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Nonprofit Quarterly: “The New Economy Initiative: What Might It Teach Philanthropy?”

By Sean Watterson
January 6, 2017

Whereas most nonprofit foundations issue grants to other nonprofits or individuals, a program run by the New Economy Initiative (NEI) and the Community Foundation for Southeast Michigan (CFSM) is taking another route in an effort to improve the economic lot of Michiganders. You can read more about the genesis of the ideas about how to revive business in Detroit here to put this effort in context.

The New Economy Initiative has a strong foundation base, including well-established national leaders in philanthropy, which suggests that this is something of a collective experiment in this type of funding.

NEIdeas is a contest offering grants to two categories of businesses in the Detroit, Hamtramck, and Highland Park areas: a $10,000 prize to 30 businesses grossing under $750,000 annually, and $100,000 to two businesses grossing between $750,000 and $5 million. Even if a business does not win, a world is opened to all applicants through other small business connections and seminars aimed to foster growth.

The idea behind NEIdeas is to encourage business-expanding ideas by making capital available to the would-be expansionists. In some cases, these businesses might have a difficult time finding access to other capital markets and end up stagnating or worse. Underlying this drive is the theory that encouraging growth will help improve the economic lot of many struggling areas. More growing businesses can mean more jobs, more jobs can lead to improved living standards, and improved living standards can lead to greater outside investment.

That this line of reasoning will lead to its desired goal is far from certain, however. Small businesses are delicate things and aren’t always run by incipient magnates. There are good reasons why the failure rate of businesses is so high. (A cursory search of the Internet shows estimates ranging between 66 percent and 94 percent.) One of the biggest is liquidity crunch; when things turn south, many businesses don’t have the cash to stay afloat. NEIdeas dances around that problem without specifically addressing it.

Will it work? The program is still early in its life, so it difficult to say. There is reason to be optimistic, though. NEIdeas awards prizes, seminars, and connections to existing businesses, not ephemera that might one day maybe open their doors. That is one enormous step in the right direction because it shows two key things. First, it shows there is at least some demand for the goods or services the business offers. It’s not as though someone is asking for funding to sell sand on a beach. Second, it shows that the applicants have some, even if minor, business acumen. Whether in business for a day or a decade, opening up shop takes a lot.

In other words, this program seems to have dispensed with the sometimes-cultish philanthropic adoration of innovation as a measure of entrepreneurship. This in and of itself is a step in the right direction, one more respectful of the role of small business in healthy local communities.

But, still, it is an experiment. Besides the delicate nature of small businesses, a lot will need to go right for this project to be the spark the region needs. Enough of these businesses will need to remain viable over the coming years, which will almost assuredly involve them catching a few breaks, and while these prizes give these businesses the cash they need, they will not safeguard against a downturn nor will they guarantee that investment in the company will bear fruit. There is also no guarantee that the money awarded will offset other earnings that will be saved for a rainy day. Imagine a small company has $10,000 in cash and plans to buy new machines. Then, that same company wins $10,000 to buy those new machines. If that original $10,000 does not remain in savings and is instead used to double down on new machines, it has done nothing to alleviate the risk of a future cash crunch.

With all of that taken into account, it does seem that encouraging economic growth from within struggling areas is a strong plan of action when it comes to revitalization. At the very least, it is an idea worth exploring and goes a long way for 32 businesses each year, whether they grow or fold the next. This is definitely an idea to watch.

READ THE FULL PIECE: Nonprofit Quarterly