While entrepreneurial startup activity is on the rise, Black entrepreneurs still face barriers their white counterparts don’t. Despite this, Black entrepreneurs make powerful contributions to the U.S. economy:
- According to the National Minority Supplier Development Council, minority businesses produce more than $400 billion in annual revenue and actively employ more than 2.2 million people, either directly or indirectly.
- Minority-owned businesses contribute close to $49 billion in local, state, and federal tax revenues.
Even though the United States is becoming more diverse, there is continued disparity in entrepreneurship among people of color. That relative lack of representation reveals more than an untapped opportunity — if it isn’t addressed, it will be a long-term anchor on the economy.
I am a Black executive who has been on both sides of the aisle as an entrepreneur and investor. My intent of this post is not to dwell on the past or further admonish individuals on the racial disparities heightened in the wake of George Floyd’s murder, but rather discuss a path forward to increase representation rate as it relates to Black entrepreneurship.
I am the product of very educated grandparents (all with master’s degrees) and parents who were among the first to attend integrated Southern colleges. We beat the odds. Their conviction and success have bestowed upon me incredible opportunities, including attending top universities and having executive-level roles at premier global companies. Yet, my family and I never seriously discussed or considered entrepreneurship, as a path for advancement.
At college, for most of the Black community, the goal was to focus on graduating, intern at a notable company (thank you INROADS), and ultimately land a good job or go to graduate school. There was very little consideration of going off to work for a startup; the closest thing was to work at an established technology company that used to be a startup, like Microsoft or Apple. It should be noted, by the way, that I was literally studying near the trailers where Yahoo and Google were launched.
While I tried the corporate path, I realized early on that I was wired differently and pursued the entrepreneurship path interspersed with “good” corporate jobs. To that end, I have been a part of 5 entrepreneurial ventures, 2 of which were acquired, and one that went public. So, looking back, why was pursuing a career as an entrepreneur not my primary focus?!?
In this series, while I will discuss the current challenges and obstacles, I will also offer recommendations on how we can improve the odds of “entrepreneuring while Black” going forward. The objective to change the mindset so that the pursuit as a Black entrepreneur is given greater and more serious consideration and to improve the chances for success.
And, like any good future-state project, before we begin, we must first conduct a current-state assessment of where we are so that we can evaluate our situation, identify areas for improvement, monitor, measure, and improve. Yes, I’m a consultant at heart, so this approach is hard-wired in me.
The Challenges of Entrepreneuring While Black
There is a significant appetite for entrepreneurship in the Black community. According to the “2019 State of Women-Owned Businesses Report” commissioned by American Express, Black-led companies represent 89 percent of net new firms, most of which, are led by Black women.
To look at it more broadly, while Blacks make up more than 13 percent of the U.S. population, they only own 7 percent of the businesses. The reasons for this gap vary depending on whom you ask, but most agree that this is predominately due to racism, discrimination, and limited access to economic and business resources.
While racism and discrimination are significant forces driving these challenges, the sources of the gaps in the performance of minority firms can be examined through four critical factors for successful small-business ownership:
- Financial Resources: Access to sufficient financial capital to establish a venture, buffer losses, achieve efficient scale, and exploit business opportunities;
- Management Capability: The leadership of sufficiently skilled and capable entrepreneurs to effectively launch and operate a venture;
- Brand Awareness: Exposure of a venture’s products/services leading to an increased awareness of the brand in which to successfully promote and sell; and
- Venture Capital Access: Access to Venture Capital (VC) firms in which to successfully promote a venture, improving the likelihood of receiving investment and associated benefits.
In my case, even though I had the pedigree (BS, MBA from the top schools in the world, executive roles in the Fortune 50), there were inherent obstacles that my pedigree could not overcome.
I cannot predict which start-ups will succeed, but I can tell you from experience that those start-ups with limited capital have a higher likelihood to fail. A business that starts from a strong financial position is more likely to be able to endure challenges, adapt to change, and scale based on opportunities that arise. Startups with more initial funding are also more likely to receive additional sources of funding during financing rounds, which effectively compounds the negative effect of a smaller initial raise.
For many Americans, capital is created through homeownership and family assets. With significant (and widening) racial and ethnic gaps in overall wealth, access to starter capital is even more difficult. Black families have lower wealth levels than white families do, which results in the lower equity levels of new Black businesses compared to White businesses.
And, while not all businesses can be high growth, this lack of access to capital trickles down to bank loans and lines of credit. Due to a lack of locally-based financial institutions, good credit, and financial literacy, Black entrepreneurs are locked out of debt and equity capital. Moreover, without access to well-capitalized social networks, Black entrepreneurs lose out on any chance for meaningful friends and family rounds, as well.
A critical factor impacting the success of Black entrepreneurs also relates to their ability to develop and execute a solid business strategy and manage underlying business operations mostly due to limited experience and exposure in these roles. Prior family business ownership is far less frequent among Black entrepreneurs than among Asian and White entrepreneurs. Black entrepreneurs have lower education levels and fewer years of managerial experience than Asian and White entrepreneurs.
These traits result in lower opportunities and success at starting new businesses, and a greater propensity to enter business lines with low entry barriers (thus higher failure rates) and lower business survival rates. Exposure to an environment rich in entrepreneur human capital, including management guidance, will have a significant impact in developing the appropriate and applicable skills for aspiring Black entrepreneurs.
