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Follow the Money: How Does Baltimore Support Small Business Growth?

Sept. 28, 2017
CONTACT: Jill Rosen
Office: 443-997-9906
Cell: 443-547-8805
jrosen@jhu.edu @JHUmediareps

Baltimore, a city with clear economic assets and competitive advantages, should have a more robust financing system to cultivate a range of startups and small businesses, concludes a new report by Johns Hopkins University’s 21st Century Cities Initiative.

The report titled Financing Baltimore’s Growth: Measuring Small Companies’ Access to Capital, found that for small businesses to flourish, they will need to secure more venture capital and working capital loans.

“Given Baltimore’s competitive advantages – our strong industries, great universities, and geography – the local financing system for startups and small businesses should be much stronger,” said Mary Miller, a visiting senior fellow at 21st Century Cities and the report’s lead author. “It’s time to solve the riddle of why Baltimore punches below its weight.”

The report states that while venture capital investment in Baltimore-based companies has increased markedly over the last decade, most of it originates outside the city. The report also found that the city needs revitalized lending programs to fill gaps left by banking consolidation, a national trend that has hit Baltimore especially hard.

Without this critical capital, businesses – from Main Street shops to tech startups – might never take off or grow. Even worse, they might leave Baltimore for a place where there is more financial support, depriving the local economy of jobs and economic growth. As it is, about 30 percent of companies launched at some of the city’s incubators leave Baltimore to find initial capital, the report found.

The report outlines key recommendations for improving local financing, including:

  • better measurement and tracking of capital flows and businesses
  • more concerted efforts to match businesses with investors
  • enhancements to local lending capacity
  • expansion of the range of financial institutions in Baltimore.

To produce the first comprehensive map of Baltimore’s small business financing system, the authors studied investments to city-based companies through 40 public and private funding sources or programs from 2000 to 2016. Additionally, they interviewed more than 50 stakeholders in government, banks, investment firms, community development financial institutions, incubators, nonprofits, and small businesses.

In recent years, about $560 million per year was invested in or loaned to startups and small businesses in Baltimore, about 75 percent of which came from private sources such as banks and venture capital investors, the report found. Public sources like subsidized and guaranteed loans, state and federal equity investments, and federal research grants for new companies made up the remaining 25 percent.

The report found that equity investment in Baltimore’s startup and small business sectors has grown, particularly over the past two years when venture capital and other forms of equity investment exceeded $200 million annually compared with $50 million eight years ago.

Despite the growth, most of these investments are less than $1 million per investment round, the report found. And nearly 60 percent of venture capital investors are based outside of Baltimore and Maryland. This makes local businesses like the city’s life sciences and new tech companies highly dependent on outside capital and increases chances that they will move out of the city.

The report calls for the creation of regular events to showcase growing companies and connect them with investors. The report also recommends the establishment of a digital exchange to help businesses and investors locate each other.

“Getting the right company in front of the right investor at the right time can mean all the difference for a small business staying and growing in Baltimore versus moving to another city or shuttering its doors,” said Ben Seigel, executive director of 21st Century Cities. “We can get some quick fixes through better alignment and organization at a citywide scale.”

The report found that loans to small businesses have also grown lately. Still, they have not returned to pre-recession levels due to bank consolidation trends. This means the city’s small businesses are securing less working capital and credit to meet operating expenses and to expand.

Although there are many state and local funding programs that could potentially fill the gap, according to the report, they are fragmented, hard to navigate and do not provide much capital.

The report recommends encouraging public and private leaders to develop more lenders skilled in small business loans, and finding smarter ways to use public money for growing small businesses, including using public money as a guarantee to leverage private loans.

Another key recommendation urges use of the report’s analysis of Baltimore’s small business financing system as a starting point for regularly measuring investmentsto firms and tracking companies’ use of capitalthroughout their development. This would help identify gaps in the financial system that keep companies from growing and hiring in Baltimore.

“Baltimore has a legacy of entrepreneurship to both attract and develop some of the world’s best talent and most creative ideas,” said Lindsay Thompson, associate professor at the Carey School of Business and a 21st Century Cities steering committee member.

“However, as this report documents, systemic financing patterns in recent years have contributed to robbing Baltimore of its wealth creation potential. More importantly, the report offers much-needed suggestions for reversing this trend and creating a startup and small business support structure that would benefit all of Baltimore.”

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