Comprehensive Study Identifies Gaps in Columbus’ Small Business Ecosystem

Work is coming to a close on phase one of the City of Columbus Small Business Ecosystem Assessment facilitated through Next Street and Development Strategies.

The comprehensive assessment analyzes the city’s small business landscape to identify strengths, opportunities and gaps. The insights, developed through on-the-ground perspectives of stakeholders in the community, as well as benchmarking against peer cities, will help the city define its role in the small business ecosystem. The findings will be used to shape a multi-year small business agenda with specific strategies and recommendations.

The on-the-ground team involved in the assessment included individuals from small business leadership and entrepreneurial support organizations, to nonprofits, capital providers and business associations. It’s a group Henry Golatt, Program Development Coordinator for the City of Columbus’ Office of Small Business and Entrepreneur Development, says they will look to expand to bring more voices to the table in the next steps of the process.

The assessment covers basic factors like the demographics of Columbus’ small business owners, industries primed for growth and office and commercial real estate. A large portion of the project also analyzes the capital situation in Columbus, from types of lenders to the equity in lending.

Major Ecosystem Gaps

To paint in broad strokes, two major gaps were found through the assessment.

First, Columbus entrepreneurs and small business owners face a gap in the collective knowledge of resources and programs available to them. There are also challenges in the ecosystem communicating across itself. It’s a problem that Golatt has identified as one of his main priorities in his role with the city.

When it comes to capital, there is a major shortage of lenders focused on microloans and smaller dollar loans. Also, while Columbus is seeing some traction with traditional bank lending, it is deployed inequitably.

To provide more context to each broad finding, we’ll summarize some of the key findings and contextualize what they mean.

Overview of Columbus’ Small Business Ecosystem

Key Demographic Findings

  • 98% of Columbus’ business establishments are operations with fewer than 50 employers and non-employer firms
  • 21% of Columbus’ small businesses have employees
  • Small businesses with employees have grown 0.9% in five years
  • Non-employer firms have grown 1.9% in five years
  • A large disparity exists between the diversity of the population and the percentage of Black- and Latinx-owned employer firms
  • 49% of business owners in Columbus are over the age of 55

What Does it mean?

While Columbus’ small business scene is growing, it is not doing so equitably across demographics of the city’s population. Black and Latinx households have a lower median income than White households. The majority of businesses have White owners, with only 4% of firms with employees owned by Black entrepreneurs, and 3% by Latinx entrepreneurs. To keep the ecosystem growing, non-employers need to graduate to employers, while new non-employer firms emerge. An aging entrepreneurial population also represents a unique need for succession planning.

Key Industry Findings

One of the major strengths of Columbus’ small business ecosystem is its diversity of industry. No one industry accounts for more than 14 % of total establishments. Healthcare, retail trade and professional services account for the three largest industry segments. However, diversity and inclusion varies greatly by sector.

Based on this assessment, seven priority industry clusters were identified for growth including:

  • Construction
  • Food & Beverage Retail
  • Health Care Services
  • Local Business Services
  • Personal Services
  • Distribution & E-Commerce
  • IT & Digital

What does it mean?

Each industry presents its unique challenges that are specific to Columbus, like infrastructure and affordability, but also fall in line with national trends, like the shortage of workers in the construction trades or trucking. However, a wide variety of opportunities exist across different business sectors.

Key Neighborhood Findings

  • Columbus ranks 8th among large metropolitan areas for overall income segregation
  • Areas with higher income levels and home values generally have more small businesses
  • Land use impacts small business density, with commercial land primarily Downtown and in northern portions of Franklin county, and industrial land use concentrated in the southern and western portions of the county
  • There is a severe lack of Class A office space in underserved neighborhoods
  • There is a large supply of vacant retail space across neighborhoods

What does it mean?

Factors compound that could account for the disparity in minority-owned businesses. Black and Latinx individuals report a lower median income, with income impacting the clustering of small businesses.

The lack of appropriate space also limits the ability to expand the small business ecosystem. Neighborhoods like the Near East Side and North Linden have no Class A office space currently available, while the Hilltop and South Linden have no supply of Class A space. Class A space is generally an indicator for relative market competitiveness for business growth, and no available inventory limits possible growth in knowledge-based industries. Class A office space is also expensive to build. Half of the city’s total Class A space is clustered Downtown, with only 7.7% available.

