Entrepreneurship as a Component of National Power

Entrepreneurship as a Component of National Power

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Maria Contreras-Sweet discusses best practices for fostering entrepreneurship in the United States and its influence on U.S. global competitiveness.

KHAISHGI: My name is Mohammed Khaishgi, and I’ll be moderating our event on entrepreneurship as a component of national power.

The U.S., of course, is known globally as a beacon of entrepreneurship, and we have been able to attract some of the best minds from around the world in hubs such as Silicon Valley in the pursuit of entrepreneurship. Our small and medium-size enterprises make up about a third of our national exports. So I think it would be fair to say that entrepreneurship is an important tool in our global leadership.

So for today’s session we have—there’s no one better placed to shed light on this than Maria Contreras-Sweet, who is the administrator of the SBA, the Small Business Administration, which is the government agency tasked with supporting entrepreneurs and small businesses.

The SBA mobilized in excess of $20 billion just this past year in supporting small businesses and currently supports, as part of its portfolio, tens of thousands of small and medium-sized companies. So I think that in terms of reach, there is—I’m hard-pressed to think of an institution that has a broader remit and reach with relevance to the subject that we have.

Maria was nominated by President Obama to her current position in April of 2014. Prior to her current position, she has had a fairly diverse mix of government, corporate sector, and entrepreneurial roles. Most recently she founded a—and this is prior to the SBA—she founded a community bank in downtown L.A. that supports SMEs and entrepreneurial ventures. She has also had a distinguished government career in California. And she was the longest-serving secretary of business transportation and housing in the state’s history. And then, finally, she was a senior executive with Westinghouse in their 7-Up and RC bottling company.

Maria is also a first-generation immigrant, like myself, and hence she brings a broad-based perspective that’s particularly relevant to today’s discussion.

We’re honored to have Maria join us and share her thoughts. The format for today’s discussion is that during the first 20 minutes or so I will engage Maria in questions on today’s subject, and then after that we’ll open it up to our distinguished panel.

We—as a reminder, today’s session is on the record and is being live-streamed on CFR.org. When we come—there are some rules of the house in terms of how we ask questions. I will come to that when we come to the audience participation section.

So to start things off, Maria, I’ll turn to yourself. Welcome to CFR. Maybe it might be relevant—I’m sure many of our members—and I know that we have a distinguished audience here that would be intimately familiar with the work of the SBA, but perhaps it might be relevant for those that are less familiar if you could shed some light on the SBA, the work it does, and also perhaps some of the connections that it has with international competitiveness and just the general international arena.

CONTRERAS-SWEET: Well, thank you for that, Mohammed.

Let me just back up for a minute and thank you all for coming out today, particularly on a rainy day. It’s so nice that you would come out and indulge us with your good thinking. I was quite impressed with the attendance credentials of the group here, and so I want to thank you for that.

What I’m really looking forward to is not just having a dialogue but more of a listening session. I want to learn from you. I want to understand what you’re thinking, what you think the impediments are, what you think the proper role of government is in all of this work.

At the SBA, we’re delighted to have the seat at Cabinet around entrepreneurship, around small business. It’s a pleasure to sit at the table where we can boast 68 months of consecutive job growth. But it’s an absolute pleasure to be saying, but Mr. President, that job growth is coming—the majority of it is coming from small businesses today.

And so I’m proud of the work that we’re doing. We’ve hit record levels on all fronts. And so I’m really proud of the team. Some of them are represented here around the table.

Just to frame it, we very simply call our organization Three Cs. For those of you who are not familiar with the SBA, we provide counseling. We have one of the best networks in the world around counseling networks. Particularly for export purposes, we have what we call USEACs, United States Export Assistance Centers, where one can go in and learn about trade financing and what countries have what scheme, and we help people navigate.

We have a global network that we’re expanding with the State Department that provides counseling, matchmaking. I was recently in El Salvador and was able to see some women there connecting with women here and already doing business together.

We also have around our programs—you may have heard we have some people have a wealthy uncle that goes into a bank to provide a guarantee when you’re about to be turned down. At SBA we serve as Uncle Sam, and so we go in to serve as the guarantor when you walk into a lending institution on a marginal loan.

I’m particularly proud of our export product, because while we have varying levels of guarantees—50 percent on smaller loans, 85 percent on some—our export loans are guaranteed up to 90 percent. So if there is any reluctance on a bank’s part, your faithful U.S. government stands in to support 90 percent of that loan in case of a default. So I think that’s really strong support.

And the third is contracting. The U.S. government has asked the SBA, through our mandate, to direct 23 percent of the federal spend to small businesses. And so, in that regard, we’re at military installations. We are everywhere where procurement is taking place to make sure that that’s happening.

I’m proud to report that there are two we hit historic levels. We actually attained a 24.99 percent on contracts with small businesses. So we now say that the 23 percent is not a goal. It’s the floor. And we’re working—we’ll continue to work in that regard.

