Presented by: The SBA Administrator MARIA CONTRERAS-SWEET
Speech Date: Friday, February 12, 2016
Speech Location: New York, NY
Good morning, what a special opportunity to be here at NASDAQ. For many entrepreneurs, this is the Promised Land. It represents the dream that, someday, they might stand here, ring the bell, take their company public, and join the titans of American innovation.
Today, after seven hard years of recuperation and rebuilding, the conditions to start or grow a business have substantially improved. The recession has receded. Unemployment is down; job creation is up. Job lock is down; health coverage is up. Even though IPO proceeds are down; VC investment is way, way up. Barriers to entry are coming down; women and minority ownership rates are climbing up. Complacency is down; disruption is up. While we still have a few hills to climb, we’ve come an awful long way in a very short time. From Main Street to Wall Street, the state of entrepreneurship is strong.
But without our serious attention, it won’t stay that way. In ways large and small, America is changing. You can feel the tectonic plates shifting beneath our feet: Our demographics are changing rapidly. There’s an increased focus on gender equity, which is long overdue. The clean energy revolution is real and gaining momentum. The new gig economy has people working in ways we’d never dreamed of and is disrupting entrenched economic interests.
At the same time and, in part, because of some of these changes, too many families are working harder and harder and finding it tough to hold on, let alone move up the social ladder. This shift is playing out at kitchen tables as families sit down to pay their bills, and it’s playing out in political races all around the country. You see the tension all around us, if you just look. Within blocks of here, there are billionaires from around the globe buying condos for north of a hundred million dollars. A new report found that 62 people control half of the world's personal wealth. In the shadows of those luxury buildings, you have independent small businesses struggling with skyrocketing rents and barely hanging on. And all over this city, men and women – often as a second or third source of income – are driving passengers around the city in their own personal cars or renting out rooms in their apartments. That’s the world right outside the doors.
Change is here. It’s upon us. I see it as I travel all across the country. The tough part, the challenge for us, is figuring out what it all means and how to harness all this change to broaden opportunity instead of constricting it. There’s no simple fix. It’s not enough to find a few success stories, proclaim the American Dream alive and well, and move on. We talk so much about the American Dream, but I sometimes worry we’re taking it for granted.
Look, I’m the product of American opportunity. I was born in Mexico, raised by a single mother in Los Angeles, worked in the private sector, started three businesses including a bank, and now I’m a member of the President’s Cabinet. You bet I believe in the Dream. But it’s not our birthright. It could disappear in the blink of an eye if we don’t nurture it. Each generation must rekindle it. We have to make sure it’s there for those who come after us. But how do we do that? I believe expanding entrepreneurship is an answer, maybe the best answer. Entrepreneurship alone may not be sufficient, but it’s absolutely necessary.
Income inequality has exposed fissures and racial tensions in our cities. Expanding entrepreneurship can provide new economic pathways with the potential to lift whole communities. We educate the best and brightest at our universities and our broken immigration system sends them back home to compete against us. Expanding entrepreneurship can empower talent in our own backyard to create good jobs here at home. Automation and cheap foreign labor are upending job roles and job stability. Expanding entrepreneurship can help us create new businesses and new industries.
Sometimes, in periods of anxiety, I know there’s a reflexive flight to safety. And anyone who’s ever started a business knows that entrepreneurship is anything but safe. It’s full of risk. But sometimes, taking a risk is the safest thing we can do. We must expand the middle class and leave a healthier country to our children and theirs. I believe we need to encourage risk takers – our entrepreneurs – in communities all across the country. The choices they make to strike out on their own won’t just impact their families or their communities. They’ll impact all of us by creating the jobs we need now and the companies that will trade on NASDAQ in the future.
But there’s no way we can meet this challenge by only looking to businesses in the same places led by the same people doing the same things. That’s “entrepreneurtia,” and it’s a recipe for decline. In our American story, especially our economic story, change is the only constant.
Just look at Detroit. Fifty years ago, it was the center of American innovation. There are some great things happening in the city now, but past performance is no guarantee of future success. It’s going to take Washington and Wall Street working together to avoid the trap of entrepreneurtia. We’ve got to search out and empower new entrepreneurs with enthusiastic intentions, not simply double down on yesterday’s winners.
Entrepreneurship is in our DNA. America was settled by traders, merchants and explorers determined to pioneer new frontiers. Centuries later, we’re one of the few countries that reserves a seat in the President’s cabinet for the entrepreneur. As a banker, entrepreneur, and government official, I come to NASDAQ in the spirit of collaboration, because capitalism requires our cooperation. Markets work best with transparency, liquidity and efficient and effective regulation, and America works best with robust economic opportunity, forged by capital flowing freely to all segments of our society.
