Puerto Rico - Overcoming the Barriers to Growth for Small Businesses
Universidad del Sagrado Corazon
Puerto Rico has faced a series of manmade and natural disasters for almost twenty years now. Economic recession from the early 2000’s to the present reduced GDP growth and drastically increased migration to the mainland. A 2017 hurricane (Maria) as well as a massive government debt crisis accelerated this migration which has resulted in Puerto Rico losing almost 20% of its population over the last twenty years. In addition, infrastructure on the island has suffered as the government does not have the tax revenue available to maintain a standard of infrastructure conducive to business operations. These factors have placed pressure upon the cornerstone of the economy, small businesses, which make up 99.7% of all business establishments in Puerto Rico. These businesses struggle to grow and face uncertain futures. Our continued partner in Puerto Rico, Universidad del Sagrado Corazón (USC), is looking to change that future for the better.
What was the problem?
USC asked the Business on the Frontlines team to identify the critical barriers constraining small business growth as well as ways for the university to help businesses mitigate these barriers. USC had hypothesized that there was a common group of these barriers that were impacting small-businesses across Puerto Rico. In addition, USC hypothesized that some of these barriers could be overcome by small businesses with the assistance of the University. However, USC also acknowledged that there were fiscal and personnel constraints that would hamper costly and personnel-intensive solutions. Also, the solution would have to take into consideration the students at USC and would have to benefit them somehow. Therefore, the solution we had to propose had to be high impact, low cost, easily implementable and integrate the students.
What did we do?
Prior to our in-country experience, we focused on a handful of hypothesized key constraint areas that we had identified through interviews and research. Our initial interviews were with Puerto Rican citizens in the US, Puerto Rican financial institutions and governmental organizations. These interviews and our research revealed there to be seven main barriers constraining small businesses, namely: poor infrastructure, a shortage of human capital, lack of vision by owners, lack of access to capital, owner risk aversion, skills/labor shortage and decreased market demand.
In an effort to focus attention on actions small business owners can take in the near term, we narrowed our developing hypothesis to address most of these constraints to those which we believe USC is well equipped to make significant progress. Our recommendation is that USC should create a Vision Fund Facilitation Program, replicating a search fund model to encourage highly skilled individuals to move into Puerto Rico and acquire a small business in the capital of Puerto Rico, San Juan. USC would have acted as administrator of the program, operating as a facilitator, and the central piece bringing in all parties of interest. Specifically, USC would have vetted candidates, identified target companies, and assisted operators with finding sources of funding. Additionally, USC can utilize its understanding of the Santurce region and provide the Vision Fund members with support during the process so that they may create growth in the region.
Utilizing this feedback, the team set out to utilize our first week on-island to conduct a feasibility study of our recommendation as well as to conduct interviews with small business leaders in order to confirm our hypothesized barriers.
What was the turning point?
Despite the BOTFL teams' research, data, interviews and partner discussions, in the end, there was no way for our program to be successfully launched at Sagrado. Our hypothesis faltered when we considered three key questions:
1) How Do We Fund This Program? - There is not a sufficient amount of capital available in Puerto Rico, let alone within the Sagrado network, to enable a search fund. Grants are an option for other initiatives, but we were unable to find grants that specifically covered an individual’s acquisition activity or a program remotely similar to the one we were looking to build.
2) Where Can Operators Get Funding to Acquire A Business? - An anecdotal example of this comes from Grupo Guayacan that needed to spend 2 years to raise a fund of two million dollars. Private equity and venture capital activity on the island is very limited. Banks are very conservative on the island as well, and it is highly unlikely that they would be interested in this activity when they already limit the number of loans to small businesses. Additionally, the alumni network at Sagrado was not extremely developed, and would not be able to support students with capital, stripping away another traditional method of funding for search funds.
3) Is There A Way to Incorporate an Educational Element into the Program? - At the time, Sagrado currently has a program in place for the education of startups in creative industries called Nuestro Barrio. The program was designed to help revive the artistic culture in the Santurce neighborhood and includes lessons on business model, growth strategy, and sales strategy among others. We initially thought that there was a way to fold the Operators of the Vision Fund into these workshops. However, given the issues with funding we did not explore this opportunity further.
Given the answers to these questions, the team set out to find additional ways that Sagrado could help to mitigate these barriers.
What did we recommend?
Across all of our research and findings we had found one critical need of small businesses that had been minimally addressed in the market: education. While there are options available for continuing education in the form of accelerators and incubator programs such as the SBA Emerging Leaders Program and the Guayacan GVA Program, these are highly selective and limited to a handful of small businesses. This means there are still a significant number of small businesses who genuinely want to find new ways to grow and expand their business but cannot get the help. Given all of these factors, the team proposed a solution called: The Nuestro Barrio Visión Program.
The Visión Program mission was the creation of growth opportunities for small businesses in the Santurce community through a series of workshops held at the Universidad del Sagrado Corazón. These workshops would take place weekly over a three-to-four-month period (12 classes) and would focus specifically on areas of growth strategy and financial savviness as well as other areas of need for businesses. This program would then serve as a pipeline to other programs (GVA, Emerging Leaders) and will have a strong emphasis in relationship retention once companies have “graduated.” Overall, this program aimed to increase Sagrado’s relationship with the local business community, create opportunities for students to be involved with local companies and find both temporary and full-time positions, and above all help small businesses in the area grow and expand beyond their current capabilities.