To launch the next generation of entrepreneurs, innovators in finance need to step up

Sweet Grace Heavenly Cakes was born in 2008, as the Great Recession ripped through the United States, particularly affecting working-class communities like Lawrence, Massachusetts. Danaris Mazara can identify the exact minute the bakery was born, in fact. She was lying on her couch, staring at the drop ceiling of her rented house.

She had $37 in food stamps to her name, given to her by her mother who had stopped by earlier in the day to offer her support. “I know you are going through a hard time,” she said, handing the coupons to her daughter.

Danaris worked at Samsung and was about to start her shift. Despite having that job, it wasn’t enough to cover rent and food. Her husband, Andres, was out of work and sliding into depression. The closure of Haverhill Paperboard, a local manufacturer that had been operating for more than 100 years, cost him and 173 other workers their jobs. Danaris and Andres had lost their house and declared bankruptcy.

“What are you going to do with $37 in food stamps?” Danaris asked herself, staring at that ceiling. “In a couple of days, you won’t have anything to feed your family, because that is not enough to buy groceries.”

Their baby daughter Grace was asleep nearby. She had been conceived after a string of miscarriages. Danaris desperately wanted to stay home with her, but her family couldn’t afford to lose her income. This balancing act, baby, factory job, depressed husband, was not for her. She was sure this was not the life she was meant to be leading.

Danaris believes in God, and at that moment a divinely inspired thought came into her head: “Make flan.”

From that beginning, her business was born. She sold the flan on the break room table at Samsung, generating enough for more ingredients. Then, Danaris learned how to make cakes from the women in her community – and then, heard about a program, EforAll, that helped her become more profitable and find capital. With her good fortune in being inspired to start a business and finding the help she needed at the right time, Danaris now, nearly 15 years later, employs more than a dozen women and has a storefront on Essex Street in Lawrence, home to a thriving Dominican and Puerto Rican community.

Based on the research we did and conversations we had in the course of writing our recent book, we believe there are more potential Denarises out there than people realize: entrepreneurs waiting for a stroke of luck that will help them out of tight spots and into the lives they will find rewarding.

There’s a forgotten history of entrepreneurship in America, which includes many more women and people of color than is generally recognized. And the rates today at which women and people of color are starting businesses has accelerated to the point that, today in America, white men are now the minority of business owners, if you consider the entire swath of formal businesses, from “soloprenuers” to employer businesses.

There’s a forgotten history of entrepreneurship in America, which includes many more women and people of color than is generally recognized.

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In our book, we call today’s entrepreneurs “The New Builders,” to recognize that this generation is substantially different from previous generations. The demographic shift is due to the growing diversity of our country, but also reflects some special conditions that make startup life and small business ownership especially appealing to women and people of color.

For one thing, our nation’s recent focus on social justice gives more of them a greater license to dream. Meanwhile, the world of work remains a miserable experience for many. And, given the economic needs driving them, we’re seeing a surge in business starts post-pandemic.

The problem is that today’s New Builders start small – as all businesses do – but too often stay small. Lacking the entwined systems of finance and mentorship that supported past generations of (white, male) entrepreneurs and that still over-index in support of a tiny subset of businesses in the tech world, today’s entrepreneurs face almost insurmountable obstacles. As Elizabeth recounted in her speech at the Greater Kansas City Chamber of Commerce 2021 Small Business Celebration Awards this week, entrepreneurship in America has been on a slow decline for the past 40 years. Very few people in the mainstream notice this trend, in part because they are focused on the tiny subset of very successful businesses that exist in the 1% of startups that take VC funding.

But it is the decline in the broader world of entrepreneurship that is a crack in America’s identity as a land of opportunity and innovation. We don’t get innovation only from white men educated at Ivy League schools. We get innovation, historically, from giving a broad swathe of people the opportunity to create businesses that drive economic growth.

One of the underrecognized reasons for the decline in entrepreneurship is the major mismatch between today’s New Builders and the infrastructure that helps companies start, survive, and thrive.

Danaris is an inspiration. But we should not expect or ask people to start businesses on $37 in food stamps.

We believe the fastest lever to give people like Danaris the wherewithal to start companies is a well-designed system of finance that provides capital, as well as the emotional and social support entrepreneurs need. According to Kauffman Foundation research, beyond the 1% of startups receiving venture capital financing, only about 17% take any outside financing at all. The key is getting the same level of robust financing to the remaining 83%.

In that vein, we would like to highlight four promising directions in finance innovation that would help the vast majority of entrepreneurs who aren’t getting funding. There are many more to consider, but these would be a good starting point.

• Financing at scale. Large technology platforms, like PayPal and Stripe, have the potential to touch many businesses, and many of them have products that offer forms of finance across the broad swathe of entrepreneurs, but the rates charged are higher than those found at banks, and they fail to offer the kinds of other support that are arguably even more important to success. If they were to become leaders in the movement to help New Builders, it would have to come about because of a mindset shift among their executives and the largely white men in their networks: that businesses started by women and people of color are not inherently riskier than the companies created by men, and that New Builders are not environmental, social and governance (ESG) investments. And these executives would need to accept their responsibility for creating a more inclusive and equal society.
• Create a new capital class. Empowering more people to see themselves as investors and lenders would unlock more capital at the grassroots level, as models such as Grameen and Kiva have shown. How could this function in communities and Main Streets in America? It’s not clear, yet, but we believe there are innovations to be had in enabling more people to invest in startups. If more people think of themselves as investors, they will create demand for new financial products.
• Connecting investors with Main Street. Community loan funds have existed for decades, enabling community minded institutions and wealthy individuals to put money into funds that in turn provide capital and support for businesses. Are there ways to scale these funds or turn them into an asset class? There are already signs that technology is at work in this space, as a handful of new companies, like Mainvest outside Boston, build platforms that help people who aren’t necessarily wealthy, invest in companies in their communities. The regulations in this space are still onerous, however.
• New Builders helping New Builders. One of the most promising developments coming out of the increased social justice awareness in 2020 has been a focus on getting more capital into the hands of Black and brown innovators in finance. The $100M fund-of-funds partnership between the Kauffman Foundation and Living Cities is one example of this.

In some cases, like that of Brian and Candice Brackeen, former entrepreneurs have decided their bigger impact lies in getting capital to more people in their communities. The duo launched Lightship Capital. They initially intended to raise $25 million but closed $50 million to invest in underrepresented founders – perhaps a sign that more institutional investors are looking to invest in New Builders.

Our systems of finance must change. The New Builders is in many ways a call for people who now control capital in our country to do what they do best: innovate new financial products to create and serve a new market. We shouldn’t be asking New Builders to change how they build and finance their businesses. We should be asking ourselves how we can adapt to the new generation of people who are starting businesses today.

There are hopeful signs. The great reception of The New Builders is one of those signs. In our experience as a venture capitalist and a journalist, the smartest people take a long-term view. While the most powerful members of the capital class can seem short-term and indeed are often deeply motivated by profit, they want to be ahead of the game. The future of the economy clearly lies with New Builders, who are more diverse in terms of their background, but just as capable and lofty in their dreams as any generation of entrepreneurs before them.

The New Builders by Seth Levine and Elizabeth MacBride explores the changing face of small business and startups in America. Levine is a co-founder and partner at Foundry Group, a Colorado-based venture capital firm. MacBride is a writer and the founder of Times of Entrepreneurship, a journal covering entrepreneurship and finance.

Uncommon Voices columns bring new perspectives and opinions on topics related to the Kauffman Foundation’s work. If you have an idea for a column, please read the guidelines for contributors.