Now, I know the stock market has had a tough run the last couple of months, but the market isn’t always the bellwether for the economy that some believe. The economist Paul Samuelson once joked that Wall Street predicted nine out of the last five recessions. A more durable indicator of our economic health is the state of small business. If our small business sector were a country, our output would rank No. 3, above Germany and Japan. Small firms employ half of the private sector. They’re creating 2 out of 3 net, new jobs. The middle market is our most powerful path to create broadly shared growth.
A new report says 62 people control half of the world's personal wealth, but even some of them say it’s time to engage in a discussion about wealth formation trends. The way we’ll make progress is by expanding access to capital to America’s most promising entrepreneurs who’ve yet to be discovered. They’re in the rural heartland and in our mid-size, urban cities. They’re graduating from our historically Black colleges and Hispanic serving institutions. They have insights and connections to their communities and novel ideas and products to serve them.
Last year, more venture capital was injected into our economy than any time since the 1990s. The Small Business Administration provides Wall Street and Washington a platform to work together to empower a new wave of diverse innovators – men and women who are constrained not by the power of their ideas, but by their limited capacity to commercialize them. Some on Wall Street see dark clouds gathering, but diversification can serve as our umbrella. I believe we can steer around future storms if we embrace true diversity in our portfolio and harmonize the three pillars of our ecosystem: our institutions, investors and innovators.
Institutions
So let’s start with institutions … government institutions. If you ask entrepreneurs about their experiences with government, they usually respond with a four letter word: Regs! Regulations can be confusing, duplicative, expensive, and overwhelming. I say this as someone who started and ran a community bank in Los Angeles.
If you’re an entrepreneur, government at every level owes you regs that are reasonable, understandable, and calibrated to your industry’s risk profile. I’ve cut so much red tape at SBA, I may have the scissors on my desk bronzed and mounted – a memento for when I return to the private sector.
I’ll never forget the day I started my first business. I had to get the necessary approvals from my government: Permits. Licenses. Inspections. Zoning approval. Federal, state, county and municipal boxes to check. I drove all over the place, and filled out a lot of forms requesting identical information. It was a crash course in regulatory insanity.
The World Bank ranks 189 countries on the ease of starting a business. The U.S. ranks 49th. We can do better. We must to do better. So last year SBA launched Startup in a Day. The idea behind the program is simple: An entrepreneur's most precious commodity is time. We enlisted major cities to take a pledge to implement new technology so entrepreneurs can apply for everything they need to start a business in less than a day. That’s the power of institutional cooperation.
The SBA isn’t a regulator, a watchdog or a sheriff. We were conceived to support small businesses, to provide them access to counseling, capital and federal contracts, to help them create jobs, and to empower investors to do the same. Our ecosystem is envied and emulated around the globe. I've traveled to Madrid, to Morocco, to Milan and to Mexico to promote President Obama’s global entrepreneurship agenda. Today’s entrepreneurs must navigate a borderless marketplace. Next month in Medellin, I’ll convene our second Global Ministerial to open more SME export channels. What makes our ecosystem different and better is the willingness of our government institutions to partner with banks to share risk and then share credit for creating jobs, profits and shareholder value.
As SBA Administrator, I’m CEO of the world's largest business loan guarantor, the world's largest middle market “fund of funds,” and the world’s largest angel seed fund. (Ironically, we’re the only federal agency with the word “small” in our name.)
Most Americans see SBA as the lending agency. Using the full faith and credit of the United States, we guarantee debentures for small businesses deemed too risky by the banks. We help finance manufacturing hubs and high-growth disruptors, as well as restaurants and retailers. The SBA guarantee has become the world’s largest extender of small business credit, with a current loan portfolio of $120 billion. That’s a lot capital that would otherwise be parked on the sidelines, if not for collaboration between the government and the banks.
Under President Obama, SBA-backed small business loans have supported 4 ½ million jobs. I’m proud to report that last year the SBA directed the federal government’s record-breaking year for awarding small business contracts – $91 billion worth, represent 25 percent of the federal spend. We also shattered our record for small business loans. We’ve been busy growing our lending network with more credit unions, community banks and mission-based lenders committed to filling geographic and demographic gaps. We’ve added microlenders to increase opportunity for those on the lowest rungs of the entrepreneurial ladder… Launched “reentry-preneurship” efforts by supporting the “ban the box movement,” because if someone took a wrong turn and paid their debt to society, they deserve a second chance … And changed our regs so citizens on probation or parole who can’t get hired can access micro capital and hire themselves.