With respect to our relationships in the international community, what we’ve been wanting to do is understand whether any trade agreement is in effect or not. We feel an obligation at the SBA to recognize the globalization of the marketplace. So it’s inevitable. Whenever small business lights up their website, they are engaged in international commerce. So what’s the proper role of SBA and USG in general? And that’s what our questions have been about.

We’re pleased that so many roundtables around the country have given us advice and empowered our voice so that we could have the first-ever SME chapter in a trade agreement. We’re very proud of that. And we think that that sets a standard. So my hope would be now that, going forward, there would be no agreement—(audio break)—particular region, and also those are fueling our thought and our future strategies.

Let me just conclude, because I want to continue this conversation, that in my view I think it takes a—(audio break)—that kind of courage, that kind of boldness. And the U.S. is very good at fostering that. But we also need to make sure that investors continue to be present, deep, and broad as we go into international markets, that they will be there for those investments.

And third, and one of the reasons I’m here today is to understand the institutions that we need to support them. In many instances it’ll be about get out of the way. In some instances it’ll be about how do we provide the right support for these nascent entrepreneurs. And so that’s what we’re here to do is to learn, to have a listening session, and to understand what you’re hearing and how we implement what we hope will be the TPP agreement very soon.

Thank you.

KHAISHGI: Thank you, Maria.

I’ll start off by perhaps asking a couple of questions. Your examples of Qualcomm and Tesla are particularly relevant. And I guess, within the SME industry, you have a distinction between traditional SMEs, so SMEs that have been traditionally small and perhaps will remain small in terms of their growth trajectory, and then sort of the higher-growth entrepreneurial ventures, particularly in the technology industry.

The question that I have with respect to the SBA was how is—how does the SBA stay relevant to the latter category, to the second category, especially given sort of the availability of other forms of financing in a vibrant venture-capital industry? So how would you define your role? And within that segment, given that that segment is often held up as a best practice of U.S. leadership, sort of in the international arena.

CONTRERAS-SWEET: Well, thank you.

Again, I think it’s important for us to understand the geopolitical activity in each country so that we can help small businesses navigate safely, to understand what their governance models are. And that’s part of the work that we’re undertaking.

The second, again, I think investors are key. And so what SBA is trying to understand, working with our partners—Mary Jo White at the SEC, working with Richard Cordray at the CFPB, Tom Curry at OCC and Marty, of course, too, probably at the FDIC—what we’re trying to understand is what is the proper role of the alternative finance channel in all of this?

We go in and we guarantee. For those who have recourse, we have collateral. We can go in and provide a conventional loan—conventional under SBA terms. But there are some instances where we cannot be. And we also don’t want to compete with the private capital markets.

And so what we’re trying to understand is how we can promote safe navigation through the alternative finance channel. So we’ve been working, for example, with institutions like the Pew to build what we call a bill of rights, a bill of protection—(audio break)—healthy. So we need to have a growing population. We need to make sure that our birthrates are in balance. We need to make sure that innovation is in place. We need to make sure that people are employed.

And so, in that regard, I’m keenly focused on making certain that our programs are accessible to all our populations. We just—just yesterday I was out in Los Angeles promoting a program for the millennial entrepreneur. And you know the president is deeply committed to My Brother’s Keeper, because I think, to the extent that we bring everybody into the fold, we need to have every American working that can work.

And so I’m proud of the 68 months of consecutive job growth. I’m proud of the numbers of when we took office and where we are now. But we’ve got to continue that important work and so that we can keep our vibrancy alive.

KHAISHGI: Wonderful.

Well, we’ll now open it up to audience participation. Many of you, I see, know the rules. If you wish to be called upon, please pass your card, your name card, sideways. And I will call upon yourselves. Please wait to be called upon. If you could speak into the microphone, state your name and your affiliation. We would request that you keep your questions and comments concise so that we allow as many members as possible to speak. And just as a reminder, this meeting is on the record.

Q: Is this on? I’m Mitzi Wertheim with the Naval Postgraduate School. I come at this from a slightly different direction. I come at this from the standpoint of learning, having an educated workforce.

I think Apple has the best mantra, which everyone that gets hired there, the first thing they’re told is if you don’t know, ask. We all learn together.

My second point is I think this whole business of understanding how systems work, which is related to governance. My perception is that colleges and universities don’t do that. And you might want to link up with them and see if they couldn’t set up a program where the students would actually try to figure out how the systems work, first of all, because they need to learn it, but then you would have that knowledge base.

I mean, I’m stunned by how little the American public understands about how our system works; and finally that I think everyone—academics can write for each other, but they need to also take whatever they’ve written and write it for the non-expert so they can understand it. That’s not a requirement in tenure, so virtually none of them do that. But I think we ought to ask all of our think tanks and all of our colleges and universities to do that. We want to make it accessible. If people don’t have time to struggle—I’m just struggling with a new book about economy from Sir Adair Turner, who’s brilliant. But it’s full of words I don’t—they don’t translate.

