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Report: Here’s what Louisiana small businesses want from state government

February 9, 2020
Originally posted on The Advocate

A group of executives have been hashing out for several months priorities and goals meant to improve the small business climate in Louisiana, focusing on access to capital, support programs, occupational licensing and regulatory policy.

The culmination of the Louisiana Small Business and Entrepreneurship Council's effort is a draft report expected to hit Gov. John Bel Edwards' desk in the coming weeks.

The board includes 16 business and government leaders from across the state who have been meeting with the Louisiana Economic Development department to develop recommendations for the governor, some of them on business wish lists for a long time.

It suggests deeper exploration into: 

  • Angel Investor Tax credits to create a state- and private sector-supported venture capital fund to stimulate high-growth industries.
  • A statewide accelerator program to help emerging companies scale up operations.
  • Possible changes to loan guarantee programs to entice lenders to underwrite small business loans.
  • Elimination of more than 40 existing occupational licenses currently required.
  • Reducing the cost of workers' compensation for businesses and tort reform.
  • Expanding government contracting opportunities, particularly for military veterans.

“This (report) is the first step. We're still gathering information to determine the best road forward. … We'll continue to make recommendations as we learn more moving forward,” said council leader Edward Krampe III, who is chief executive officer of Lafayette-based MacLaff Inc., a major McDonald's franchisee in the state with 45 restaurant locations.

“We have a really diverse group of people from all over the state in many different businesses,” Krampe III said of the council make-up.

Across Louisiana, there are 82,644 small businesses, classified as those with fewer than 500 employees, employing 917,466, or 53% of the private sector workforce, according to the report, which relied on U.S. census data.

In the Capital Region, those numbers are 14,033 small businesses employing 167,433, or 50% of the area's private-sector workforce; Acadiana Region, 12,499 small businesses employing 135,523, 61%; and the Southeast Region, which includes New Orleans, 26,463 small businesses employing 290,550, 54%, census records show. 

The goal of the report is to juice those numbers and improve on Louisiana's national rankings in various often-cited business categories: 42nd in entrepreneurship; 49th in venture capital; and 44th in business tax climate, with a more favorable 24th ranking in labor regulation. 

“Given Louisiana’s relatively low ranking, 'low-hanging fruit-opportunities' likely exist where marginal reforms could yield significant positive impact,” the report said.

Currently, Louisiana is engaged in numerous activities in an attempt to facilitate entrepreneurship in the state, the report said, but most of the activities are focused around a few paths. Those include tax credits, business incubators operating under a real estate management model and university-based activities.

“Louisiana appears to be lacking in access to capital, investor networks and accelerators that help startups understand how to successfully scale their business,” the report said.

The council hopes to build on a foundation of several small business-focused state economic development programs operated by LED. Those range from the department's Small and Emerging Business Development program and an Economic Gardening program that nurture fledgling businesses, to the department's CEO Roundtables in which executives learn from each others' experiences and tackle business problems. 

The report notes that “successful high-growth startups tend to have an outsized impact on the economy.” It cites as one example Austin, Texas, a state capital and university town, that spawned Dell computer, then attracted operations from Facebook, Apple, Amazon and Adobe.

“Although the high-tech sector is the one that gets all the press, there are many different sectors that can create high-growth businesses. One in Louisiana is health care; we've had a couple startups that are doing pretty well,” Krampe said.

But the council's executives don't want the state to invest in companies directly and be “in the business of picking winners and losers,” Krampe said. “We want either an accelerator program or venture capital funds to do what they do and then maybe create a state matching fund for those programs,” he said.

In addition to council members, the report relied in part on research performed by LED and discussions with a number of partners, including Committee of 100 for Economic Development, Reset Louisiana, the National Federation of Independent Business, Louisiana Association of Business and Industry, and the Small Business Administration. A significant portion of the research involved identifying best practices implemented by other states, which can serve as a model for Louisiana, the report said.

Angel Investor Tax Credit

For the past three decades, Louisiana has planted seeds to build a venture capital industry by investing about $40 million of equity in nearly a dozen funds that in turn are expected to invest in homegrown startups. However, the venture capital match program activity has largely dwindled in recent years.

