As a precursor to this year’s Opportunity Finance Network’s Small Business Finance Forum in Chicago, Community Reinvestment Fund, USA (CRF) and Next Street brought together leaders in the Community Development Financial Institution (CDFI) industry to learn from each other. The topic du jour – Understanding, Assessing, and Acting within a Market to Effectively Serve Small Businesses – for this June’s event attracted a cross-section of 25+ organizations, mainly CDFIs, serving all 50 states, to advance our collective thinking around the topic.
The impetus for this event came through support from JPMorgan Chase & Co. as part of its Partnerships for Raising Opportunity in Neighborhoods (PRO Neighborhoods) initiative. The $125 million, five-year initiative works to address neighborhood quality issues that are among the biggest drivers of income and wealth inequality. Through an annual competition, PRO Neighborhoods invites CDFIs to work together collaboratively to address a specific community development challenge with innovative solutions. PRO Neighborhoods also supports peer learning events, capacity building and knowledge sharing opportunities to enhance the impact of the winners and the broader CDFI field.
CRF, a CDFI with a mission to empower people to improve their lives and strengthen their communities through innovative financial solutions, received a PRO Neighborhoods grant in 2014 to support the Emerging Small and Medium Enterprise Initiative. This program was a collaboration including CRF, Coastal Enterprises, Inc. (CEI), the National Development Council (NDC), and Calvert Social Investment Foundation. In the spirit of the PRO Neighborhoods initiative, this cohort of CDFIs partnered to leverage each other’s strengths – including deeply rooted business lending expertise in local markets, innovative applications of technology, and unique knowledge of and access to capital markets – ultimately enabling the group to deploy just under $150 million in small business loans, nearly double the original target amount over the three year course of the program.
Since participating in the inaugural class of PRO Neighborhoods grantees, CRF has continued to explore collaboration opportunities with a variety of community development partners. Most recently, CRF and Next Street have worked together to develop a deeper, more data-driven and analytical understanding of how to approach key target markets. With a core expertise around market assessment, Next Street – a boutique consulting firm founded in 2005 with the goal of transforming the way finance and business advice are provided in underserved markets – was an obvious partner to co-facilitate the peer learning event.
Together, CRF and Next Street guided participants in an engaging discussion on the current state of small businesses, how to analyze a market before you can serve the small businesses within the market, and what you can use to measure the effectiveness of your actions. We then concluded our discussion with a series of breakouts and questions, which all culminated in a realization that we still have more work to do together.
That said, here are 5 key takeaways that might be helpful to you, and the small business communities you serve, right now:
1. Any small business ecosystem effort should have some focus, at least in part, on supporting minority-owned, women-owned, and/or immigrant-owned businesses.
Small businesses – particularly those that are underserved – need access to capital, revenue, and knowledge. While it is no surprise that businesses need these three things, participants were drawn to data that demonstrated how women and ethnic minority groups have disproportionately lacked access to capital, debt, and equity products. Specifically, minority-owned firms experience a loan denial rate of two to three times those of non-minority-owned firms. Furthermore, women are twice less likely to have access to traditional commercial banking products. Supporting historically underserved business owner populations is clearly a focus that we, as CDFIs, live and breathe each day, but it also calls upon us to be even more rigorous in our understanding and analysis of the markets we serve. Conventional lenders and traditional sources of capital tend not to focus on the unique needs of the customer groups that we serve, which partially contributes to the lack of available readily data and analysis. It’s incumbent upon us not only to focus on these markets from a mission perspective, but also to be committed to a data-driven analytical approach of how best to meet unmet needs.
2. Organizations have trouble defining, identifying, and targeting their target customer.
Participants have an earnest desire to understand their ideal customer. The most common questions posed to us were:
a. Who truly is our customer, and how do we find data on specific target populations that potentially make up our customer base?
b. Does it take “boots on the ground” to understand a businesses’ true needs?
c. Do we, as a nonprofit CDFI, have the products/capacity to effectively meet the needs of those businesses, and who can we partner with in new geographies to accelerate our ability understand and serve new potential customers?
