November 28, 2018; Twin Cities Business
In an opinion piece posted on the Twin Cities Business website, Sarah Lutman reflects on the topics discussed at a recent mini-conference held in St. Paul. Entitled, “Inclusive Economic Prosperity in the Midwest,” and sponsored by the Council on Foundations, the mini-conference covered how philanthropies—foundations in particular—are increasingly engaged in investing in private businesses as a way to accelerate economic development and alleviate poverty.
The basic premise of this kind of charitable contribution is that by investing in business development in economically challenged neighborhoods, foundations can help entrepreneurs establish or grow business ventures, which will build wealth and provide jobs within that neighborhood. In so doing, the foundation fulfills its goal of addressing a significant need in a distressed community.
Examples from the mini-conference include the Edward Lowe Foundation’s partnership with the City of St. Paul on an “economic gardening” project, which brings money, expertise, and support for businesses to grow within their community rather than relocate or use other strategies. Another example is Wells Fargo Bank, one of the lead sponsors of this mini-conference, and its Diverse Community Capital program. The bank has committed $100 million to local community development financial institutions to work with racially diverse small business owners.
The opinion piece concludes by describing a panel discussion of entrepreneurs of color who each described their challenges in establishing mission-based businesses. Lutman, a St. Paul-based consultant, ends by saying, “When the businesses founded by and serving people of color have the resources and connections to grow, we all benefit.”
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Moving beyond the self-congratulatory pats on the back that inevitably come with this kind of event, as Lutman points out, one can question whether it’s reasonable for a foundation even to be engaged in this kind of activity. The staff often do not have expertise in business innovation, startup investing, or other critical knowledge areas. Moreover, she wonders, is this work even charitable in nature? Private philanthropy can pay significant penalties if it gives to efforts that lie outside of the IRS definition of “charitable purposes.”
In an article on regional economic development organizations for the Brooklyn Law Review, Matthew Rossman explains that the work can be defined as charitable if the for-profit corporation receiving the investment lies inside the boundaries of an economically distressed neighborhood. In that case, the primary beneficiary of the results of the investment is the economically distressed neighborhood. However, if the corporation is located outside that type of neighborhood, even if it hires people from the neighborhood, or if it works on a regional level, then the argument could be that the private owner is the primary beneficiary of the investment and so might not be considered charitable.
One question Lutman doesn’t bring up is if this is the most effective way foundations can invest to ameliorate poverty. Statistics demonstrate that more than 50 percent of startup businesses fail within the first four years of their existence. So, a foundation gets excited about having started three businesses, but what should the reaction be four years later when only one is still active? How do we measure the success and impact of that investment?
What about alternative investments? NPQ has been covering the growing movement around worker cooperatives as a way of creating “a more democratic and a greater equitable distribution of economic resources.” However, if foundations considered investing in those trickle-up ideas, it would mean changing our economic model, supporting a system that is more equitable by its very nature than standard capitalism is considered to be. Would the Ford Foundation, which got its money from that very system, consider an alternative? Maybe.—Rob Meiksins