CONTRERAS-SWEET: You know, Mitzi, I am so appreciative of your comments, because I have to tell you it doesn’t matter. We think we’re branding—you know, we’re inside the Beltway here and we all think that everybody notices SBA. And I’m still dismayed. It’s very disappointing. We just spent millions and millions and millions—of AMEX’s dollars, I should say, not your government taxpayer dollars—(chuckles)—of American Express dollars, lifting up Small Business Saturday. We were on football games. We were on every radio station. We were on television stations. I can’t tell you how many press interviews I did this last week. And still you sit down at Thanksgiving with, you know, the everyday family and you start talking about Small Business Saturday, and everybody’s asking me what it is.

And so it is disappointing that it’s hard to get a message out in this—you know, with the advent of so many different channels and segmentation. So it is a challenge for us. And I think your point is well taken. I’ve actually been talking to Arne Duncan and now his successor about how we go into B schools and even further on down the line to begin to talk about entrepreneurship.

And I’m a big advocate for entrepreneurship, not only for the purposes of building solutions for our challenges—you know, cybersecurity, precision medicine, all of those solutions that we’re all seeking—but also because I think entrepreneurship can also play a role in the nonprofit sector; you know, the resourcefulness, the problem-solving. And so I’m talking to Arne about how we can imbue even grade-school students with this notion of entrepreneurship so that people understand what the complex web is that it takes to support this kind of system.

And so any ideas that you have like those are always welcome. Thank you.

Q: Put it in the evaluation system. People have to be evaluated on how curious they are. And if it’s not put into the personnel system, everyone’s afraid to ask questions.

CONTRERAS-SWEET: If we’re not measuring, holding people accountable.

Q: Right.

CONTRERAS-SWEET: That’s right. Thank you.

KHAISHGI: Thank you, Mitzi.

Edward.

Q: Yes, I’m Ted Alden. I’m a senior fellow here at the Council.

You mentioned the SBIR program, the innovation program. I think I’m correct in saying that one of the reasons that’s been such a success is that there’s really a clear market failure there, because you have, you know, a fair bit of funding for early-stage research. We have our universities doing that. We have some of the world’s most brilliant scientists. We have, as Mohammed mentioned, a very developed venture-capital industry.

So once you’ve moved to the stage of having a product that’s even potentially marketable, there’s a lot of money there. But there is that kind of valley of death in between, in trying to move from good ideas to marketable products. And I think the SBIR program has been very important in filling that.

The question I want to ask is on the export side. Is there sort of a similar kind of market failure? I mean, are there a lot of small businesses that ought to be exporting, that are potentially successful in the way that Qualcomm and Tesla moved to become large companies, that aren’t doing that because the private sector doesn’t support that activity in the way it should?

I mean, I presume you’re constantly trying to think about that. You know, what is the sort of export equivalent of the SBIR where government can make that difference, kind of getting over that hurdle, taking small domestic companies to making them successful small exporting companies?

CONTRERAS-SWEET: Right. I think our challenge—you know, as probably you could probably tell me more about it, but let me just share at least my three observations.

One is a small business will say, again, in absence of a trade agreement, I don’t have patent protection. I don’t have protection. So they’re concerned about the lack of governance programs around the world. You know, you sell one to the wrong country and that’s all you need to do. You know, they’ll have the product out, you know, the next morning. And so there is concern about how to protect their product in a globalized marketplace.

The second is to properly be matched. They don’t know how to navigate and actually connect with the procurers around the world. And so they need to be, if you will, ushered through the process. And so I think that’s an opportunity for us too at SBA. We’re trying to understand how we implement the trade agreement to make sure that they’re able to safely navigate, how we do proper matchmaking in a way that protects them.

And third, as you aptly point out, is the financing of it. That’s why to me—I mean, people say, oh, well, maybe SBA could just pick up the work of Ex-Im Bank. Ex-Im Bank plays a really critical role because they are that credit insurance. If you’re not compensated, if you’re not paid for your product, you have this insurance that allows you to still have the boldness to go in and to enter that marketplace. And so I think it’s really important for us to get behind this trade agreement and understand the unbridled activity that could take place as a result.

KHAISHGI: David.

Q: Thank you. David Short with FedEx.

First of all, I just wanted to say FedEx is a very engaged member of the U.S. Chamber of Commerce. The CEO of FedEx Freight, Mike Ducker, currently serves as chairman of the Chamber. And in that connection, I had the privilege, the pleasure, of working very closely with Diana Rodriguez prior to her service at SBA and just wanted to congratulate you on stealing her away from the Chamber. I can tell you she’s very sorely missed at the U.S. Chamber, but I know she’s making a great contribution on your team.

