Trendwatch: Foundations Get Serious About Backing Entrepreneurs and Businesses

Scholars like Harvard political economist Benjamin Friedman have demonstrated that economic growth drives any number of positive trends: improved human rights, better health, women's empowerment, higher education attainment, and many others.

Historically, though, explicit efforts to foster growth haven't been all that high on the agenda of a philanthropic world that cares about all the things I just mentioned. In particular, funders haven't tended to do a lot in the way of supporting entrepreneurs, whose businesses create many of the new jobs that propel growth. Meanwhile, small business has been on the decline in the U.S. for the last decade, a trend that was greatly accelerated by the Great Recession, with new business creation plunging by 30 percent in the wake of the economic crash.

Now, though, more funders are finally getting serious about fostering new businesses. A recent report from Endeavor, a nonprofit that nurtures entrepreneurship around the world, has found a rising trend in U.S. foundations getting behind entrepreneurs and small businesses. Endeavor reports that "over 100 American foundations now believe entrepreneurship is critical for the health of their communities."

We've talked about many of these foundations here at Inside Philanthropy, including Kauffman, Mizuho, Knight, and Kresge, as well as the high-profile community foundations in Boston, San Francisco, and Silicon Valley. As well, we've written about some of the new funders interested in entrepreneurship, like the Keywell Foundation, and how some niche funders—like those interested in women's empowerment—are increasingly backing new business creation. We've also covered a number of big recent gifts to universities that aim to foster entrepreneurship.

These funders are coming at business creation from a number of angles including supporting mentorship, job skills development, access to capital, and business planning skills development, among other strategies.

One notable trend spotlighted in the report is that foundations are looking beyond boosting the start-up phase of businesses and increasingly "targeting later-stage, fast-growing companies that generate greater job creation and economic outcomes."

Why are foundations finally warming up to this economic challenge? Endeavor's study identifies several reasons, some of which may surprise you. The first is to "strengthen and sustain the local philanthropic sector." Yes, as it turns out, philanthropy's keen eye for entrepreneurship may be partially driven by enlightened self-interest. One outreach director was quoted in Endeavor's report as looking at it this way: “We support entrepreneurs because they are the future philanthropist, maybe in our community, maybe in another community.”

The second reason is an obvious one: Foundations saw the suffering and mass unemployment in the wake of the recession and they did the right thing—mobilizing to back solutions. As I mentioned, many of the new jobs created in the U.S. economy are typically created by small businesses.

A related reason foundations are piling on to entrepreneurship? To empower underserved communities. Building small businesses has historically been a key way for marginalized groups without credentials or connections to get ahead. More funders understand that these days, and many small business creation programs are targeted at underserved populations.

A fourth reason: To improve the quality of life in a community and prevent "brain drain"—the sad process by which all the young talent leaves a community for better prospects elsewhere. Funders are realizing that a strong entrepreneurship ecosystem—the type of ecosystem fostered, say, by Surdna's work on local economies (which I wrote about recently)—not only attracts talented young people, but it also helps seed the establishment of businesses with local roots.

Beyond these reasons, I'd add another: Economic issues have moved to philanthropy's front burner lately, amid a loud debate about inequality and social mobility. And because foundations are creatures of capitalism, as Benjamin Soskis noted recently here, it's not surprising that many funders seek to address inequity using market tools. Meanwhile, there are now many more ideas and strategies to do this, thanks to years of patient work by creative nonprofits and funders alike. For example, the asset building movement—after many years of laboring in the trenches—has now really hit its stride. Among other things, that movement has long championed micro-lending and business creation as keys to building the intergenerational wealth that is essential to upward mobility. Lately, a lot more funders are paying attention to these ideas.

Perhaps there was a time in our country's history when people could do little more about the economy than wait for the next business to move into town or for the next boom to get underway, but that time is no more. Philanthropy is now feeling more empowered to proactively shape economic life for the better. And that's good news both for entrepreneurs and the rest us of who benefit from the prosperity they help generate.

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