Startup Policy Update

June 20, 2024

For anyone who is focused on the role entrepreneurship plays in helping people and communities transition from poverty to wealth, there are three issues you can advocate for right now. The first two are current legislative actions: the Community Development Investment Tax Credit Act (CDITCA), and the Expanding American Entrepreneurship Act (EAEA). If you would like to lend your endorsement of these two bills, the Center for American Entrepreneurship and Engine are partnering to gather endorsements and present them to our legislators. The deadline to endorse is TODAY at 5pm ET, so act now while you can by filling out this form. The third is a march organized by the Poor People’s Campaign, A National Call for Moral Revival, taking place on June 29 in Washington, DC. You can learn more and RSVP at this link.

If you’ve followed our work at Make Startups, you know our efforts to highlight and address the bias in America that favors established businesses over entrepreneurs. We developed the entrepreneurial poverty calculator to highlight the number of founders facing poverty in every county in America who qualify for workforce development assistance. We also piloted the largest workforce training program for entrepreneurs and are working to expand it to reach 25% of the nation by the end of this year. So, why should you support these three initiatives?

Much of the focus on the CDITCA and EAEA has rightly been on their impact on improving access to capital among minority and women founders. However, we'll delve deeper into the systemic challenges they address. In Rev. William Barber II’s new book, “White Poverty, How Exposing Myths About Race and Class Can Reconstruct American Democracy,” he highlights that approximately 40% of Americans can be classified as poor and low-income, including 26 million Black adults and 66 million White adults.

Typically, these issues are framed as “workers vs. owners” or “socialism vs. capitalism”. However, our existing policies have created an environment that determines who can invest and who cannot, allowing only a select privileged group to participate in the wealth creation that capitalism enables.

Our policies determine who can benefit from capitalism and who cannot.

How is this manifested, and how would these new policies address that issue?

Community Development Investment Tax Credit Act (CDITCA)

While the SBA has done an incredible job supporting small businesses through its lending programs, most SBA loans require a business to have been in operation for two years, excluding early-stage entrepreneurs. This makes launching a business primarily available to those with personal wealth, wealthy friends and family, or personal assets like a home that can be leveraged for a loan. SBIR and STTR grant programs focus on disruptive and scalable technology-based businesses that typically fall outside the needs of disadvantaged communities.

CDFIs are specialized financial entities providing credit and financial services to underserved markets and populations. Certified by the U.S. Department of the Treasury's CDFI Fund, they operate with a mission of community development and accountability to their target market. CDFIs include community development banks, credit unions, loan funds, and venture capital funds. They promote economic revitalization through tailored financial solutions.

The CDITCA aims to stimulate investment in CDFIs by offering tax credits to private sector investors. These investments support underserved communities, enhancing the financial capacity of CDFIs to foster economic growth and provide better access to credit for small and disadvantaged businesses.

Expanding American Entrepreneurship Act (EAEA)

The EAEA addresses venture capital markets. Most funds operate on a "2 and 20" model, which consists of a 2% management fee to cover operational costs and a 20% performance fee on profits. However, the current cap for angel funds is $10 million, with a limit of 100 investors. This makes it challenging to operate funds effectively in many communities.

Example:

Currently, for angel funds, there is a cap of $10m that can be raised, meaning that in the majority of communities in America, there is a $200k cap on operating expenses for a fund that is launching to support early-stage businesses. While that sounds like plenty, once legal and accounting fees, and office space are factored, it provides little margin to operate the fund, provide ample due diligence, and raise a new fund each year.

Additionally, the current rules limit the number of investors in these funds to 100 individuals. In small and mid-size communities, not to mention communities with high poverty rates, finding 100 individuals willing to write a $100K check is an overwhelming challenge.

The EAEA would raise the cap on funds from $10 million to $50 million and double the number of permitted investors from 250 to 500. These changes would make it easier for new fund managers to emerge by increasing allowable fund sizes and investor numbers, thereby lowering the required investment per person. This would make early-stage investment more broadly available.