The question I wanted to raise—you touched a little bit in your opening remarks on trade agreements. You mentioned the TPP and so forth. I’d be interested in your thoughts on the idea of a plurilateral free trade agreement with special benefits for small business. We’ve seen in the Doha Round, it’s—I won’t say impossible, but it’s very tough to get agreement of the 159 or so members of the WTO on the next big step forward in global trade.

But we’ve also seen, I think, increasing interest in plurilaterals in various areas; in the trade and services agreement, where you have a critical mass of like-minded countries that basically say, well, if all 159 can’t agree, that’s too bad, but that’s not going to hold us back. We’re going to go ahead with something that all of us can agree. And so if you had a critical mass of countries, more than just, say, the 12 in the TPP, but a critical mass of countries that understand the opportunity, understand the potential of SMEs to grow their economies, to lift standards of living, to contribute to global trade.

Would that be an idea worth pursuing, to pursue a plurilateral agreement with special trade privileges only for the SMEs?

CONTRERAS-SWEET: Thank you.

First of all, let me thank you for your work. I think speed to market is everything, you know, from patent and then the logistical aspect of getting it out. And certainly your company plays a really important role, particularly for the SME space. So thank you very much for filling that opportunity for us.

Let me just say that—a couple of things. One is, to the extent that we haven’t made any progress on the larger context, I think that that’s why we’re so focused on TPP. I think that this is the important part. And recently the president and I traveled to Panama, where we were meeting with the Summit of the Americas, La Cumbre de las Americas. And I have to tell you that in talking to President Solis, President Varela, all these heads of state, they’re focused on multilateral agreements, you know, and they’re saying we want to be a part of this agreement, but in absence of it, we’re moving forward.

So I think your point is an admonition to us to say, you know, we’d better get in the game and begin to form our own, because, if not, other countries are creating their own. I mean, there have been hundreds of agreements that have been entered into absent the U.S. And so I think that you’re hitting a very sensitive chord. And that’s why I think TPP is so critical. And it’s not as though, again, just to put a fine point on it, that if we don’t pass ours, that that means nothing else is taking place in the world. This activity is taking place regardless, so let’s get in the game to make sure that our country is the beneficiary of this activity.

Thank you. But any ideas that you have, any particular countries that—you’re probably sensing more activity in others. You would probably be a tremendous resource for us. Could you shed any light on that?

Q: Well, I’m not really prepared to do that right now, but I’d love to coordinate with you and your team and do that, absolutely. And I would just add, small businesses are some of the best customers of FedEx. So I think we have a strong relationship. We have webinars. We have all sorts of resources to help small businesses export from the U.S. and from other countries. You know, we’re carrying exports among 220 countries and territories around the world, and the SME segment is very critical for us. So I’d be very happy to collaborate with your team to pursue that.

Thank you.

CONTRERAS-SWEET: Thank you. And thank you so much for recognizing Diana’s work. She really has been a star in the agency and she’s been leading a lot of these efforts for us. Thank you.

KHAISHGI: Thank you, Maria.

Lauren.

Q: This is Lauren Wilk with the National Association of Manufacturers. And we have a lot of interest on small business, entrepreneurship, particularly small business trade promotion on customs and trade facilitation, export controls.

But I wanted to talk really quickly about intellectual property. You mentioned patent protection. And I want to just mention briefly that trade secrets is an area of increasing concern for many NAM members, small businesses in particular, who find that trade secrets, slightly different than patents, are hugely valuable. They’re valuable assets for those companies. And they’re facing a lot of threats overseas with some of the localization measures, government approval processes that are forcing disclosure of trade secrets.

And that’s something that is really a barrier to—especially in emerging markets, a barrier for some of these small businesses to doing business. And frankly, sometimes it’s just, you know, you hear one horror story from a colleague and you don’t want to pursue that market. And so I wanted to just raise that issue in the context of the trade agreements and the WTO and encourage you to maintain a dialogue with your partners across the interagency as the TPP moves forward, as we work through WTO enforcement, to make sure that trade secrets is a priority, given that it’s a slightly different thing than patent protection, but equally important.

CONTRERAS-SWEET: Mmm hmm. But it’s still in, you know, the rubric.

Q: Yeah.

CONTRERAS-SWEET: Recently we teamed up with Michelle over at the USPTO, and we’ve now included her in our counseling efforts, in our outreach efforts. And so we’ve really tightened that relationship up quite a bit.

But Kati’s also raised, I thought, a really interesting point about, as I read your paper, and in conversations with you about the role that the online solutions can bring to help people export more efficiently and effectively, not maybe specifically around trade secrets, but I thought that your point was really an important one too. And you may want to elaborate on that.

KHAISHGI: In fact, Kati, I think you’re the next person for me to call.

