State’s economic development model must change

Statehouse Report
August 8, 2014

By Frank Knapp Jr.
S.C. Small Business Chamber of Commerce
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AUG. 8, 2014 — Raising the per capita average income of all South Carolinians is a goal of economic development efforts. But while South Carolina has added 7.1 percent more jobs since 2009 primarily as a result of new manufacturers entering the state, our per capita income has fallen nearly 3 percent during that same period, according to the last available information from the Census American Community Survey data.

Our economic development model must change and concentrate less on big business recruitment and retention and more on small business development that can reach every community in the state. Two out of every three net new jobs are created by start-ups and small businesses under five years of age. These are the real job creators who need our attention and what they critically need is access to capital.

Our traditional mechanisms for funding entrepreneurs and small businesses, primarily banks, can’t do this alone. The former head of the Small Business Administration, Karen Mills, recently wrote that the data on the gap between small business demand for credit and banks loans “raises troubling signs that access to bank credit for small businesses was in steady decline prior to the (economic) crisis, was hit hard during the crisis, and has continued to decline in the recovery as banks focus on more profitable market segments.”

It is time to put everyone, regardless of occupation or income, into the economic development game of providing capital for our entrepreneurs and small businesses. Instead of our citizens sending all their discretionary investment dollars to Wall Street, we need to develop a culture of investing locally and provide relatively easy mechanisms for this to happen.

Currently only high-net worth individuals are legally allowed to invest directly in a business that is not registered with the Security and Exchange Commission. These “accredited investors,” who have net assets of $1 million not including personal residence or incomes of $200,000,  have two local investment mechanisms available for them — angel groups and an angel fund — and another is on the way.

South Carolina has several angel groups where participating investors actively select businesses, typically five to eight a year, in which to invest their own money.  The median angel investment per investor is $10,000, in companies seeking to raise around $500,000.  For more information about angel groups contact the South Carolina Angel Network.

Some accredited investors prefer to invest more passively or in a more diversified way.  The Palmetto Angel Fund co-invests in all the early stage businesses funded by the state’s angel groups. Its investors commit $25,000, spread over multiple years, to benefit from the due diligence expertise of the angel groups and the management expertise of the fund managers.  For more information about this Fund contact the Palmetto Angel Fund.

Unfortunately only several hundred of the over 100,000 South Carolina families who qualify as accredited investors actually invest directly in South Carolina businesses. There are three reasons for this. Potential accredited investors simply don’t know they can invest directly, don’t want to commit to a certain level of investment or don’t have an easy way to find in-state businesses looking for investors.

A new online portal is coming to address the latter two reasons. Accredited investors are being asked to privately register with this cutting edge mechanism that will resemble a shopping mall. Accredited investors will be notified by email when a business opportunity is available for them to review for either an investment or private loan.

Finally, new federal rules are being prepared to enable everyone regardless of income to invest directly in a local business. This democratization of investing, called equity crowdfunding, has the potential of unleashing a new wave of capital our entrepreneurs and small businesses need to grow our communities from the ground up.

Creating jobs, increasing per capita income and reducing “poverty areas” can be achieved.  But first we must create a culture of investing locally in our small businesses and entrepreneurs.

Knapp is the president and CEO of the South Carolina Small Business Chamber of Commerce and the recipient of the Small Business Administration’s 2014 South Carolina Small Business Financing Advocate of the Year.

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