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Why Ecosystems Matter: Lessons from Cincinnati

Below is the Nowak Metro Finance Lab Newsletter shared biweekly by Bruce Katz.  

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In my first newsletter this year, The Year of Advancing Community Wealth, I wrote the following,

“…we need to codify the new governance features and innovative practices used by leading urban institutions and intermediaries so we can speed replication horizontally across cities.”

I just returned from Cincinnati, where Andrew Petrisin and I met extensively with the Cincinnati Minority Business Accelerator (“MBA”) and The Port — each a robust local institution helping to invent new practices of community wealth. Andrew is an Associate Consultant at WSP and, like me, has been working with Accelerator for America on a range of infrastructure and institutional issues.

We traveled to Cincinnati to learn about more about how each of these successful entities do their business, so we can speed replication and adaptation to other cities. What we found was an ecosystem of corporate, philanthropic and public actors that provide a strong foundation for the success of the MBA and The Port. This insight about ecosystems helps explain why Cincinnati has emerged as a city with multiple institutional models; readers will recall my newsletter on the Cincinnati Center City Development Corporation (“3CDC”) several months ago.

Within this Cincinnati ecosystem, let us go deeper into the Cincinnati Minority Business Accelerator; a subsequent newsletter will focus on The Port.

The Cincinnati Minority Business Accelerator, long backed by major corporations, has a portfolio of firms that are owned by African Americans and Latinos, with annual revenues of $1 million or more and with the potential for accelerated growth within two to five years. While the MBA is platform agnostic, 42 firms with thousands of workers in the construction, facilities management, packaging, and consulting industries are currently in the MBA’s portfolio.

The MBA is currently pursuing a four-pronged strategy, armed with a new Kauffman Foundation grant.

First, it continues to help minority owned businesses of scale grow, its bread- and-butter.

Second, it is building a pipeline of future minority owned businesses and seeks to identify 50 growing companies over the next five years as part of its portfolio.

Third, it is working with REDI Cincinnati, the lead economic development agency for the region, to bring more minority owned firms into the manufacturing, aerospace, and chemicals sectors. It has about 200 prospects. The MBA, in short, is focused on growing minority owned businesses of scale in leading advanced sectors.

Finally, the MBA is seeking to grow minority owned businesses by acquiring other businesses with no succession plans. This is a major opportunity that is hidden in plain sight and deserves further explication. Across the country, small businesses face a succession crisis. In the 2015 Financial Planning Association/CNBC Business Owner Succession Planning Survey, 78% of respondents say they plan to sell their businesses to fund their retirement. However, fewer than 30% have a written succession plan. In simple terms, “The boss is looking to retire, and the kids don’t want to take over.”

This has particular implications in the manufacturing industry, where there are numerous family-owned businesses that have been passed down from generation to generation. Without succession plans, there is a threat that companies might close or be purchased by private equity firms that move them out of the region or pick them apart. The loss of companies—to state GDP, to worker incomes, to manufacturing supply chains—can make a big impact on local and state economies.

As Andrew and I talked with Darrin Redus, the Minority Business Accelerator’s CEO, and his incredible team, it became apparent that the success of the organization has been fueled by a broader ecosystem. The MBA sits within the Cincinnati Regional Chamber, rather than exist as a separate entity. As such, it has relationships with major corporations and anchor institutions that procure large amounts of goods and services. In fact, the MBA is actively looking to “bend the spend” of funding streams from government, medical, and education spending to support minority owned business.

The MBA also benefits from decades of supplier diversity efforts at Proctor & Gamble and Kroger. These efforts have yielded a talent pool of engineers and business professionals who naturally start their own businesses and/or mentor other entrepreneurs as they create and implement their business plans. It is simply impossible to imagine the MBA’s success without recognizing the strong platform on which it was built. This is a strong lesson: merely adapting the MBA model to other cities will not work unless the broader network of companies and anchor institutions commit to the expansion of businesses owned by people of color.

Cincinnati, in short, has created an ecosystem for nurturing, growing, and capitalizing minority-owned businesses. Most cities have thick and textured ecosystems for supporting tech startups and scale-ups: universities, incubators, accelerators, angel and seed funds, mentor groups, etc. The ecosystem for growing Black- or Latino-owned businesses is less developed and—crucially—less funded, consisting mostly of government-focused MWBE programs and small business debt vehicles. There is a stark contrast between the robustness of the broader innovation ecosystem in many cities (well-capitalized, highly networked, a blend of public/private/civic, etc.) and the meager system accessible to minority entrepreneurs (barely capitalized, overly governmental, non-profit led, etc.).

Bucking convention, Darrin and his team are leading the country in developing a more robust system accessible to minority businesses. The MBA is looking to invent and deploy new financial products that support growing companies with equity investments rather than traditional debt, and they are smartly looking to raise their own Fund to deploy these new equity products. They are working with Next Street and others to develop a playbook for these kinds of intermediaries, which business chambers around the country can adopt and adapt.

This is New Localism personified. A proven model emerges in one city and then gets codified for replication and adaptation elsewhere.

Cincinnati’s success, of course, prepares it for major national trends including rapid demographic transition, growing spatial disparity and income inequality, and a changing climate impacting institutional investors.

Let us take one of these trends—a nation well on its way to becoming majority minority. The minority share of the population greatly exceeds the share of businesses owned by minorities. In addition, minority-owned businesses tend to be small in size and primarily situated within non-advanced sectors of the economy with lower pay and benefits.

As demographic transition takes hold, a few cities will become magnets for the growing pool of minority talent – workers, entrepreneurs, investors, professionals, developers, and community practitioners. Cincinnati is skating to where the puck will be and will reap the benefits for decades through the work of the MBA.

In The Year of Advancing Community Wealth, I laid out the goal of “building a strong urban infrastructure of institutions and intermediaries”. Cincinnati’s success forces us to think about not only replicating, adapting, and scaling individual institutional models, but also how to replicate, adapt, and scale the relationships between them and the ecosystems that support them.

Cincinnati has been building something special over the past several decades. Its time to pay attention.