mobile-bannertablet-bannerdesktop-banner
Goldman Sachs Hands Clients Losses In 'Top Trades'
A sign bearing Goldman Sachs' logo Photograph by Bloomberg via Getty Images

How Goldman Grooms Its 10,000 Small Businesses for Growth

Jul 11, 2016

For Roy Castro, the path to becoming an ice-cream distributor was hardly as sweet as it sounds.

After getting out of prison following a drug charge in 2002, Castro, 41 , took whatever jobs he could get, he says. That first meant hosing out freezers for a local ice-cream distributor, outside in the middle of winter. From there, he learned to repair the freezers themselves, and in the process , doubled his salary as a technician. T hen, in 2013, he decided to go all in and take out a $500,000 home equity loan to purchase a partnership in his current enterprise, D.M. Ice Cream in New York City.

But like a lot of smal l- business owners, Castro’s desire to build a thriving business could only take him so far. What he says he needed was an education about his own financials, and mentorship.

So in early 2016 he turned to Goldman Sachs and its 10,000 Small Businesses initiative. Launched in 2009 , it offers something like a mini-MBA in a few short months to hundreds of businesses a year , at no cost.

In some ways, Goldman’s program bears similarities to popular accelerators that cater primarily to the high-tech world, such as Y Combinator, 500 Startups, and Techstars. These tend to provide seed funding as well as advice--not to mention industry connections--on how startups can develop their business plans and grow more effectively. Dozens of academic institutions, from Brigham Young University to the Massachusetts Institute of Technology, also have entrepreneurship programs and innovation competitions that offer education and help to business owners at various stages of growth.

Goldman says its program, whose curriculum was developed by Babson College, is primarily philanthropic, focused on job creation and economic development. It does not take an equity stake in its companies, which are typically beyond the startup phase.

Yet some critics say 10,000 Small Businesses is part of the investment bank’s own community - building efforts following its involvement in the financial crisis, which shuttered nearly 200,000 small businesses around the country between 2008 and 2010. In 2011, i nvestment bank Morgan Stanley similarly launched a program, offering $500 million in loans to small businesses through the Community Reinvestment Fund and CDC Direct Capital. Both Goldman and Morgan Stanley rechartered as bank holding companies in 2008, which entitled them to federal bailout funds, but also subjected them to federal banking oversight.

T o date, Goldman has worked with 6,500 companies who sign up for the 100-hour program in 13 community colleges around the country. Its goal is to offer $500 million in loan support and programming through community development lending partners.

Along the way, Goldman has also assembled a high-profile group of business luminaries to co-chair and advise the program, including Berkshire Hathaway chief executive Warren Buffett, former New York City Mayor and entrepreneur Michael Bloomberg, Harvard management guru Michael Porter, and of course its own chief executive , Lloyd Blankfein.

In order to qualify, companies must submit a formal application including a business plan, and they must demonstrate a clear desire to grow, according to Goldman representatives. Each company must be in existence for at least two years, have a minimum of $150,000 in revenue, and four full-time employees. Once accepted, they learn through a series of nine course modules, that give them hands on experience with things like company financials, negotiations, marketing, and securing financing.

With entrepreneurship in vogue, and everyone from rock stars to soccer moms claiming it as their new-found profession, the natural question to ask is can entrepreneurship be taught? And more pressingly, can programs like Goldman’s have a lasting effect on the economy and job creation?

“The really interesting question for entrepreneurship and programs like this, is to what extent they are just focused on small family businesses that are easily replicated,” says Luke Williams, executive director of New York University’s W.R. Berkley Innovation Lab, part of the Stern School of Business. The Innovation Lab offers a competing program run through NYU.

Williams says that while the key things all entrepreneurs need are mentorship and access to financing, both of which 10,000 Small Businesses provides, he adds that if entrepreneurshi p programs really want to create job growth, they need to focus on helping so-called disruptive, young businesses that tend to add jobs more quickly. The Goldman program, he says, focuses more on creating incremental growth. The median age of its business is 12 years old, which puts them a good distance away from startup territory.

In fact, there is data to back up Williams’ claim. Fast-growth companies—for example the Facebooks and Ubers of the tech world—represent just 1% of businesses, but are responsible for creating 40 % of all new jobs, and 10 % of new jobs annually, according to the Kauffman Foundation.

Patricia Greene, the chair of entrepreneurial studies at Babson and the academic director of 10,000 Small Businesses, disagrees with Williams. She says it’s up to each Goldman entrepreneur to determine what growth looks like, and even older businesses that go through the program can learn to innovate.

“It’s an economic development program, and the goal is job creation,” Greene says. “But it is up to the individuals how many jobs they want to create.”

By the end of the Goldman program, entrepreneurs like Castro are supposed to leave with a comprehensive growth plan that they’ve developed through input from peers, professors, and program mentors on how to scale the business. That includes workshops with top Goldman executives, who can often make connections for the businesses. The participants are also supposed to walk with a network of alumni they can depend on to continue growing their businesses, as well as some idea of how to approach banks for financing.

