Betsy Zeidman: I'm delighted to be on the call. In a nutshell, the Milken Institute, for those of you that don't know, is a think-tank based in Los Angeles. In part, we study financial innovation and how private capital and innovative financial structure can be used to address a variety of public and social problems. We have had a very strong interest in Emerging Domestic Markets since the late 1990s. We were very much involved in the early days of ICEF and it's a real pleasure to see the chord it has hit among government leaders, foundations, nonprofits and the private investment community. It's very clear that if we're going to tap that potential, all those parties and all the strings of capital have to be at play.

Our sense of what we call emerging domestic markets comes from the work we did in the late 1990s, following on the heels of Michael Porter's 1995 article on the potential of the inner city. But we went at it from a slightly different angle; as opposed to looking at "place" we started with the "people" side of underserved communities, examining minority- and women-owned businesses, and their untapped potential. We discovered that the growth rates among these firms far outpaced that of the national average, but even those growth rates were constrained by problems in accessing capital in general and equity capital in particular.

We realized that we'd tapped a chord when a lot of investors started saying, "Well, wait a minute. There's a way we can do business in these communities." They realized the attractiveness of both the place and the lower cost of redevelopment in inner cities and the people the incredible human capital that hadn't yet been tapped.

Once Glenn Yago and I, both at Milken Institute's Center for Emerging Domestic Markets, recognized this potential, we started realizing that financial innovation helps bring capital to a broad variety of businesses that never had capital before.  In 2003 we issued a report with the Ford Foundation called Financial Innovation Technology Transfer. We took the notion of technology transfer and fed it through the lens of financial technologies by looking at how different types of loans and instruments might be applied to emerging domestic market businesses. We then looked at what some of the real capital gaps were.

We discovered that there just wasn't enough robust data. People who really believed there was a market could tell the story. But there was no real systematized, standardized approach to data that could give a real sense of what the market was. In addition to the difficulty in defining the emerging domestic market, there were a lot of different groups collecting data: government agencies, joint efforts like the CDFI data project, ICIC's database and its particular niche of inner city businesses, etc. But there was very little collaboration and a lot of confusion, Terminology definitions were all over the board.

This report that we just issued, [Executive Summary] can be accessed on our website [Full Report is also located here]. We looked at what the data really are, and at some approaches to creating a consortium in order to get better value and a better sense of the market.

Glenn, one of the things that you've always talked about is the need for data and why it's so important. Could you talk a bit about the kind of data there are in the mainstream sector and how those data helped create markets and new financial instruments?

Glenn Yago: Michael Porter's initial paper on inner city competitiveness was a very creative attempt to shift the common viewpoint and to understand the competitive aspects in what was defined as the inner city. Similarly, we now need to understand finances, financial structure, and capital structure in order to overcome information asymmetries, or the lack of information which leads to mis-pricing assets, the absence of price discovery in markets, and undervaluing people, places and things. All of those dynamics are fundamentally focused on information.

At that time (in the 1990s), we were constrained by the terminology that had emerged from the School of Human Ecology at the University of Chicago in the 1930s and '40s, which looked at concentric urban economic growth. It was reified in the 1960s and '70s to talk about inner cities. But we were now dealing with more polycentric urban development. We find many of our "inner cities" in a variety of locations, even as they do retain the characteristics identified in that competitiveness paper, in terms of low median income and the different marketing, competitive, and strategic clusters that could be easily identified.

When we began doing projects for the Minority Business Development Agency, we categorized existing data to understand the geographical or demographic based drivers of the economy that were emerging within the United States. We discovered that terms like "minority businesses" tended to be not only politically incorrect but statistically inaccurate. If you were looking at states like California or New York, that have diverse population groups, "minority status" is a kind of anachronistic term to describe what's occurring in these demographically- and data-driven markets.

We weren't looking at these markets correctly if we were trying to understand the competitiveness of those markets. We weren't examining them in terms of regional economics or understanding them in terms of macroeconomics from an economic policy strategy. We required additional data to encourage people to look at these markets through a different lens.

Betsy Zeidman: We knew that a capital gap existed and that data was a problem, so we set out to delve into those issues in greater detail. In a literature review, we found that there's still a significant difference in the approval rates of loans between white and African American or Latino firms and in the terms and pricing of those loans. We also discovered a dearth of data on EDM, broadly defined, in terms of both the people and the place.

Through extensive interviews, we found that there were certain things that would help open the spigot on capital: first, having loan level data with greater granularities, so different types of investors or lenders could identify the particular areas they were interested in; and second, having larger data sets to get a broader sense of the market and have the ability to credit score. There's a lot of controversy about credit scoring and whether it's discriminatory, but research shows that it ultimately does increase lending to people who would not otherwise necessarily get capital. And so, even though it seems counterintuitive, credit scores decrease discrimination.

We then identified databases in this space. We did over 100 interviews with people and we identified nearly 70 databases that fall within EDM characteristics. They fell into a four or five key groups: financial institutions such as banks that have their own databases, and the funds that tracked their databases; government agencies such as EDA, and Department of Commerce; trade associations, such as the NAIC that collects data from its members; and nonprofits such as the ICIC database. And then what we�ve broadly called information management companies: private sector entities such as S&P and Venture One. We looked at their databases, survey units, and measurements, and then drilled down to discover how many units they had, whether or not this database was available, and then whether or not they were interested in sharing it.

The findings fall into a couple different categories, which you can see in our online matrix contained in the report. The databases are generally good at one thing each. For instance, the FBO is really good at the demographics, but it doesn't have financing. NIAC is very good at tracking the returns of their funds, but there are only a few funds in there. And with most of this, data are self-reported, so there is very little verification.