Since my arrival at SBA, our loans are up 42 percent to women, 36 percent to minorities, and 39 percent to veterans. We’ve added microlenders to increase opportunity, supported the “ban the box movement” because people deserve a second chance, and changed our regs so citizens on probation or parole who can’t get hired can access micro capital and hire themselves. We’re aggressively pulling all the levers available to us. The historic criticism of SBA – that the loan process is a morass of red tape, paper forms and long wait times – has been answered. Today’s loan guaranty process is automated, intuitive and quick. We call it SBA One. Our new digital application is as user-friendly as Turbo Tax. Why, we’ve even entered the online matchmaking business. Our LINC system is like match.com, except we help entrepreneurs arrange a date with a lender – more than 30,000 so far. We’re processing loans faster, and we’re paying out faster in the two percent chance of default.
Since the recession ended, SBA’s loan portfolio has become self-sustaining, requiring no taxpayer subsidy. Our modest fees surpass our low charge-offs. Yet inexplicably, only a third of America’s 6,200 banks are active SBA lenders. The American job market has bounced back, but conventional small business credit has not. It’s now only at 83 percent of its pre-recession level. Compared to 2008, that represents a $58 billion shortfall. Last year, SBA guaranteed nearly 70,000 loans, so I’ve seen what’s coming in. So the question must be asked: Why have so many banks closed the door of opportunity to so many in the small business market? Especially with an institutional partner willing to provide up to a 90 percent hedge.
This reticence has fueled a growing online lending industry with some responsible actors, but some bad ones, too. Alternative lending rates are traditionally higher. Sometimes, much higher. We need America’s big banks fully in the game. Those banks rethinking their retrenchment are adding value to their books. Charge-offs and delinquencies for commercial loans are at their lowest rate in nearly a decade. So today, I challenge all banks to re-engage in small business lending. You’ll be doing a service to your country and your institution’s bottom line.
Investors
To investors: I never cease to be surprised by your surprise that SBA’s portfolio extends beyond traditional commercial lending. In the ’50s, President Eisenhower created not just one, but the two greatest highway systems the world has ever known. One was for cars; the other for capital – the SBA. That’s right, the SBA started the “fund of funds” industry in 1958. It was SBA … “government” … that opened the first version of what’s now a $3½ trillion industry. Moving your investments out of one high-risk silo and spreading risk over a broad category of investments – yes, SBA pioneered that.
The SBA’s Small Business Investment Company program (SBIC) is the world’s largest middle market fund of funds, with a current portfolio of $26 billion. We now have more than 300 SBIC licensees. We invest in those with a strong track record and commitment to grow small businesses. Some of our most iconic brands were financed by SBICs: Apple, Tesla, AOL, FedEx and Hewlett Packard. We provide investors the capital they need to execute their investment strategy and do so without dilution. We take no carry. We typically offer a 2-to-1 government match on private funds raised. This formula allows fund managers to make a big impact with low-cost leverage, so they can help drive capital formation.
Impressively, almost a quarter of the small businesses financed by SBICs are located in low and moderate-income areas. Moreover, SBICs provide CRA credit for banks and a small business exemption from the Volcker Rule. Once you do the math and consider how few strings are attached, the millions in federal matching funds are a very good deal.
We’ve created a new product for equity-oriented managers. Our Early Stage Fund offers deferred-interest debt leverage for up to five years. We’ll match your capital raise if you invest 51 percent in pre-revenue companies. Our Impact Investment Fund is expediting applications for licensees who invest 51 percent in underserved areas or next-generation industries like advanced manufacturing, education technology, and clean energy. SBA is committed to providing new capital streams to entrepreneurs minding the double bottom line: social and financial returns.
To that end, how do we get more investors to see the upside potential of venturing outside of their comfort zone? Silicon Valley is going through a period of introspection on diversity issues right now. Early in my career, I served on the Federal Glass Ceiling Commission, so I’m no stranger to the debate. In the mid-90s, when the Commission convened, senior leadership at Fortune 500 companies was 97 percent white and 95 percent male. Over the last two decades, we’ve made some progress in diversifying the C-suite, but not enough. Last year, the New York Times ran an article about CEOs of the S&P 1500. It ran under the headline: Fewer women run big companies than men named John. That’s right: More men named John run our leading companies than women named anything.