Neighborhoods from Downtown to Linden to the South Side have thousands of feet of vacant retail space. The majority of vacant retail space is clustered in the Hilltop, accounting for 9% of the city’s total, and the Near South Side, 4% of the city’s total. While much of the square footage is obsolete, it represents an opportunity for redevelopment.

Overview of Columbus’ Capital Ecosystem

The capital ecosystem analysis examined three facets within the capital landscape: lending, equity and capital demand.

Key Small Business Lending Takeaways

The study examined the lender landscape across three categories: bank lending, SBA lending and CDFI (community development financial institutions) lending. Across the landscape, outside of ECDI, there exists a large gap for smaller dollar loans for higher-risk Main Street borrowers. CDFIs and credit unions typically offer more flexibility and lower dollar loans than traditional banks, but don’t offer the microloans many businesses need.

Bank Lending

  • Columbus has consistently ranked last in its peer group in terms of small business bank lending per small business
  • Columbus bank lending has seen strong and consistent growth of 3% over the past five years leading its peers in terms of sustainability of growth
  • A majority of bank loans are deployed to middle and upper income census tracts
  • 41% of the Columbus population lives in low and moderate income tracts, but this population receives only 27% of bank loans

SBA Lending

  • Columbus outperforms most peers, ranking second in overall SBA lending per small business
  • Columbus has seen consistent growth in SBA lending over the last five years

CDFI Lending

  • CDFI lending in Columbus falls in line with national trends, but lags many peer cities in scale
  • Not all CDFIs are not required to report their data making exact measures challenging

What does it mean?

While Columbus is seeing steady growth in small business lending, gaps exist in the ecosystem and dollars are typically delivered inequitably. CDFI lending represents a major opportunity for growth. As a private sector financial institutions, CDFIs historically work with underserved markets and populations – mirroring the major need in the Columbus ecosystem.

Key Equity Funding Takeaways

  • The equity capital market for high-growth startups in Columbus is strong compared to the state, but lags behind out-of-state peers
  • Equity deals are growing is size indicating success in the high-growth space

What does it mean?

Equity capital is typically deployed to certain kinds of high-growth or tech-based businesses. Equity investments require a certain return which is only achievable for select industries and types of businesses – it isn’t the solution to the gap for more Main Street businesses in need of funding. Columbus is doing well when it comes to high-growth businesses, ranking above the national average in growth of scaleups – companies that have grown to 50+ employees.

Key Capital Demand Takeaways

  • Columbus has an estimated debt capital gap of $6.9 billion: a demand of $7.2 billion across employer and non-employer firms is met by a $362 million supply
  • The unmet capital gap is up 2% from 2012

What does it mean?

It’s a simple lesson of supply and demand: the want for capital far exceeds the current available supply. This can prompt small business owners to look for funding from other sources. Some will seek the support of their friends, family and network, however many underserved business owners don’t have these robust networks to tap into for capital. There is also a rise in online and predatory lending practices that can saddle business owners with rates that will ultimately constrain their growth or sink their business.

Ecosystem Gaps Identified Through Business Owner Perspectives

Numbers tell part of the story, but what do Columbus’ business owners actually see, hear and experience in the ecosystem? A number of focus groups were conducted to capture on-the-ground perspectives. There were several key takeaways that will help to shape the next phase of the plan focused on how to actually close the gaps in the ecosystem.

Major gaps to be addressed include:

  • The limited awareness around existing resources for small business owners
  • Resources and support for post-launch businesses, especially those looking to hire their first employee(s) and scale
  • Attention and resources are directed at high-growth or tech-centered businesses, with a lack of funding and support for Main Street businesses
  • Underserved business owners face a multitude of challenges including disproportionate access to capital, neighborhood stigma and gentrification
  • Businesses in Downtown, Short North and the surrounding neighborhoods are facing challenges with affordability and parking

What happens now?

As the city looks to better define its role in the small business ecosystem, planning begins on a multi-year strategy of specific recommendations and implementation. The plan will include working with a variety of potential partners including: entrepreneur support organizations (ESOs), capital providers, chambers of commerce, and individuals and groups involved in business & industry, academia / talent pipeline, and philanthropy.

ADDITIONAL READING: Learn more about how the city is connecting with small businesses through the program coordinator position held by Henry Golatt.