The Next Zuckerberg Could Be in West Virginia

Venture capitalists are obsessed with looking for the next new thing in Silicon Valley. The former head of the SBA explains why they’re looking in the wrong place.

Facebook CEO Mark Zuckerberg speaks at the Newseum September 18, 2013 in Washington, DC. Zuckerberg participated in an interview with James Bennet, editor in chief of the Atlantic, on 'the knowledge economy', including Zuckerberg's involvement in the immigration debate.
National Journal
Amy Sullivan
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Amy Sullivan
Oct. 31, 2013, 10:31 a.m.

No Amer­ic­an politi­cian can go wrong singing the vir­tues of small busi­nesses. But the much-revered corner­stone of eco­nom­ic growth is a broad cat­egory, en­com­passing every­one from the in­de­pend­ent con­sult­ant to the cof­fee-shop own­er to the start-up founder on the verge of ex­plos­ive growth. And while our rhet­or­ic may not dis­tin­guish between them, poli­cy­makers must in or­der to un­der­stand how to best sup­port the needs of dif­fer­ent kinds of small busi­nesses.

That’s something Kar­en Mills learned as head of the Small Busi­ness Ad­min­is­tra­tion dur­ing Pres­id­ent Obama’s first five years in of­fice (Mills stepped down in Septem­ber). A long­time ven­ture cap­it­al­ist — she was a found­ing part­ner and man­aging dir­ect­or of Solera Cap­it­al — Mills had a spe­cial in­terest in identi­fy­ing prom­ising busi­nesses in areas out­side Sil­ic­on Val­ley and New York City, which are already sat­ur­ated with in­terest from in­vestors. Na­tion­al Journ­al re­cently caught up with Mills, who is split­ting her time this year between Har­vard Busi­ness School and the Kennedy School of Gov­ern­ment, to talk about the kinds of fed­er­al policies that can sup­port in­nov­at­ive small busi­nesses. Ed­ited ex­cerpts fol­low:

What’s wrong about our pop­u­lar con­cep­tion of what small busi­nesses are?

It is well-un­der­stood now that small busi­ness is the back­bone of the Amer­ic­an eco­nomy. Half of the people who work in this coun­try own or work for a small busi­ness. But what is less un­der­stood is what kinds of busi­nesses these are and how they con­trib­ute to job cre­ation. There are 28 mil­lion small busi­nesses in the U.S. — but only 6 mil­lion of them have em­ploy­ees. Those busi­nesses fall in­to two cat­egor­ies: high-growth en­tre­pren­eur­i­al busi­nesses and Main Street, or loc­al, busi­nesses.

They’re both ter­rific­ally im­port­ant. Main Street busi­nesses are the ones that are con­stantly open­ing or clos­ing — the res­taur­ants, the dry clean­ers, the car-re­pair op­er­a­tions. We need to make sure they have the cap­it­al they need. When one closes, the next needs a loan to open, so we don’t end up with shuttered store­fronts on Main Street like we did dur­ing the Great Re­ces­sion. But only a re­l­at­ively small group of busi­nesses cre­ates most of the jobs. And that group needs to be the fo­cus of our growth policy in or­der to keep us com­pet­it­ive.

Who are the small-busi­ness own­ers in this key group?

Well, con­trary to pop­u­lar be­lief, all of those en­tre­pren­eurs do not live in Sil­ic­on Val­ley. In fact, as SBA ad­min­is­trat­or, I traveled all across the coun­try vis­it­ing ex­traordin­ary en­tre­pren­eurs in places like Nashville, West Vir­gin­ia, Seattle.

One small com­pany in Iowa was mak­ing a vac­cine that was for shrimp and ex­port­ing it to shrimp farms in In­done­sia. You might won­der why in the world a shrimp vac­cine was com­ing out of Iowa. But re­search at Iowa State that fo­cused on swine flu also worked for shrimp. So Har­ris Vac­cines had ex­pan­ded their product line to cov­er shrimp as well. They be­came a great suc­cess story and a great ex­port­er. These com­pan­ies can be in all kinds of dif­fer­ent in­dus­tries and geo­graph­ies.

