Closing the Capital Gap
Inner-city companies attract 31 percent less growth capital than average U.S. businesses, according to a report by Inner City Capital Connections, a partnership between the Initiative for a Competitive Inner City and Bank of America that educates inner-city businessowners about equity financing and connects them with providers of such financing. The gap limits the growth of inner-city businesses and the contributions they make to economic prosperity in their communities, ICCC says in its 2009 Impact Report, “Inner City Capital Connections: Investing in America’s Inner Cities.”
“With scarce access to capital and over-reliance on debt financing, businesses forego or delay investments that would help them grow. When the Initiative for a Competitive Inner City asked the leaders of America’s fastest-growing, inner-city businesses what the obstacles were standing in the way of their continued growth, one of the most cited barriers was the lack of access to capital,” it says.
Some of the business-owners said they could not obtain funding because the size of their business or the funding request was too small, or the industry in which they operated was undesirable or poorly understood. Others cited the poor economy and tight credit markets, undesirable business location, insufficient business growth, ethnicity, insufficient business history and a lack of connections with equity providers.
The annual ICCC program was established five years ago to help increase capital flow to growing urban businesses, enabling them to achieve a size and scale to boost local employment and contribute to more economically prosperous inner cities. More than 70 percent of the 148 inner-city companies that the ICCC program has assisted over the past five years are owned by minorities.
The program entails a monthly conference call in which influential business leaders share with the CEOs of participating inner-city businesses the strategies they employed to grow successful businesses; a training session on equity financing, including the advantages and disadvantages of the different types of financing capital, what equity investors are looking for in an investment and how to present one’s company as an attractive investment opportunity; and a culminating one-day “connections” event where businessowners interact with private equity, venture capital and angel investors.
At an August 2009 focus group of 10 investors who participated in the previous year’s connections in New York, the investors shared insights on how inner-city businesses can best use their experience at those events. Businesses can do so, they said, by:
Setting realistic expectations of the events. Businesses should view these events as “first dates” rather than final stages of the investor process. Fine-tuning their business plan lead-in. Participants should hone their business plan in written and verbal formats that venture capital and private equity investor can readily digest. That means spelling out the drivers of the business, plans for growth, the required growth capital and how the capital will be spent.
Talking about the investment opportunity. Participating businesses that succeed in attracting investment put themselves in the investors’ shoes and think deliberately about the size, purpose and structure of the investment.
Understanding their options. Participating businesses should understand the full breadth of benefits that come with equity financing — beyond the dollars invested — and learn about what types of financing are appropriate for businesses of different industries, sizes and stages of growth.
While these insights are aimed at businesses participating in the ICCC events, they are just as valuable to any small business with plans to approach investors or financial institutions for growth capital.