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Mixed Signals: The State of Black Entrepreneurship

The gap in businesses ownership rates between whites and blacks is widely regarded as evidence of inequality. How bad is it really, and what can be done?

When he started his company, Donald Coleman had nothing but his personal savings and a few faithful friends to fund it. Twenty years later, GlobalHue, Coleman's marketing communications agency that focuses on minority consumers, closed 2008 with $825 million in billings. Numbers like that earn Coleman membership in an all-too-exclusive club: He is a successful black entrepreneur. And he has an idea why there aren't more people like him.

"I think it's quite evident that the lack of access to capital is the reason why there aren't more minority entrepreneurs," he says.

Coleman's experience resonates with studies like Race and Entrepreneurial Success, published last year by University of California, Santa Cruz economics professor Rob Fairlie and research associate Alicia Robb. They analyzed confidential data from the U.S. Census Bureau to paint a comprehensive picture of minority business ownership, and the results, at least for black entrepreneurship, are bleak. Overall, the number of black business owners is far lower than the national average, and their businesses also "tend to have lower sales, fewer employees and smaller payrolls, lower profits, and higher closure rates." (To see if this is unavoidable, read the sidebar .)

Fairlie reveals the worst part: Change is nowhere on the horizon. "There's no evidence business ownership rates have improved a lot in the last 25 years," he says. "Blacks have made fair gains in the labor market, education, politics and legal issues, but it seems to me like business ownership and performance are areas that have not seen the kind of progress that we've seen elsewhere."

The culprit, says Fairlie, is a low level of personal wealth, which translates into limited access to startup capital, and ultimately puts a stopper on the accumulation and transfer of riches to the next generation. Nearly half of all black families possess combined assets of less than $6,200--roughly one-eleventh the median for white families, he points out.

Fairlie laments that policymakers are overlooking the problem, and the current financial crisis won't make it any easier. But the stakes are high, he says, referring to a data simulation wherein a 10 percent increase in the number of minority businesses and a 10 percent increase in the number of employees resulted in 1 million new jobs for minorities. "People underestimate how important business ownership is in terms of [reducing] overall income inequality."

A Brighter View of the Future
Thomas Boston is professor of economics at the Georgia Institute of Technology and CEO of EuQuant, a statistical research firm that focuses on community and business development in underserved areas. He is familiar with Fairlie's research, but says that while the study is unique, the results look so dire because the data sets used don't distinguish between side businesses and full-time endeavors. When examining the dynamics of growth among black-owned businesses, he thinks certain groups are more valuable, statistically speaking, than others.

The segment to look at, Boston says, is the 3.5 percent of black-owned businesses that account for the lion's share (approximately 45 percent) of the group's total revenue and employment. These numbers tell a different story. "There's still a gap, but that gap is narrowing significantly, both in terms of business size and the industries in which they operate."

Twenty years ago, black-owned businesses were mostly small-scale service and retail establishments, but taking a snapshot today, businesses are in more diversified industries like construction, technology and health services. He adds that black-owned businesses without a payroll average receipts of $21,000; those with payroll, $700,000.

Boston also notes that African Americans comprise the highest percentage of people interested in starting a business. Of course, the disparity between those who want to start a business and those who actually do is largely defined by wealth and access to capital, but as things improve over time (and credit markets begin operating smoothly again), this should be reflected in actual rates of business ownership.

Although demographic indicators and business performance data reflect a grimmer reality, some black entrepreneurs have noticed a sea change in recent years, brought about by a technological shift that they expect will render current views of black entrepreneurship obsolete, especially where it concerns the principal barrier to entry: startup capital.

Johnny Palmer, founder of BlackEntrepreneurship.com , remembers being stumped by a lack of accessible resources for black entrepreneurs in every venture he pursued, from car dealerships to consulting. "I always felt like I was starting from zero," he says.

To play his part in changing things, he launched a website in 2005 as a source of information for other black business owners. Membership has increased by 200 percent each year, and Palmer expects more traffic as computer ownership and usage rates increase in African American communities.

Barriers to black business ownership have existed for decades, Palmer says, but the tides are turning. Technology--providing easy access to information and the abundant benefits of social networking--will serve as a catalyst for progress in black entrepreneurship, making it less cost-intensive to start and market a business. "With social media, the growth will be exponential. It's viral, and there's going to be wealth created here."