Q: An improvised name tag here. Kati Suominen, and I have two companies in the trade space, Nextrade Group. And we work with a lot of government entities, multilateral development banks, and trade associations on trade policy research, digitization issues, small-business finance.

And then the other company very much fits the topic of this conversation. It’s called TradeUp Capital Fund out of Los Angeles. It’s a new financing platform for small exporters to access equity financing as well as longer-term debt. And we started out as an equity crowdfunding platform, and now it has become a much more diversified financing platform for export-related loans as well as equity financing. And we precisely see this gap with companies below $10 million in revenue needing different kinds of solutions that are out there and that banks can provide.

So there seems to be an opportunity there to support exporters. And with colleagues from EBay, we’ve seen absolutely very dramatic rates of export participation for companies that are selling online versus companies that are not selling online; that, you know, typically 5 percent of U.S. companies export. And when you look at the data of online sellers, you see 95 percent export participation rates among those companies, dramatic export diversification to 19 different markets. On average an online seller sells, and it seems like a silver bullet for exporters, so absolutely.

CONTRERAS-SWEET: Yeah. I just wanted to say—and maybe it’s not a direct—so responsive, Lauren, to your question, but just to add that we really want to—we can’t be everywhere. There are some limitations to USG, and SBA particularly. But what I’ve tried to do is to say where is innovation taking place? Where is that happening? Clearly in hubs in Boston and, you know, New York, and Silicon Valley, and Los Angeles.

But it’s taking place now also across the country in these innovation hubs, these growth accelerators. And they all look different, right? Some of them actually help invest. Some of them just help you navigate. But what we thought that we’d do, instead of us trying to be everything to everybody, what we thought that we would do is what if we could just bring USG to those places?

And so, through the Office of Innovation that Mark Walsh heads up, what we put up is a prize, if you will, a competition, to ask the innovation hubs across the country to compete for financial, for cash prizes that would help them build their infrastructure, their capacity-building efforts.

And I thought, you know, let’s—maybe we’ll get about 50, 60 that will respond. We had over 800 that responded on our first competition. And so we’re able to identify where some of the best practices are that are taking place across the country and bring them into USG. So we invited the winners into the White House so that they could meet and learn about what’s taking place at the Treasury, at Commerce, at the Ag Department. Ag Department has a really meaningful loan program, the Ex-Im Bank, and of course SBA.

And that was so well-received that we’ve now done it a couple more times. And it’s allowed us now to extend the SBA reach, you know, many-fold in different ways so that it’s not just about people coming to USG, which it’s—you know, you know it’s not easy to navigate through a federal building and to get into an SBA office. And so, to the extent that we could free up our people with technology, give them laptops, iPhones, and get them out in the field and have them park themselves in these places, has really, I think—is proving to be effective.

And this is what we’re learning more about the challenges, so as you point out, trade secrets. But what I hear most is customs. You know, it’s really difficult to get through customs. And that’s where David’s company comes into play. We need those tools. We need those instruments and those partnerships. And that’s why I said it’s also the institutions that have to provide the unbridled undergirding for these entrepreneurs to be able to safely navigate.

KHAISHGI: Thank you, Maria.

Stephen, you had a question?

Q: Hi. Steve Rodriguez. I’m a venture capitalist who spent a fair amount of time in the Department of Defense. I’m also a (term ?) member, and I’ve hosted a number of events like this here at CFR, mainly focused on venture capital and national security. And one of the panels we had was, I guess, focused on Asian productivity, specifically China and all the unicorns or decacorns; you know, basically really expensive companies coming out of China.

And the key gap that we identified coming out of China—one thing that they’re really missing that was going to inhibit their future competitiveness was, I guess, in an allusion to your comments you just made, around incubators and kind of the support systems, including mentors and accelerators around these companies that are coming from a bottom-up approach, right? And that’s not really China’s strength yet.

So I guess, given your comments about Small Business Saturday and using AMEX—I have an AMEX card in my pocket. I like it very much. But speaking for myself and the people I know, including the accelerators and incubators, the SBA or AMEX were probably one of the last places that most companies that we back we consider going to. Now, that’s not a ding against the caliber and quality of what you guys are doing. A lot of it could be perception. But as we know, perception matters.

So I guess, with regard to the Office of Innovation that you’re running—is that correct?

CONTRERAS-SWEET: Mmm hmm.

Q: I mean, my suggestion would be to go to the—you know, go to a lot of these incubators, even though a lot of the ones that are backed, frankly, by places like AMEX or Procter & Gamble or Microsoft, they all have their own incubators. And those are the people that these—the companies that I back, quite frankly, they’ll go to them; like we have an incubator in Cincinnati, backed by P&G, and it’s had great results, but only because it’s a bottom-up approach where it’s literally dudes working with other dudes or dudettes, you know, creating stuff.