The chal­lenge for policy makers is to make sure that those who don’t reside in Sil­ic­on Val­ley or Bo­ston or New York still get ac­cess to cap­it­al and oth­er op­por­tun­it­ies.

How do you do that?

Ven­ture cap­it­al­ists are very fo­cused. Sev­enty per­cent of ven­ture cap­it­al gets in­ves­ted in com­pan­ies in just three states — Cali­for­nia, Mas­sachu­setts, and New York. But there are ways to get more cap­it­al in oth­er parts of the coun­try. One way we did it at the SBA was through the Small Busi­ness In­vest­ment Com­pan­ies pro­gram. We built pub­lic-private part­ner­ships, which gave ac­cess to cap­it­al to over 300 growth equity firms. Private in­vestors were mak­ing the de­cisions on the com­pan­ies, but the gov­ern­ment was giv­ing them more lever­age. So folks who couldn’t get VC fund­ing could get ac­cess to cap­it­al from these firms.

Now, this was a pro­gram that has been in ex­ist­ence since 1958. And it’s an im­port­ant mod­el for fu­ture policy makers. It shows you how to use the cred­it of the gov­ern­ment, the ex­pert­ise of the private sec­tor, and a policy ob­ject­ive that be­ne­fits many places around the coun­try at little or no cost to tax­pay­ers. The budget im­plic­a­tion for the pro­gram was ac­tu­ally zero. That puts it high on the list of things that can get bi­par­tis­an sup­port.

That sounds like the kind of math people like to hear. But how did it work?

The first thing we did was stream­line and sim­pli­fy the pro­gram. Obama doesn’t get enough cred­it for how much he’s re­duced pa­per­work and com­plic­a­tions across the ad­min­is­tra­tion. We took the turn­around time for li­cens­ing of these funds from nearly two years to five months. That sig­ni­fic­antly re­duced the pa­per­work, and then we were able to mar­ket it to some of the best in­vestors in the coun­try. It was much less bur­eau­cracy to deal with than it had been be­fore.

We also said we wanted to make an im­pact in geo­graph­ies and sec­tors where there wasn’t enough in­vest­ment go­ing on. The first one was in Michigan, a part­ner­ship with Cred­it Suisse and Dow Chem­ic­al. It was very much in align­ment with the state’s ob­ject­ives of get­ting more in­vest­ment cap­it­al in dur­ing the time when it had been so hard-hit by the re­struc­tur­ing of the auto com­pan­ies.

Why are ven­ture cap­it­al­ists so fix­ated on the ex­ist­ing hot spots like Sil­ic­on Val­ley or New York City?

I was in ven­ture cap­it­al for more than 25 years. The in­dustry has been very re­luct­ant to seek out some of these smal­ler high-growth op­por­tun­it­ies. In fact, the prac­tice has been to tell com­pan­ies that have a lot of po­ten­tial that they need to move to Sil­ic­on Val­ley. I think this has con­strained re­turns be­cause there are too many dol­lars chas­ing the same deal.

Now we’re see­ing that the most en­tre­pren­eur­i­al of the ven­ture cap­it­al­ists are break­ing out of the herd men­tal­ity. Many of them came to the SBIC pro­gram with new ap­proaches and they just needed cap­it­al. That is when the gov­ern­ment steps in. If the mar­ket is not fund­ing these oth­er re­gions, and the gov­ern­ment can cor­rect the mar­ket fail­ure, that be­ne­fits every­one.

One of the things that most im­pressed me trav­el­ing around the coun­try was how many high-growth suc­cess­ful com­pan­ies were in states and re­gions that you nev­er thought of. In West Vir­gin­ia, for ex­ample, there are ter­rif­ic small busi­nesses that have grown up around high-tech mil­it­ary ap­plic­a­tions in the mil­it­ary con­tract­or cor­ridor in that state.