We were more curious to see how many people were interested in some form of collaboration and access to data. Not unexpectedly, people were more interested in getting other people�s data than they were in sharing their own. But most did say they�d be interested in collaborating if there was a way to keep things private. Even large banks said they love to have access to a larger data set and competitor information, and would share theirs, but only in such a way that their borrowers couldn�t be identified and the bank itself couldn�t be identified.

At the end of the day, we decided it would make most sense to have a relational database that allows people to search across categories and to create a consortium where, by becoming a member and contributing data, you then have access to other data. There would have to be a process to mask the data and a third party would run it. There would be no way to trace it back, and there could be common answers to some of these questions: what does low-to-moderate income mean? What does emerging domestic market mean? What does inner city mean?

Ultimately the goal is to further the data set, because it obviously provides more information for researchers to tap. But from a purely business point of view, we want to enable those who are active in the field as investors and businesses, to find opportunity both in terms of investment opportunity and capital opportunity, and to enable the development of more financial instruments and financial products that could ultimately expand capital access from the government sector, the financial sector, the nonprofit communities.

I encourage you all to look at our website or e-mail me and we can send you the report.

Manjari Raman: I have a question for Glenn. What was the data point or the data set that helped change the Third World classification into emerging market? And what can be learned from that shift?

Glenn Yago: I think it�s a similar process here. A Dutch researcher, Antoine van Agtmael, changed his focus from these countries� level of indebtedness and began to look at their level of growth. He found that their growth levels were higher in a secular trend line than for the developed world and were growing not only in terms of export growth in the international market, but also in their levels of internal aggregate demand.

The analog here is that we�re looking at EDM businesses that are demographically driven, and we have businesses forming at a higher level in these populations given the age and the demographic composition of the market. They�re growing at a faster level than the national averages.

Manjari Raman: Henry, you are trying to set up a new bank that looks at the emerging domestic market and some of the challenges you face are similar, aren�t they?

Henry McKoy: Yes. I�ve seen an opportunity to tie in what�s going on in the emerging domestic market with what�s going on in the sustainability sector. The bank is essentially setting itself up as the first bank in this space with the definition of a venture bank. For all our Silicon Valley banks, the focus is bringing more flexible capital to be placed against equity capital, Essentially, we�re creating more opportunities for people to get invested on the equity side by saying, �Okay, why don�t we collaterize certain things with flexible capital that can�t otherwise be collaterized,� like equipment and things of that nature. Equity capital can then be used more strategically.

In relation to Betsy and Glenn�s focus, we�re looking at how to position the bank in a way that utilizes technology to connect money, markets, and opportunities so that businesses within the emerging domestic markets are able to become part of the global economy. The bank wants to be at the center of this particular venture market.

Oftentimes, when people hear �urban�, they think about African-Americans and other minorities. And, wrongly, that can bring with it some negative connotations. So, we really want to frame this bank in a unique way, as part of the larger strategy of this big sustainability movement.

Manjari Raman: In fact, that raises the issue around the subject of negative perceptions and the associations of some of these words. Betsy, did you get a feeling that some of the fragmentation in datasets, some of the new nomenclature, has resulted from people trying to find ways around negative word associations?

Betsy Zeidman: That�s absolutely true. We found that when we started using �emerging domestic markets� in 1999, it just tapped an enormous chord, because that demonstrated that there was value there. It is definitely an issue that people want to overcome. It just undervalues the opportunity.

Glenn Yago: Anything that marginalizes your major growth engines creates both an analytical and the perceptual misunderstanding of what you�re trying to describe.

Betsy Zeidman: The lack of definition in nomenclature makes it difficult to measure the market. We get phone calls all the time from people asking how much money have pension funds put into these markets. Well, you know what? Unless you go into every pension fund and interview every person who�s doing investments, you can�t get an answer on it. Some of them have targeted programs that they call �targeted�. Some of them have names for their programs like California Urban Real Estate. An awful lot of places have invested in these markets�whether in real estate or in private equity�but you can�t get a handle on it because it�s buried within other programs.

Tessa Hebb: So many terms do not have a very tight or clearly understood definition. And if one term falls out of favor, another is just substituted. I applaud Betsy and Glenn for this report, because I think it�s starting to put some muscle behind what some of these definitions need to be.

I'm curious about the next steps that come out of this report. Having said that they were interested in this type of a consortium, what do you think the likelihood is that these individuals and institutions will participate? Who do you see acting as the major push on this kind of data sharing and collection?

Glenn Yago: That is precisely the right question, and I don�t have a quick answer to it. We believe that the force of observation itself can change circumstances. If you could see the types of data out there, you could put them under a relational database, and then that database could be sliced and diced or broken down by categories, people, or places. You could look at it from the perspective of the entrepreneur, from those databases that track the businesses, or you could look at it from a geographical view if you were trying to track place-based differences or projects.

I hope that in our publishing this report and in having these conversations, ICEF or other entities might adopt and shepherd the project into implementation.

Manjari Raman: Will this relationship database solve a need for a particular kind of customer? Who is the customer with a burning need out there?

Betsy Zeidman: It really is something that investors want. I don�t know the business model in terms of how much they're willing to pay for it; that point would need to be fleshed out. And obviously there is a cost to building this database, and you do have somewhat diverse and competing interests. So, we�d have to do some work to find a common base of data that people are willing to share. But there is a desire for information out there.

Manjari Raman: Thank you, Betsy and Glenn, for being on the call and for starting this conversation. Hopefully you'll keep ICEF in the loop. Thank you to the folks who are on this call. And please do sign up for the 2007 Summit, if you haven�t already! I look forward to seeing you all in October in Philadelphia. Let's keep this discussion going.