Closing the African-American Startup Gap (Opinion) Targeted minority-lending programs have had only limited success in encouraging new-business creation among minorities. Could crowd-funding help close the startup gap?
By Scott Shane •
Opinions expressed by Entrepreneur contributors are their own.
Many African-Americans want to run their own businesses. Some surveys show that African-Americans are more interested in running their own businesses than whites. African-Americans are more likely to initiate the new-business creation process than whites although they are less likely to have an up-and-running business a few years later, according to the Panel Study of Entrepreneurial Dynamics, a representative survey of the adult-age population housed at the University of Michigan.
Despite entrepreneurial tendencies, African-American small-business ownership lags that of whites. White men run their own incorporated businesses at more than twice the rate of African-American men, and white women do so at more than three times the rate of their African-American counterparts, analysis by Bureau of Labor Statistics economist Steve Hipple reveals.
Policy makers have historically relied on targeted minority-lending programs when seeking ways to close this gap, but these efforts have met with limited success. Now would-be entrepreneurs can take advantage of the new equity crowdfunding legislation to try a different and potentially better solution.
Let's take a closer look at the problem. Researchers, policy makers and social advocates point to differences in social networks, role models, education, and occupational choice as reasons that African-Americans are less likely to run their own businesses than whites.
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While all of these factors no doubt matter, research by University of California at Santa Cruz economist Rob Fairlie shows that the most important factor is a difference in wealth. Because most entrepreneurs finance their businesses largely from their own savings and personal borrowing, net worth has a huge impact on whether would-be entrepreneurs can turn their new-business dreams into reality.
The typical African-American would-be entrepreneur is much poorer than the typical white one. Federal Reserve statistics show that the median African-American household had a net worth of only $15,500 in 2010, as compared to $130,600 for the typical white non-Hispanic household. Because the capital requirements to start a business are the same regardless of the would-be entrepreneur's race, that nearly 13-fold difference in net worth means that a much smaller fraction of interested African-Americans have the money to start companies than interested whites.
Loan programs targeted at minorities haven't eliminated this entrepreneurship gap between the races. Only a small fraction of people starting businesses get loans. Consequently, loan programs cannot address the shortage of capital facing the vast majority of American-American would-be entrepreneurs, who, like most would-be entrepreneurs, don't have credit-worthy businesses and need to self-finance.
What's more, to get a loan, you have to have adequate collateral. Lenders can't allow African-American entrepreneurs to put up only one-twelfth the collateral of white entrepreneurs. It follows then, that even in the presence of targeted loan programs, many African-American lack the net worth necessary to borrow.
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Finally, few start-ups can handle debt. To meet scheduled interest payments, a business needs adequate and consistent cash flow, which only a fraction of businesses have in their early years. Accordingly, even when debt is available to minority entrepreneurs through targeted programs, few African-American entrepreneurs have the types of business to take advantage of it.
The new Jumpstart Our Business Startups (JOBS) Act offers an additional, and potentially better, solution to the net-worth gap that holds back African-American entrepreneurship. The law, which was enacted in April, permits equity crowdfunding. If churches, community groups and other organizations interested in enhancing entrepreneurship in the African-American community set up equity crowd-funding efforts, they could aggregate small amounts of money from many individuals to provide capital to would-be entrepreneurs blocked from starting companies by their own limited net worth.
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