Like Palmer, GlobalHue's Coleman is also taking matters into his own hands. Having achieved his own success, Coleman hopes to encourage more entrepreneurial activity by easing the way for future business owners. This year, he established The Coleman Entrepreneurial Scholarship, which awards $5,000 for up to 20 students in select black and Hispanic colleges and universities. He says that given the downsizing in corporate America, and potential opportunities provided by the government's comprehensive stimulus package, it's a prime time for young entrepreneurs to position themselves as entrepreneurs.

What Next?
For Coleman, business ownership is a way to invest in the development of undeserved urban--mostly minority--communities. "Sometimes residents need to leave the community to find a grocery store," he says. "I think an investment should be made into the major urban cities that will [inspire] entrepreneurship to provide needed services."

EuQuant's Boston thinks the way ahead lies with policy, too. Having been involved in the city of Atlanta's initiatives to promote black-owned businesses for many years, he places emphasis on providing opportunities for minority businesses to win government contracting bids and enter the corporate supply chain.

Fortunately, there's good news on that front. Roger Campos, president and CEO of the Minority Business RoundTable in Washington, D.C., says that federal spending on minority business contracts has increased from $12.8 billion in 1978 to $531.8 billion in 2008. "And with President Obama's stimulus package," he says, "this number should move up again."

Certainly if black business owners can't win more contracts, simply throwing money at the cause won't be that effective. So another task that needs to be tackled is making sure black entrepreneurs know how to secure their chunk of those federal dollars and leverage the opportunity to take their businesses to the next level.

Ultimately, promoting black entrepreneurship has everything to do with improving and sustaining the vitality of the country's economy, Boston says. As Fairlie's study suggests, the creation of more minority businesses can spur job growth because black business owners have a greater likelihood of hiring black employees and locating their businesses in distressed communities.

"If this sector is generating jobs for African Americans, then they are addressing one of the key social problems that we continue to confront in society," Boston says. "The minority business sector is becoming a larger and larger market, and if the country is to continue to grow and be competitive, we have to make sure that this sector grows and is competitive as well."

Absolutes about the state of black entrepreneurship are difficult to come by, but one thing is clear to Farad Ali, senior vice president of the North Carolina Institute of Minority Economic Development and co-founder of PlanetMogul.com , an online community for entrepreneurial and professional development.

With the election of President Barack Obama and his rallying success of the "Yes We Can" campaign, black Americans see fewer obstacles. "Many black Americans are dealing with job losses, and while this can be devastating, many are aspiring entrepreneurs," Ali says. And as for established black business owners, they are "look[ing] forward to an economic recovery plan that will be inclusive."

Are Lower Levels of Black Business Ownership "Natural"?

John Butler, director of the Institute for Innovation and Creativity and the Herb Kelleher Center for Entrepreneurship at the University of Texas, Austin, believes it's only natural that there are fewer African American business owners.

"What drives innovation and entrepreneurship is immigrant status," Butler says, citing research that immigrants are four times as likely to be self-employed because entrepreneurship is the best way for them to adjust to a new social status or life in a new country.

Butler notes that in the early 1900s, shortly after slavery was abolished, black Americans were far more likely to be self-employed than any other group in the country. In subsequent generations, however, more individuals chose to attend colleges and universities as a means to achieve success. He explains that this is because immigrant parents tend to push their kids away from self-employment. "Americans want to work for companies. They want holidays, Christmases off."

Between 1990 and 2005, the percentage of immigrant-owned, venture capital-backed, wealth-creating companies leapt from 7 percent to 25 percent, Butler says, naming some examples: eBay's founder is a first-generation immigrant from France, Yahoo's from Taiwan, and Sun Microsystem's from Germany.

Although he doesn't deny the gap in business indicators, Butler thinks discrepancies are best explained as the result of a natural progression. For example, lower profits for black-owned businesses are because not as many are in higher-paying industries--yet. But in due time, any imbalance should right itself.

Studies on the topic often use faulty methodology, he says. "I don't know why people keep comparing immigrants to Americans. It's like asking why immigrants aren't in more colleges, or why more don't own houses. The circumstances are different."

 

Jennifer Wang is a staff writer at Entrepreneur magazine in Southern California.
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