But perhaps even more troublesome in an era of shrinking business formation is how many good ideas don’t even get a chance due to the lack of startup funding.

The recession led to a much tighter loan market for small businesses, making capital a challenge. Banks tend to shy away from loans under $50,000 because of the amount of due diligence required, and in rural areas, the disappearance of community banks means many owners can’t even find a place to pitch.

“Access to capital is one of the biggest barriers for starting a business,” says Olivia LaVecchia of the Institute for Local Self-Reliance, a nonprofit that promotes small businesses-friendly policies.

In Seattle, some owners have bypassed old-school lenders and sought the source bankrolling aspiring product designers: crowdfunding. As part of Washington state’s Fund Local program, dozens of businesses turned to Community Sourced Capital (CSC) for the funds to open or expand.

This financial service startup, founded in 2013, runs on the promise of a perk it hopes is more powerful than the T-shirts, swag, or special experiences that anchor services such as Kickstarter. CSC pins its hopes on community engagement; users pay for $50 “squares,” or segments of interest-free loans that run from $5,000 to $50,000 and are rewarded with a new neighborhood business. Owners have three years to pay back the investments.

The founder of CSC, a former climate policy expert Rachel Maxwell, says the concept came to her as she was thinking about sustainable energy systems. “I realized that we really needed a distributed economic system,” she told Entrepreneur magazine.

Since CSC’s launch, more than $800,000 has been raised for businesses nationwide, including funds that have fueled Seattle businesses, allowing Lovage meal kit company to start deliveries and giving Broadcast Coffee the means to expand its café in the city’s Central District.

San Francisco: Giving small businesses a shot against chains

With some of the most expensive real estate in the nation, San Francisco would seem like an unlikely place for small business success. But it’s this environment of hyper-gentrification and egregious rent increases that has spurred the city to experiment with new ideas. Starting in 2006, the city’s formula retail policy has proven itself to be a solid way to level the playing field, putting restrictions on chain stores that makes it easier for the little guy to thrive.

Under these rules, chain stores looking to open locations in the city’s commercial districts need to undergo a public hearing and obtain special approval from the Planning Commission. This gives the community a say, and often pushes chains away from shopping district in favor of homegrown operations.

It’s not a perfect plan, and the current system leaves much of the city uncovered. But in areas where it’s been put in effect, such as North Beach and Hayes Valley, the policy has helped bolster community landmarks and local icons, such as Two Jak’s Nick’s Place and the Pacific Cafe, two well-established restaurants. A 2013 city study showed that in neighborhoods covered by the plan, 24 percent of commercial space could be defined as formula retail; in other parts of the city, the chain share of store square footage was 53 percent.

According to statistics from the Institute for Local Self-Reliance, San Francisco’s independent retail scene now boasts twice as many independent bookstores as the much larger city of New York, as well as 80 local hardware stores, and more than 50 locally-owned grocery stores. And the city has invested even more in keeping these businesses running one they’re established. The recently enacted Legacy Business Registry and Preservation Fund provides employment and rent subsidies for long-running, legacy-approved businesses, and another tool to help keep the city’s commercial fabric intact.

A meeting at Propeller, which helps support and incubate small businesses with a social mission
Propeller

New Orleans: Fostering community connections and social justice

In the wake of Hurricane Katrina, New Orleans seemed to face challenges in every direction. Andrea Chen, a local businesswoman who helped launch Propeller, a socially oriented business incubator in 2007, saw those challenges as opportunities. As she recently wrote, the storm “laid bare issues that had existed long before the levees broke”: why not turn these hurdles into opportunities for engaged entrepreneurship? Propeller became a business center with a mission beyond the bottom line funding social ventures that tackled many of the city’s most vexing issues.

This local, high-minded focus has helped the incubator kickstart more than 100 businesses focused on key issues such as education, food, health, and urban water and coastal access, and played a role in the city’s small business resurgence: Post-Katrina entrepreneurial activity is 56 percent higher than the national average. Propeller’s mentorship model has provided local innovators with the tools to create community farms, a wetlands kayaking company, an urban fitness park, and a maternal health care collective. Chen hopes her group’s work doesn’t just help the city comeback, but become a more just, equitable community.