But, I mean, as a closing anecdote, the people I use to run my businesses are handled through biz filings. I could pay a lot less money and just try to file directly with whatever state I’m, you know, foreign-qualified in. But, you know, part of it’s peace of mind and part of it’s just knowing that, like, you know what, I have—you know, I have an extra couple of hundred dollars. I’m going to pay that to someone else to, you know, get peace of mind that I don’t have to worry about getting a letter back from the state or back from, you know, some government entity saying, oh, well, shoot, like, I know you mailed your thing, but, like, we didn’t get your thing.

So, you know, that perception matters. And that’s what drives people away from very valuable, important programs like what you guys are doing.

KHAISHGI: Thank you, Steve.

So, Maria, the question—I guess the question is, why would people go to the government rather than seeking financing, promising ideas, from the private sector, from the types of companies that Steve is talking about?

I would add, from personal experience, that, over and beyond the SBA proper, the SBA supports a whole host of investment funds through the SBIC program, which I personally have had experience with. So I can speak at least in favor of the SBA that they might be that invisible hand that you may be unfamiliar with.

But Maria, over to you.

CONTRERAS-SWEET: I think—I have two answers, actually, Stephen. I think it’s a really fair question. And again, I don’t think the USG needs to compete with the private-sector activity. I think we should complement it. So to the extent that people are getting their questions answered efficiently and effectively, I think you ought to just continue to allow that to happen. But to the extent that some people don’t have access to the resources, to hire these consultants, to go to these places, then I’m delighted that we’re in a position to support these innovation hubs across the country.

And so, to that extent, I would say two things. One, you know, Mark’s office, we have this SBIR that I just referenced, Innovation Research. On average, these grants—the phase one—if you come up with some concept that we think creates jobs and spurs economic activity, on average you get about $70 (thousand), $80,000 for, you know, a young budding entrepreneur. That’s serious money.

And if we think, at the second step, phase two, that you’re ready to go to market and that this is really a real solution, you can get awarded up to a million dollars free money. This is real money. And so I have to tell you that it is—it’s my great lament, when I give out these awards, and the recipients are boasting—and, you know, Mark has sort of been put on notice here, right here publicly—I want to say this respectfully, because I understand this is on the record. I appreciate that there are some folks who come up to me and say this is my 40th award. And I say—and I said this to Mark; I said, but 40th? You’re supposed to go out and start a company and go do something with it. It’s not research for the sake of research.

And so we are trying to make sure that we’re inviting more people in who have not been. And we find that younger institutions are a little more creative and disruptive. And so we really want to make certain that more people know about SBA and are able to partake from the bounty that exists there.

But Mohammed just referenced also we know that they won’t always come to SBA for a conventional loan. And so another tool that we have is these SBICs. Can you imagine, Stephen, that if you had a $25 million fund where you were investing—you’re the private sector and you’re investing in small businesses—and if I said to you I love your concept and your investment strategy and the space you’re in, so I’m going to match you two to one so that now you have $75 million, I think that’s a great leverage point.

So we don’t have to be the direct investor. We can support, through this bond, through a guarantee, the creation of additional investment dollars for the talent that’s out there. So I think we—you know, we’ve got to find where we should, where we shouldn’t be, where we can be direct investors and where we can just nudge and support through our guarantees, through the U.S. Treasury, the prowess of a debenture from the U.S. government.

And that is the question we ask ourselves all the time. What is our proper role in the alternative finance channel? What’s the proper role in the commercial marketplace? And it’s always that proper balance that is the challenge that we face each day.

Q: If I—if I could do a two-finger, I can start a separate conversation around SBICs, which I know well and have my own commentary on. Regarding SBIRs, there was a GAO report that came out on November 19th that offers its own critique of SBIRs, not just as a program, but also its core mission, which is actually not just to commercialize great technology, to your point—and I won a lot in previous businesses and know the programs well—but even as this program alludes to itself, the idea behind that is to drive that technology back into the government, and we call that the transition rate.

And the transition rate is horrendous. It’s approaching 2 percent. So to the extent that I can share with you, you know, our experience with those, we’d be happy to do so, because they are great tools. But they’re not being leveraged appropriately right now.

CONTRERAS-SWEET: Yeah. And I can tell you that at Cabinet we’ve recognized some of this and we’ve tried to introduce this idea of—you know, in procurement we direct 23 percent of the spend, as I mentioned, on procurement. And so the question was, how can we procure more effectively, more efficiently, and still be transparent and still be effective and make sure that we have a sense of fairness, you know, in the process?

And so that’s one of the challenges that we’ve been studying is to say is there a truncated process that we could deploy for innovations that the government really needs? We need solutions around cybersecurity. There are so many places in which we need. So how can we sole-source? What is the role of sole-sourcing? How can we be more effective at procurement?

So your advice, Stephen, sitting down with Mark, I think, would really be very well received. Thank you.

KHAISHGI: Thank you, Maria.

Patricia.

