Opinion
Performing Philanthropy

Economic Development as a Charitable Activity

Foundations are getting into the business of business, which creates wealth and jobs for low-income communities.

Economic Development as a Charitable Activity

A few months ago, foundations, policymakers, and practitioners gathered in St. Paul to talk about how our region can do more to help foster wealth generation, particularly for women- and minority-led business ventures. The mini-conference, “Inclusive Economic Prosperity in the Midwest,” sponsored by the Council on Foundations, presented both national experts in the field and local programs and businesses working to accelerate economic development among start-ups and companies poised to grow. In communities of color and for women-owned businesses, data show insufficient access to the capital, connections, training, and mentoring needed to prosper.

It’s reasonable to ask whether foundations should have a stake in the economic development ecosystem. Business innovation, start-up investing, and mentoring are not among the typical core knowledge areas of foundation staff. It’s useful to ask whether promoting new business, jobs, or economic growth is charitable in nature. Typically, foundations support charities that have 501(c)(3) tax-exempt status. They are generally engaged in educational, religious, scientific, literary, or artistic endeavors or are working to alleviate poverty. Private philanthropy can pay severe penalties if it funds entities that fall outside IRS-defined charitable purposes, from sanctions to payment of unrelated business income tax, or even to losing their own tax exemption.

However, when philanthropy targets business development programming within economically weak neighborhoods and communities, economic development can be considered legitimately charitable under IRS rulings. More foundations are adopting an economic development approach to ameliorating poverty.

Foundations are asking what role they can play to develop diverse sources of community capital, empower emerging business leaders, promote talent development pipelines, and make connections and collaborations more intentional to foster business growth.

Conference slides are accessible online (https://bit.ly/2PzxLGV) and include reporting on factors affecting new business growth. For example, the Brookings Institution’s Metropolitan Policy Program shows that:

  • There is a 30-year decline in the annual rate of start-ups in the U.S., and closures are outpacing start-ups annually.
  • The U.S. cannot sustain its economic competitiveness with so little participation in business growth by people of color.
  • Minority entrepreneurs consistently cite core problems in growing their ventures, including lack of access to capital and funding, lack of mentorship, lack of representation, challenges in developing networks, and implicit bias in the business world.

These challenges are not substantially different from ones facing nonprofits that are formed for, by, and serving people of color—challenges that foundations are working to address. As these grantmakers identify barriers to alleviating poverty, especially where poverty is concentrated, they increasingly see economic inclusion as a key driver of change.

What are foundations up to? Several grantmakers addressed the meeting to share ideas and programs. The City of Saint Paul and the Edward Lowe Foundation are collaborating on the Economic Gardening Project, which brings together a cohort of small business owners to provide “strategic research, facilitated CEO discussions, and a team of specialists in their respective fields” to help take their businesses to the next level. “Economic gardening” is defined as helping businesses within a community “grow from within,” rather than growth from business relocation or other strategies.

The McKnight Foundation presented information about MSPWin, the regional Workforce Innovation Network of 13 grantmakers committed to building more durable and better-aligned employment pipelines in the greater Twin Cities metropolitan region. Its mission is increasing worker access to jobs with family-sustaining wages. MSPWin helps coordinate action across the metro to expand career pathway programs, engage employers in workforce development, and create standardized outcome reporting and evaluation to learn what is working.

Wells Fargo Bank offered perspectives from its Diverse Community Capital program, through which the bank has committed $100 million to local Community Development Financial Institutions (CDFIs) to provide capacity building, activator grants, and social capital development (such as mentorship and online learning programs) targeting racially diverse small business owners.

The conference also included a conversation among three entrepreneurs and Chris Farrell of Marketplace, public radio’s daily business program. Each described her pathway to starting her business and the obstacles she faced when raising money to grow. “Each of these businesses has a strong social mission,” Farrell says.

Asiya Sport makes and sells “modest activewear” so Muslim women can participate in sports and other physical activities. Chelles’ Kitchen, a caterer that offers soul food, wants to boost the African-American community’s presence in the local food ecosystem. Contreras & Metelska LLC is a growing law firm that represents and advocates for immigrants.

These engaged entrepreneurs provide the best evidence of why philanthropy is getting more involved in building businesses. When the businesses founded by and serving people of color have the resources and connections to grow, we all benefit.

Sarah Lutman is a St. Paul-based independent consultant and writer for clients in the cultural, media, and philanthropic sectors.

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