In high school chemistry class, we learn glass is forged from silicon. So I’m not surprised that Silicon Valley finds itself under the same glass ceiling hanging over so many industries. I’m heartened that companies that tend to hire from a closed peer circle are now factoring the opportunity cost of their insularity. But we can’t leave this problem just at the door of Microsoft and Google.
There’s too much talent going undiscovered and too many promotions going to people who look like the folks doing the promoting. Breaking the Silicon Ceiling is not about opening more oysters in search of more pearls. The talent isn’t hiding. The Urban League, Congressional Black & Hispanic Caucus Institutes, SEO, Toigo Fellows, Gateway to Leadership, Management Leadership for Tomorrow, and the Kauffman Fellows are nurturing new pools of diverse, next-generation talent.
It’s past time to diversify America’s workforce, our corporate leadership, and the investor class. There’s an overwhelming research consensus that companies with diverse leadership perform better financially. Diverse companies are 70 percent more likely to engage a new market. It’s not just that diverse voices offer different perspectives. Research shows that having diversity in a group causes everyone around the table to contribute in new ways.
I find it disturbing that roughly two-thirds of venture capital investment goes from 3 states to 25 zip codes.
According to new Census data from December, minority company ownership is up 38 percent over five years. These firms provide 7 million jobs. Women’s ownership rates are up 27 percent, employing 8 million workers. Women and minorities own record numbers of businesses, but they can’t find affordable capital to grow. Hispanics and African-Americans represent 25 percent of the population… Yet only 1 percent of VC capital flows to Hispanic or black entrepreneurs. Does anyone honestly believe these communities are the source of just 1 percent of our best business ideas?
No one doubts the contributions women are making to business today. Women now comprise nearly 60 percent of new college graduates and control 73 percent of household spending. That’s more than $5 trillion in annual household spending. Women entrepreneurs have an especially valuable perspective on what women want to buy. But women, who account for half of the population, receive just 4 percent of VC funding. Warren Buffet has marveled at how far we’ve come using only half the talent in the country. He says if we visualize what 100 percent can do, we’ll join him as unbridled optimists about America’s future.
Innovators
Now, to our innovators. At the SBA, we have a suite of programs to foster high-growth small business development. For starters, we’ve invested millions in our Growth Accelerator Program to support 130 incubators and innovation hubs. Many serve diverse areas and undercapitalized entrepreneurs. One is in my home state. It’s a great story. One evening, two female engineering professors at UC San Diego went out to seeSocial Network, the Facebook-inspired movie. Afterward, they both had the same question: Why were there no women depicted as contributors in the dynamic start-up environment? So they launched MystartupXX. The XX stands for female chromosomes. Their mission is to mentor young women to lead the tech industry forward and to help them attract the financing they need to compete. In just three years, 23 teams – all led by female entrepreneurs – have taken their ideas commercial. One of the startups created a cutting-edge video game that teaches young children how to code. Another, specializing in human genome sequencing, just had a successful and profitable exit.
Next month, SBA is hosting our second InnovateHER competition to encourage a new generation of women disruptors to make our lives safer, easier and healthier. In Washington, they’ll pitch new products to dose medicine to babies and detect and prevent breast cancer. From this group perhaps we’ll find a woman with the right stuff to ring the bell.
Often, when I meet innovators seeking capital, I volunteer to make an introduction. I ask them if they’d like to meet an investor who bets $2 ½ billion every year on scientists in small labs. This investor loves the moonshots…Visionaries who are using emerging technologies to cure disease, feed the hungry, save the planet … maybe even colonize the moon. And the equity stake he requires to help turn a prototype into a product is zero. Then I say the investor is your Uncle Sam.
SBA oversees the Small Business Innovation Research program – or SBIR. We call it “America’s seed fund.” It’s the world’s largest source of non-dilutive angel capital for small businesses. America’s seed fund has invested $40 billion in entrepreneurs with big ideas. The market cap of just two SBIR success stories, Qualcomm and Biogen, triples the total government investment in the program since it began in 1982. How’s that for ROI?
In Brooklyn, we’re supporting a company that uses 3D printing and bio-fabrication so you can grow your own bone graft. The company is Epibone. It’s the next frontier in precision medicine, and the founder and CEO happens to be a minority woman. Nina Tandon is just back from the World Economic Forum. She earned a prestigious invitation to represent global entrepreneurs in Davos. For a decade, Nina had subsisted on academic grants from the NIH. But it was only after getting two SBIR grants that she raised $4 ½ million in follow-on private investment.