Q: Patricia Wu, C&M International. Thank you so much. I appreciate your using this as an opportunity for a listening session and your request for some pain points.

One I would just offer you. We work in international economic policy. We work with a number of companies in the health and health care sector, where we benefit from a lot of innovation and entrepreneurship here in the United States. Something that we hear from them, as they attempt to go overseas, is that they are challenged by a lack of kind of predictable ethical business environments.

They are either challenged by local players—and I spend a lot of my time in Asia, where the culture, in terms of gifts and in terms of those types of business cultures, are different. And here in the United States we are, of course, held to the Foreign Corrupt Practices Act as well as, for some companies, the U.K. Anti-Bribery Act. And those are much higher standards.

So we have been very, very fortunate in that the Department of Commerce, State Department, USTR, and others have been very helpful in working with the sectors that we work with to try to level this playing field internationally, with an initial focus on Asia, helping to really raise up the ethical standards in those countries to the levels that we enjoy here in the United States. So that was just kind of one pain point to share with you.

But I think, related to that—and this builds on the point that Lauren made about trade secrets, and also you mentioned about the TPP text dedicated to small-medium enterprises—I’m curious to what extent you are thinking or there has been thinking about leveraging SBA to even more proactively work alongside USTR, Commerce, State, our allies, for a number of companies and industries as they do try to go international and try to address a lot of these pain points.

And I think SBA does—you know, certainly does some great work, but to what extent we can build on the fact that, for so many of these countries, they look to U.S. small business as kind of the model. And so, to that extent, you and your colleagues in SBA have a really powerful voice that I don’t know if it’s amplified to the point that it can be. And I’m just kind of curious if you’ve done some thinking about how we can really activate you in our trade policy overseas.

CONTRERAS-SWEET: I really appreciate the question. I think that’s exactly the question, and that is that I work very closely with Commerce, not just, you know, Penny Pritzker and myself. We travel together. We present together, because we understand the overlap, the nature; Mike Froman and I, the same situation. And our teams do too. And we even co-locate. For example, they have their USEACs. We have ours, our export assistance centers. And we co-staff these.

What we have done is we’ve put up together what we call Business USA so that, you know, there’s no wrong door. You don’t know where to start. You want to start a business and you don’t know how to navigate through USG, that at least you can go to Business USA that Commerce and I both put up and share, and then we help navigate people through that—through the labyrinth. So there are those things.

But again, I do think that it is important for us to more aptly understand, more clearly understand, what those pain points are in each country. And that’s why we’re holding these ministerials. That’s why we’ve been having so many ambassadorial sessions. It is important for us to learn. That’s why we’re having these workshops and conferences.

And I’m pleased to say that the president himself put up, I think, a series of marvelous programs in this regard. You know that he sponsored the Global Entrepreneurship Summit, and he’s been doing that, you know, year on year. And we just finished one in Kenya. I went to Morocco, was the opening and the closing speak for Morocco. And now he’s announced that we’re going to be meeting this summer here in the U.S., in Silicon Valley. And we’re very much looking forward to that.

But each of those opportunities has presented us an opportunity to sit down to understand what those pain points are in each country and to understand what we can do to help small businesses understand that. And I’ve challenged—just in terms of execution, I want you to know that I have challenged our SBDC network. I mentioned that we have SCORE offices and small business development centers. And just recently, for example, I was meeting with a group in Miami. The mayor said to me—he said the reason we like it so much here in Miami is because of its proximity to the United States. (Laughter.) Very charming.

But anyway, but the point is that they’re already engaged in quite a bit of international commerce. So I’ve challenged our Small Business Development Network to contemplate to the challenges of their counseling programs, to hack themselves, to say what are the challenges that our small business clientele is now facing in a globalized marketplace so that we’re not just teaching the basic rubric that they’ve always taught, but now the larger question.

And so that’s why we’re convening. We’ve engaged universities. We just participated in a really interesting policy hack-a-thon in New York around this question. And so, to the extent that you can engage with us and tell us what it is in particular that you’re seeing, we’ll fold it into the rubric that we’re creating to be able to more specifically get to the pain points that you’re experiencing.

But I think you’re right. I think SBA can be and should be a much stronger advocate. For example, how many of you knew that SBA actually has an office of the ombudsperson? We have an office dedicated just to this point, that that is that if you are having a pain point, not only at SBA but across USG, we have an office that is purely dedicated to helping you navigate and advocate for you and address the issues and the challenges that you’re facing across USG. That’s an office that should be, you know, promoted more.

So if FedEx wants to help me brand that office—(laughs)—I’d be happy to get into a new SAM, a new agreement, to do it, because that is—if I had any great regret, it is that the SBA resources and offices and services are not as recognized that they need to be to serve the American people.

KHAISHGI: Thank you, Maria.

We’ll try to squeeze in two more questions, so—and I’ll request the participants to keep their questions short. So Erik, if you could go.