I’ve heard you talk about the fact that while cap­it­al is ob­vi­ously key to pro­mot­ing high-growth small busi­nesses, there is a vi­tal role for in­sti­tu­tions as well. What are those?

It turns out that one of the most power­ful new evol­u­tions that’s hap­pen­ing to be­ne­fit en­tre­pren­eur­ship around the coun­try are re­gion­al eco­sys­tems that are sup­port­ing a vari­ety of new kinds of in­sti­tu­tions. Eco­nom­ic clusters have really taken off all around the coun­try. In the last five years, we in the fed­er­al gov­ern­ment sup­por­ted 56 new clusters. The evid­ence is that when a cluster de­vel­ops and has re­la­tion­ships with loc­al in­sti­tu­tions, it tends to bring those be­ne­fits to all of the sim­il­arly minded small busi­nesses that could not have the scale to get them on their own. So if you want a com­munity-col­lege sys­tem to provide pre­ci­sion work­force train­ing, as a cluster, you can get their at­ten­tion and get that done.

Ac­cel­er­at­ors are an­oth­er in­ter­est­ing phe­nomen­on. All across the coun­try, we see places — some­times phys­ic­al spaces or just col­lec­tions of re­gion­al in­ter­ested parties — who are sup­port­ing star­tups. They get VC and an­gel in­vestors to­geth­er and con­vene demo days for their start-up com­pan­ies, so they can ex­pose them to fin­an­ci­ers. There are great ac­cel­er­at­ors in places you wouldn’t ima­gine. In Nashville, there’s one fo­cused on health care that has tre­mend­ous suc­cess.

Man­u­fac­tur­ing in­sti­tutes are the last kind — they in­volve uni­versit­ies as well as clusters and ac­cel­er­at­ors that are fo­cused on man­u­fac­tur­ing in­nov­a­tions. As you know, man­u­fac­tur­ing is one of the most im­port­ant drivers of job cre­ation around the coun­try, and the amaz­ing thing is that these are ac­tu­ally not very ex­pens­ive.

When you took over at the SBA, the agency had seen its budget stead­ily cut over the pre­vi­ous dec­ade. What kinds of con­ver­sa­tions did you have with mem­bers of Con­gress to build new sup­port for the agency?

We were able to il­lus­trate tan­gibly how the agency could have a pos­it­ive im­pact on small busi­nesses and their growth. As con­gresspeople went home, they heard in their com­munit­ies from busi­nesses that needed SBA loans, that liked the ment­or­ing and coun­sel­ing provided by small-busi­ness de­vel­op­ment cen­ters.

What amazed me when I came to Wash­ing­ton is that no one had really looked un­der the hood at the agency and dis­covered the gems that were there. Now, they were rough and needed a little pol­ish­ing and stream­lin­ing. We took 100 pages of pa­per­work out of the SBA loan pro­cess, for ex­ample. And as we began to de­liv­er, the pro­grams be­came more and more suc­cess­ful, and less costly. When you stream­line and sim­pli­fy, you tend to take costs out of the sys­tem.

Do you have a fa­vor­ite gem that you dis­covered at the SBA?

The SBIC pro­gram was cer­tainly one. But an­oth­er is the largest pro­gram the fed­er­al gov­ern­ment runs — the gov­ern­ment con­tract­ing pro­gram for small busi­nesses. It was flawed and had a fair amount of ab­use. Big com­pan­ies were pre­tend­ing to be small com­pan­ies, that sort of thing. We needed to clean it up.

But once we did, we showed oth­er agen­cies how much bet­ter the out­comes could be when they chose a small com­pany in their con­tract­ing. Smal­ler com­pan­ies can be more in­nov­at­ive, they don’t have the over­head of a large in­sti­tu­tion. As we made it easi­er for oth­er agen­cies to find great small com­pan­ies, and made it easi­er for small com­pan­ies both to get con­tracts and to grow to meet the needs, we had so much suc­cess that I think it really turned around a lot of people’s views about the small-busi­ness gov­ern­ment con­tract­ing goals. In just one year, we cre­ated $100 bil­lion for small busi­nesses that way.

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