Marketing and sales are essential, but brand awareness also plays a significant role in driving sales. In fact, 82 percent of consumers searching online favor brands that they know. Yet, Black-owned businesses are disproportionately located in urban areas and disproportionately serve ethnic retail markets according to the Kaufman Compilation report on Race and Entrepreneurship. As a result, Black entrepreneurs have limited opportunities outside of this urban sphere to raise brand awareness, thus impacting sales.
Simply put, consumers don’t buy what they don’t see. If you shop in J. Crew all the time, it’s doubtful you know what’s popular at Footlocker. A limited exposure also fuels the perception that Black solutions and services are inferior and not ones that will have a more significant and broad impact.
Additionally, there is a perception that Black entrepreneurs are not seen as legitimate in the same way as entrepreneurs of other ethnicities because of the negative stereotypes associated with Blacks. This negatively affects consumers’ intention to patronize Black businesses. This lack of legitimacy has resulted in Black entrepreneurs struggling with entry and success in businesses not typically associated with Black entrepreneurship (e.g. high tech), thus limiting them to businesses, which they are typically associated with (e.g. hair salons, music stores). To gain legitimacy and be taken seriously often requires the involvement of white males as partners or in leadership roles in the associated venture.
Venture Capital Access
There is a lot of myopia in today’s venture capital (VC) firms primarily driven by the lack of diverse representation as noted in this TechCrunch report. Venture firms and investors who still claim they cannot find racial minority entrepreneurs to invest in today are not looking hard enough. The fact is that talented black founders are only growing in numbers, and that is despite a system that continues to discourage them systemically.
- Minority entrepreneurs made up just 8.5 percent of the people pitching their businesses to angel investors in the first half of 2013, according to a report by the University of New Hampshire’s Center for Venture Research.
- In general, White- and Asian-Americans are overrepresented in both large technology companies and the venture world relative to their share of the U.S. population.
While trends have recently begun looking up, venture capital firms still need to do much, much more — if not for any noble or virtuous reason, at least because it’s good for business and represents an untapped opportunity.
Why It’s a Problem
Understanding and supporting the needs of minority entrepreneurs is not just a moral imperative, but an economic one as well. The workplace is getting increasingly diverse. According to the U.S. Census Bureau, the minority population is expected to rise to 56 percent of the total population in 2060, compared with 38 percent in 2015. This growth, coupled with the fact that minority-owned businesses have increased more than 50 percent over the last decade, means that the future economic growth of America will increasingly depend on this burgeoning group.
If a company desires to address this trend and seek to reach a more diverse consumer base, across gender, ethnicity, and class allows businesses to better connect and engage with customers, as noted in this 2018 Forbes article, it needs more diverse perspectives to clearly understand how they make their purchase decisions. A homogenous environment can adversely impact a company’s bottom line in ways both tangible and intangible.
Amid this technological renaissance, we will see much farther-reaching impact if we surround ourselves with a more diverse set of experiences and invest in a manner that reflects diversity. We have a considerable opportunity to address meaningful issues and achieve significant returns, and the longer we wait, the more opportunity is lost.
A Path Forward…
While entrepreneurial startup activity is on the rise, Black entrepreneurs still face barriers their white counterparts don’t. Despite this, Black entrepreneurs make powerful contributions to the U.S. economy. This first post provides a current state assessment of the matter. The intent is not to scare but to allow ourselves to have an open and frank discussion on “Entrepreneuring While Black.” While there is no silver bullet, it seeks to capture the current state in order to recalibrate and drive momentum in the right direction, enabling both investors and entrepreneurs alike to turn the corner and unleash the potential that exists with the Black entrepreneurial community.
In this series, I will seek to offer fact-based recommendations and guidance in the hopes of making gainful advances that are measurable and impactful in the area of Black entrepreneurship focusing on the following areas:
- Increase Exposure to Entrepreneurship: Create and increase internships and apprenticeships to help young people of color learn more about entrepreneurship.
- Drive Access to Viable Markets: Enable entrepreneurs the opportunity to market and sell their products/services successfully.
- Create Access to New Social Networks: We need allies; institutions need to broaden the outreach of their business and social networks.
- Pursue Advanced Financing Solutions: Enhance capital vehicles, including consistent and relevant credit models, to extend credit responsibly and improve capital availability for individual Black entrepreneurs.
- Develop a Pipeline to Access Professional Education Programs:As the cost of education skyrockets,increase access to educational resources on demand and partner with technology companies and institutions to make access to computers more readily accessible.
- Establish a Talent Development Pipeline: The establishment of the entrepreneurship ecosystem consisting of the exposure, education, and skills development is a critical pathway to develop and drive entrepreneurship.
- Develop and Employ Entrepreneurship Scorecards:According to Peter Drucker, “you can’t manage and do things right in your business if you’re not measuring it.” To be held accountable; devise and employ scorecards to monitor and measure performance and employ criteria in personnel performance evaluation.
- Make Entrepreneurial Support Organizations More Inclusive:Encourage entrepreneurship support organizations to track entrance and retention rates of entrepreneurs of color. This data can track progress and help identify challenges to address.
I welcome your feedback and contributions as I am vested (excuse the pun) to make meaningful change and advancement in this critical area of “Entrepreneuring While Black.”
About the author
Ronald (Ron) Berry is a senior-level executive with global experience and success in B2B and B2C digital commerce in a variety of industries and businesses. If you have any further questions or would like provide additional insights, please contact him at ron@EastanConsulting.com.