Q: Thanks so much. Erik Malmstrom from USTR.

My question is through your international focused work at SBA, have you found models and practices in other countries that you think the U.S. and SBA should bring back home to improve our own support for small businesses?

CONTRERAS-SWEET: I’m getting this question from the USTR and I would be asking you that question. (Laughs.) I thought you were here to help me answer the questions. (Laughter.)

No, seriously, there are bits and pieces everywhere, as you know. I really, really did enjoy my time in Kenya, for example, and the way in which you probably saw the M-PESA program there. I think it’s spectacular, and the way the president and the entire government has supported that program, because so many people have not had access to financing, to banks, to the formal culture of banking, that they’ve been able to come up with this alternative and the way they’re supporting that system.

I don’t know if you’re all familiar with M-PESA, but I think that that’s—you know, that was a foundational innovation that I really think that PayPal and—you know, I’m sure—I’m live-streaming here, and so, you know, I don’t want to insult any other corporation, but I think it was foundational. It really helped to spur advances in this field.

So I see really interesting things taking place all over. I just came back from Mexico. And to see the micro-lending programs that were taking place there, and we’re trying to learn something from them. Obviously everybody knows the Grameen model and how he began with real micro-lending.

So what I’ve tried to do at the SBA is to have what I call a complete vertical, from their very, very entry point. You first want $10 (thousand) or $20,000, $5,000. We don’t have the infrastructure, the capacity, to put out a $2 (thousand) or $3 (thousand) or $5,000 loan. So what SBA has done is it’s put up a web, a network, of micro-lenders. And to help them, we’ve put more technical assistance up front. And we learned that from the Grameen model and from the model that I just recently saw in Mexico.

So we know that it takes, in many instances, more resources to be able to bring in a $5,000 loan than it does to bring in a $100 million loan. I mean, that guy knows he’s ready. He’s got financials. He’s already got, you know, independent audited financials. But it’s the person starting in their very entry point that really needs the challenge. So we’re putting more in technical assistance at the front end.

And then what we’ve done is we’ve zeroed out fees. SBA has zeroed out fees on loans under $50,000. We have recruited more credit unions. Credit unions can play a really critical role with SBA. And we hadn’t really been leveraging them to the extent that we should. I say—I challenged them. And I have to tell you that their regulator, Debbie Matz, at NCUA, all across the board—CUNA—all the associations stepped forward when I said you’re a nonprofit. You, as a result, don’t pay taxes. And you don’t have the CRA obligations of the for-profit division. So what is your proper role in the mix? And they agreed to help us on the small-dollar loans. And so they’ve come in. We’re now training credit unions to help us in that level.

For the next level, we call it community advantage loans. We have now a new network of nonprofit, mission-based lenders to help for the next stage. And then on—and so it goes zero fees, up to $150,000 on our loans. We’ve put in a campaign to recruit more lenders, like the credit unions. More community banks are being trained now.

And I also know that, to be frank, we have to be critical of ourselves. Our systems have not been easy to work through. And so what we’ve put in is two levels of technology. One is called LINC, L-I-N-C, and it is if any of you here in this room need a loan and you’ve ever experienced what I call a very slow maybe, which is where you go and you knock on the door of a bank and then they say, well, maybe we’ll get back to you, and then, you know, a month later you’re still waiting, and so we said how can we empower the borrower to get through faster?

And so this LINC seeks to do just that. It says—it’s like Match.com. And the idea is that you respond with—you respond to 20 questions. We direct them to local banks within your geographical preference. And then now you have banks competing for your loan. That’s helped us. We’ve already made, like, 20,000 matches off of that program.

And SBA One is where we’re revolutionizing our entire guarantee program and our contracting program so that we make it more online and facilitate it faster.

These are the things that we’re sharing. But what we have found that is really helpful around the world, and we think we’re going to help lead in this regard, is our NAICS code system. We are—SBA sets the size standards. And every country defines small in different ways. And so we think that we need to have more uniformity around that. And so we’re working with different key countries in TPP as well as our prospective TTIP partners to be able to help internationally a global standard of what is small.

Thank you, Erik.

KHAISHGI: I’m afraid we’ve run out of time, so we won’t have time to take that final question.

I just wanted to remind everybody that this meeting has been on the record.

And Maria, I wanted to thank you, on behalf of CFR, for what’s been a very informative session, and wish you the best of luck at the SBA. Thank you.

Please join me in—(applause).

CONTRERAS-SWEET: Thank you. Again, I just wanted to acknowledge Kati for her leadership and the role that she played in convening us and helping us prepare for this; and to you, Mohammed, for navigating us, ushering us through this so nicely.

KHAISHGI: A pleasure. Thank you.

CONTRERAS-SWEET: Thank you very much to all of you for your time.

(END)

This is an uncorrected transcript.

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