Most of Next Street’s and CRF’s experiences (validated by the head nods of attendees in the room) have included concentrated efforts to properly answer these questions. We continue to recognize significant gaps in our understanding of exactly who our target customer is, what their unique needs are, and where we ought to focus and specialize in order to fill these gaps. While these concentrated efforts often require experts (e.g. external consultants, in-house practitioners, etc.) who can help answer these questions, some organizations have successfully boot-strapped by working with graduate-level interns or pro bono consultants as a cost-effective alternative. Either way, time and resources are needed to properly understand the target customer and set these organizational efforts up for success.
3. A simple 3-step process can get you started.
Participants latched onto our process – (1) understand the market ecosystem, (2) identify the gaps, and (3) develop a plan – to help them understand and exert influence on a small business ecosystem within a particular geographic area. Drawing from examples of this 3-step approach through Next Street’s efforts in Boston and CRF’s efforts in Baltimore, we shared the importance of (and challenges involved in) quantitative and qualitative information gathering.
Participants were particularly drawn to two specific tools that have resulted from sample plans to serve small businesses in a particular place. CRF’s technological solution, known as Connect2Capital, effectively utilizes technology to assess and address the capital needs of small businesses. Connect2Capital provides a distributed web application that can source information about small business financing needs across multiple geographies and customer segments, aggregate and standardize that information, and automatically route loan inquiries to CDFI business lenders with products that match the identified need. A second approach is rooted in Next Street’s experience operating small business solution centers in New York City. Through these brick-and-mortar facilities, Next Street works with entrepreneurs and small business owners to secure financing, recruit and train company talent, obtain M/WBE certification, and navigate the greater ecosystem at large. Utilizing technology effectively or concentrating efforts in a single small business center each meet the needs of small businesses in their own way, but one must know how these efforts play into the broader small business ecosystem in order to fully unlock their potential.
4. Evaluating the impact of our efforts helps us be more effective.
We admitted to ourselves that the data collected to measure our effectiveness in serving small businesses is sometimes of little use. We also proposed, however, that our common goal should be to develop a system that reports on data from loan/financing applications, how technical assistance impacts company growth, and any follow-on financing activity – thereby, evaluating our impact from start to finish. In order to have a holistic measurement system, we must also candidly answer the following – “is our data collection based on our funders’ needs or our own?” Since most participants acknowledged that funders often dictate data collection, we see it as our collective responsibility to understand why we are collecting data, and in turn, how it will be used. In either case, we need to ensure that the data we are collecting helps us inform our strategy and business decisions, and ultimately helps us be more successful in meeting our clients’ needs.
5. Continued collaboration is key.
From our collective experiences, small businesses benefit when organizations collaborate to improve the entire ecosystem. As obvious as collaboration might seem, it is often difficult to execute in a way that delivers value to all participants. When done effectively, the upside is significant. Particularly when thinking about market assessment, collaboration can yield valuable insights for CDFIs that might be operating with a competitive lens, instead allowing for lenders in a single market to differentiate their offerings, focus on what they each do best, and present a more coherent landscape for the small business customer. To this end, successful collaboration can take many forms, including regular convenings with partners (e.g. CDFIs, business service organizations, business owners, etc.) or partnership networks to build deeper community connections, or through a shared technology platform. Regardless of the way in which collaboration happens, we agreed that the underpinning of any collaborative effort requires an openness and willingness to build an ecosystem based on the success of the collective, rather than the individual.
Overall, we encourage you to absorb these 5 takeaways to potentially help you in effectively participating in your own small business ecosystems. If you want more detail on the materials that we used during our discussion (and the data sources cited in this post), feel free to download a copy of the presentation below. We welcome your comments and feedback to continue to advance our shared agenda even more.