For his part, Castro was already on the road to strong growth. On his own, he’d doubled D.M.’s revenue to $6 million in three years. Yet there were some things about growing his company that held him back. He wanted, for example, a better understanding of his own financials. He had always depended on his boo kk eeper and accountant to understand things like his profit margins, his balance sheet, even his profit and loss statement to them.

“I wanted to be the biggest ice cream distributor in New York,” Castro says. “I knew I could put it together, but I wasn’t sure about the back end.”

Castro says Goldman’s module on financial statements was invaluable, as it showed him everything he needed to know about reading his own balance sheet, analyzing his profit and loss statement, and, most critically for him, understanding his profit margins.

He says he submitted his business’ actual books to the class for analysis, a process he found a bit intimidating at first, because it required him to be totally open with his peers.

That analysis, however, laid the foundation for Castro’s growth plan, which first involves selling more of his higher margin products to his customers -- local bodegas and mini-markets. Using a spreadsheet, he and the class could see that alone would increase his margins to 33% from 28%.

From class discussions, he also decided to invest $60,000 in a state of the art point of sale system that analyzes daily product sales and margins. Prior to that, he had depended on his delivery drivers for that information. The new technology gives Castro timely information about whether his profit margin strategy is working.

The final steps of his growth plan are to expand the scope of the products he distributes, to include other snack items beyond ice cream, for example hot pockets, frozen pizzas, and empanadas.

Taken together, Castro says his growth plan will boost revenues by 25% in 2016 alone.

Jodi Lahaye, co-owner of Hedgehouse, a company that manufactures upscale throw beds and other lifestyle bed and bath items in New York City, s ays the program helped her make the shift from selling exclusively through wholesale distributors direct to retailers. Longer term, her growth plan involves opening a bric k and mortar store, as well as building out the company’s nascent online sales channel. A destination hotel promoting the brand is also on the horizon.

Related: The Small-Business Appeal of the Libertarian Party

Before the program, Lahaye, 50, says she had thousands of ideas for growing the company, but had a hard time sorting out which ones would actually work because she wasn’t able to develop the necessary metrics. The program gave her the skills to analyze her ideas, and perform feasibility assessments, which look at timing, available resources, and capacity.

“Not every idea is an opportunity,” Lahaye says she learned. “You need to follow an organizing principle.”

She expects to increase revenues 47% to $700,000 in 2016. For 2017, she expects to hit $1.2 million. For 2018, the target is $2.4 million -- and it’s not theoretical.

“I can tell you exactly how we will do this,” she says. “Like most small business it is all about cash flow, and bridging the chasm between running a business out of your garage, to being in the big show.”

And per the prime program goal -- job creation -- revenue growth will allow both Castro and Lahaye to hire, five and two employees, respectively, in the next six to 12 months.

In that regard, they resemble the majority of program’s alumni. On average 7 0% of program participants increase their revenue by almost half six months after completing the program, according to Goldman’s most recent progress report. By 30 months, 82 % have doubled their revenue. In terms of job created, nearly half of participants report a 22% jump in headcount six months after the program. And 30 months out, 61% say they’ve boosted their headcount about 115% on average .

By comparison, according to the most recent numbers from the National Small Business Association, 45% of all business owners increased revenue by some amount in 2015, a nd 23% increased their employee headcount.

While the numbers are promising, the question still remains how sustainable the growth is for Goldman’s cohort of small businesses.

“We feel confident the business owner are going to continue to grow their revenues, grow their companies, and create more jobs,” says Dina Habib Powell, head of Goldman ’s impact investing business, and president of the Goldman Sachs Foundation, who adds the program is on track to reach 8,500 businesses by 2017. “The trajectory is going the right way.”

For Castro’s part, he says it’s possible his growth may peak. But he’s already developing plans to potentially acquire competing companies, he says. And, he says he’s also in talks to secure up to $1 million in financing to increase the size of his current location.

Similarly, Lahaye says she’s had conversations with New York Business Development Corporation, one of Goldman’s capital partners, for a loan of up to $250,000 that will support her growth plan. The connections she’s made with Goldman executives have also opened some important doors for her marketing endeavors, Lahaye says.

The rest, however, really is up to her, she says.

“Lofty ambitions are achievable,” Lahaye says. “But you have to create specific, measurable, repeatable, and timely goals.”

All products and services featured are based solely on editorial selection. FORTUNE may receive compensation for some links to products and services on this website.

Quotes delayed at least 15 minutes. Market data provided by Interactive Data. ETF and Mutual Fund data provided by Morningstar, Inc. Dow Jones Terms & Conditions: http://www.djindexes.com/mdsidx/html/tandc/indexestandcs.html. S&P Index data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Terms & Conditions. Powered and implemented by Interactive Data Managed Solutions