Cate Costa is an 1871 mentor and entrepreneurship development professional with more than ten years of experience as an entrepreneur herself and coaching founders in a variety of industries. In this guest blog, Costa takes a hard look at changes that need to be made among entrepreneurship support organizations in order to better and more earnestly support minority and female founders.
Guest Author: Cate Costa, 1871 Mentor
One of the primary tenets of effective business management is the necessity of measuring performance over time and adjusting one’s strategy based on the data you gather. It should give us pause then that most entrepreneurship support organizations (ESOs), especially those working specifically with minority and female entrepreneurs, are either unwilling or unable to do so.
According to work out of MIT in 2008 and data collected since, minority-owned business performance has made no gains in catching up to the performance of white-owned businesses in nearly three decades. If a for-profit company failed to deliver on its promises to customers, it would go out of business long before the thirty-year mark, yet entrepreneurship support providers continue to offer (and their funders continue to financially support) the same old programming, despite knowing that it’s not going to move the needle.
As data science continues to expand its role in all aspects of our businesses and our lives, this is simply unsustainable and the future of entrepreneurship support will necessarily look very different from what it looks like today.
But what, specifically, will change?
We’ll get to that but first, let me tell you a story about Melody.
Melody is the owner of a small construction company that won its largest contract to date with a property developer. The ESOs that Melody works with immediately count and publicize her success of winning the contract, logging the top line dollar amount in their records. However, six months later:
- Melody realized that her costs were nearly as much as her revenue on the project and, on top of that, there was a delay in payment from the developer;
- she didn’t have enough cash reserves to cover the delay so she was unable to pay the company’s bills;
- the company couldn’t qualify for a bank loan so Melody turned to a micro-lender to cover payroll for the already completed project (this is recorded as another success for the ESOs and for the Community Development Financing Institution (CDFI));
- there was another delay in payment so the micro-loan funds are gone and now Melody has that debt and her other liabilities to deal with;
- there is no cash to buy the materials for the next job so the start is delayed and the contract is dropped;
- even when the payment finally comes through, the margins are so slim on it that it’s not enough to save the sinking ship and the company is forced to close its doors while Melody is still responsible for the micro-loan, which likely has an interest rate of around 16%.
While that example sounds extreme, and it is, it’s also not terribly uncommon. Yet if you were to examine whether the ESOs were doing their jobs based on the success metrics set out, it would appear as though the ESOs had been tremendously effective helping this small business win a contract and secure financing. Given that the measurements used to evaluate ESO and CDFI performance could present what happened to Melody as a success, there are clearly issues with those measurements.
Therefore, while I expect to see a number of adjustments to the overall funding and support model, the single biggest change to the system will be a change in key performance indicators (KPIs). The key to achieving real impact is measuring success by metrics that actually create that impact, not vanity metrics that make for good press releases.
Firstly, the metrics of success for entrepreneurship support will need to change so that they match the metrics of success for the highest-performing businesses. At best, the current models measure metrics that may be correlated with success but do not provide a full picture of the company’s health or growth (like contracts won); at worst, they seek to maximize metrics that successful companies typically seek to minimize (like number of full-time employees).
Secondly, incentive structures for the entrepreneurship support providers must be adjusted so that what is good for the service provider is also good for the entrepreneur served. Without proper KPIs in place, you cannot have effective incentive alignment and without effective incentive alignment, it’s impossible for a provider to give objective advice. This problem is often exacerbated by the fact that most service providers do not have adequate levels of training or experience to understand the conflicts between their incentive structures and effective business advising.
Thirdly, effective KPI selection and corresponding improvements to data collection methodologies will help to eliminate issues around comparing relative performance of organizations, duplicative counting of data, and vague or overly generous client counts.
Let’s work together to make sure that the future of entrepreneurship support does not allow service providers to be rewarded for creating stories like Melody’s.
You can find a more complete examination of how entrepreneurship support should change for the future in my white paper Re-Examining Entrepreneurship Support Structures to Improve Outcomes for Under-Served Entrepreneurs: Why Current Models Fall Short & How We Can Fix Them.
The opinions expressed here by 1871 guest writers are their own, not those of 1871.