Another SBIR firm has invented a biodegradable substitute for Styrofoam. Ecovative uses agricultural waste, mixed with a component of mushrooms, to make sustainable plastics and sustainable furniture. If you throw away Styrofoam, it goes to the landfill. Five hundred years later, it will still be there. Throw Ecovative’s material into a landfill, and it will compost. From it, new life could grow. It’s already being used by Dell as a green alternative to ship their products. Ecovative isn’t based in Silicon Valley. The company is breathing new life into the smallest town in New York, upstate Green lsland. It was once home to a railroad car factory and a Ford parts plant. Gavin McIntyre and his friend made their discovery while studying at Rensselaer Polytechnic Institute in Troy. SBIR helped America find these two innovators in places Wall Street often forgets to look. Gavin: Thank you for your vision, and congratulations to you and Eben on your success.
We know it won't be one big breakthrough that puts our planet on a more sustainable path. It will be 10,001 small breakthroughs. It will be innovators in small labs who are passionate about harnessing the wind and the sun and the water. It will be biomass researchers turning fungus and methane into energy-saving consumer products. It will be mission-driven entrepreneurs who know the clock is ticking and the day will come when the damage done to our environment cannot be reversed.
The Sustainable Jobs Fund out of Durham received our very first SBIC Impact license. One of their portfolio companies, NextTracker, builds carbon tracking systems for solar power plants. Their work has kept more than a million tons of carbon out of the air. That’s the equivalent of taking more than 200,000 cars off the road.
In Paris, a unanimous signal was sent to the markets that the time has arrived to invest in clean tech, that the coming years portend a flood of clean-energy buyers. The fact that every country signed on to a meaningful plan to take action is nothing short of historic. It’s our small labs leading the effort to invent new cost-saving clean energy technology. Through the SBA and our sister agencies, government can facilitate investment in small innovators. SBIR can help researchers get that early-stage proof of concept. And SBIC can help build a bridge over the so-called Valley of Death, so promising new discoveries are commercialized and globally distributed.
SBA is helping our small businesses ensure that America, not China, leads in creating the clean technology and green jobs of the future. The near-future. That’s the potential we embrace today. In many ways, SBA resembles the businesses of the new sharing economy. Ride sharing companies that transport millions of riders without owning a single cab… Home rental companies that house millions of travelers without owning a single property. These companies do more than provide a service. They provide an intuitive, accessible platform that empowers customers and expands their choices. This also describes the SBA we’re building: a more efficient institutional platform to partner with investors and innovators alike. We make a powerful triumvirate.
The SBA is not a bank, yet we manage a $120 billion lending portfolio. We’re not a direct investor, but the funds we license and leverage have put $26 billion on the street to support small businesses. We’re not scientists, but we’re ensuring America’s largest seed fund invests $40 billion to capitalize life-saving, planet-sustaining discoveries. And we aren’t consultants, but through our resource partners, we manage the world’s largest business counseling network.
This is personal for me. Yes, I am a member of the President’s Cabinet serving as the voice for small business, but I didn’t speak a word of English when I immigrated to this country from Mexico at the age of 5. My grandmother dreamed that someday, I might work in an office and become a secretary. But a cabinet secretary? Only in America.
I feel an obligation. Now it’s my responsibility to make sure that the little five-year-old girl immigrating to America today has the same chance I had, and I’m doing all I can to give the hard-working single mother the opportunities that my mother never had. But I’m not doing it just for their sake. This isn’t charity. It’s economics. Growing our economy is good for all of us. We all stand to benefit if we can tap into all of the genius and all of the hard work that America has to offer. We can’t afford to let talent lie fallow.
To local government institutions: Get out those scissors, streamline, rethink outdated rules, make it easier for companies to start and easier to operate. To financial institutions: I challenge you to get off of the sidelines and into the game and restore small business credit in America. To investors on both coasts: Invest in new places and new people. Diversify your portfolio and your perspective. Spur entrepreneurship and innovation in unlikely places. To innovators: Take the risk. Hack, disrupt, and innovate your way into the history books. We’ll stand beside you and do all we can to help.
Only if we all do our part will America remain the world leader in entrepreneurship and innovation. More than our shared responsibility, it’s our shared opportunity…. An opportunity for Wall Street and Washington to look past the rhetoric and empower a new community of inclusive entrepreneurs… Leaders who will use their diversity and cultural competencies as the wind to their back – and whose work will shape our common future.
Together we can stimulate the economy, expand our middle class, strengthen our democracy, and preserve American exceptionalism for the next generation. God bless you, and God bless the United States of America.