The report said Louisiana should consider selling tax credits to create a state- and private sector-supported venture capital fund that's not focused on any particular industry sector. This fund would be different from previous efforts, which carved out investor money for technology startups or biotechnology and life sciences ventures.

The report also said there potentially should not be a cap on the Angel Investor Tax Credit so investors making an equity commitment will know tax credits are available to them. The rationale, the report said, is that selling tax credits does not have an immediate impact on the state budget. It said the impact of successful startups in the state should be greater than the cost of the tax credits.

The report said the state should identify the types of Louisiana startups that are negatively impacted by the inability to obtain seed funding and identify potential funding sources and structures; additional education services for small business owners and entrepreneurs; and research options to improve Louisiana’s entrepreneurial culture.

Business owners also requested that the state invest in a license for SourceLink, which is a resource for small businesses and considered an asset mapping tool and customer matchmaker.

Accelerating businesses

There was support among the executives for a statewide accelerator program, in addition to business incubators spread across the state. Accelerators work with emerging companies to scale-up operations. The executives urged LED to explore what other states across the country have found to be successful regarding incubators and accelerators. 

“We have a tremendous array of incubators across the state. … What we don’t have is the next phase of growth for these small companies which is acceleration,” Krampe said.

The goal is for that accelerator network to be centralized and connected so that any small business interacting with one of its branches can get access to the whole network. There is a Techstars program, which is an accelerator for high-growth tech startups, in New Orleans only, and Propeller is a homegrown accelerator for startups in New Orleans as well.

Loan guarantees

LED's economic development corporation already approves business loan guarantees — a state version of a U.S. Small Business Administration-backed loan. 

Since 2011, LED's board has approved small business guarantees across 58 companies for $21.9 million of the $31.7 million in capital they received from lenders. Most of the loan guarantees are split between the Capital and Acadiana regions, which had 20 and 22 loans respectively. Seven were backed across the New Orleans metro region since 2011.

Small business leaders recommend conducting a study of entrepreneurs who are impacted by the lack of access to startup capital — those often being too early stage to qualify for a loan but without enough personal wealth to finance a business.

The board wants to explore whether changes to how the state supports small businesses with access to capital could make a difference with lenders to entice them to underwrite early stage loans.

Eliminating some licenses

The report suggests that the state should explore the elimination of more than 40 existing occupational licenses currently required.

There are 29 occupational licenses required in fewer than half of the other states in the country. There are 12 licenses required in fewer than 10 states across the country. In addition, the council suggests including a small business representative as a member of the Occupational Licensing Review Commission. 

“We have 63 licensing bodies in Louisiana. That seems like the cost for our government to run those and for small business to try to meet the requirements of those is pretty big,” Krampe said.

Workers' compensation costs

The board also suggested exploring ways to reduce the cost of workers' compensation for businesses, taking note of best practices in Arkansas and Virginia which are lower-cost states for that insurance. 

On average, Louisiana employers pay $2.23 per $100 of payroll dollars for workers' compensation insurance compared to only $1.08 in Arkansas and $1.17 in Virginia, according to the report. The board asserts that there are some types of jobs defined as high risk by insurers which may not be.

Tort Reform

The board also suggested tort reform, referring to the long-standing high insurance costs in Louisiana. Potential tort reform touted by businesses would change how Louisiana courts function and force litigants into pretrial negotiations rather than a system that the report said may appear to extort insurance companies for out of court settlements.

“Considering the past failed attempts at tort reform over recent years, the (board) recommends that tort reform proponents expend resources on researching and proposing incremental, bipartisan, proven reforms that would result in more competition and lower costs for consumers and businesses,” the report said. 

Government contracting

Expansion of government contracting, particularly for military veterans, was another priority the board agreed upon. One recommendation was that state agencies should be required to submit agency-specific small business outreach plans with goals and strategies to broaden the available pool of vendors. 

Similar to a disparity study conducted by East Baton Rouge city-parish, board members suggested a statewide small business disparity study which breaks down existing contracting data to see where there are gaps.