In a previous post, I outlined three truths about today’s economy that should guide our efforts to restore economic opportunity for all. This series is a deeper dive into those challenges, and some of the promising solutions I’ve observed.
I recently came across a powerful report released in December from The Kauffman Foundation, entitled “Including People of Color in the Promise of Entrepreneurship”. The data and insights included cast a spotlight on the unique challenges faced by entrepreneurs of color when launching businesses. They also highlight the economic potential that we squander every day that w
e allow barriers to persist. Kauffman estimates that a 10% increase in the number of firms owned by people of color, for example, could result in 1 million net new jobs for people of color.
The report is critical reading for anyone invested in America’s overall economic growth. That’s because the economic success of our nation’s fastest growing populations—people of color—spells the economic success of our nation.
And when I hear about the experiences of people like Chester Williams, an African-American business owner living in New Orleans, I’m reminded that these statistics aren’t just abstract numbers but, in fact, the summation of countless individuals who face undue hurdles every day in pursuit of the promise of entrepreneurship.
Williams, who my team recently had the opportunity to speak with, decided to go into business for himself as an electrical contractor a few years back. He had over two decades of experience in the trade to back him up. But as it turned out, what he lacked would prove a bigger factor in his success or failure than his expertise: that is, capital.
Starting out, Williams explains, he worked out of his kitchen. He’d arrive at jobsites equipped with just his truck and two workmen. The lean set-up made it possible to stay afloat, but it was no recipe for long-term growth. There were bigger, more lucrative jobs that Williams knew he was capable of taking on. But they’d require investment in equipment and the capacity to expand his payroll. He couldn’t even afford the paperwork to vie for contracts. Williams desperately needed capital, but was repeatedly denied credit by local banks, often on the basis of his credit score. “Look at the statistics of all of the businesses that fail. Now imagine you have no money.
You’ve basically got to start up your business from zero, with zero.”
The solutions that Williams needed in the early days of launching his business are the same ones that we need to be implementing across the country, to reduce these barriers for entrepreneurs of color at scale:
Limited Access to Capital
For one thing, we know that there’s a mountainous racial wealth gap. That means entrepreneurs of color are less likely to be able to draw on personal assets or turn to family and friends for funding in the early stages of business development. For Williams, this gap also manifested itself as he tried to establish a customer base. He started out, as most entrepreneurs do, through word of mouth in his own networks. “But if you’re African American in New Orleans,” he explains, “that’s more likely than not going to mean people with much less disposable income. You start working for your friends, trying to build up your business, but they can’t even afford to hire you.” He explained that he’d often work at a discounted rate, and would sometimes complete a job only to find that the customer could no longer pay for it. Trapped in this pattern, it was difficult to see a path to financial stability, much less growth, for his business.
This “friends and family gap” makes the ability to secure capital from elsewhere even more critical. Yet, a paltry 1% of venture-backed firms have African-American founders. People of color are rarely at the decision-making table where investment capital is concerned; senior teams of America’s venture capital firms are 78% white, and only 1% Black and 1% Hispanic. When it comes to loans, studies have shown that entrepreneurs of color on average face higher denial rates, pay higher interest rates, and receive lower amounts on business loans than their white counterparts.
Studies have shown that entrepreneurs of color on average face higher denial rates, pay higher interest rates, and receive lower amounts on business loans than their white counterparts.
A new fund called Groundwork is targeting this problem in the tech space. As a venture capitalist, founder Jason Towns knows that entrepreneurs desperately need early-stage dollars to give their good ideas a chance to flourish into high-growth businesses. Groundwork will provide capital to its first cohort of minority-owned tech start-ups in 2017. The Impact America Fund and The Runway Project are among many others targeting funding needs for similar entrepreneurs.
No one’s Born a Businessperson
Another hurdle alluded to in the Kauffman report is the barrier to acquiring the skills and know-how needed to establish and grow a company. As an entrepreneur, by definition much of your work is in uncharted territory. Learning from others’ experiences can demystify the process in a way that raises the likelihood of success. Groundwork will create an online network for entrepreneurs to share experiences and learn from one another. There are other groups, like Village Capital, which bring together cohorts of entrepreneurs for a rigorous business crash-course. The Village Capital program also connects participants with a network of powerful mentors across the country.
However, entrepreneurs don’t necessarily need to participate in intensive accelerators to learn from their peers. In Albuquerque, New Mexico, business-owner Carmen Bolivar attends a weekly gathering called Taza–inspired by the “1 Million Cups” network–where she can get a good cup of coffee and the chance to connect with dozens of other Spanish-speaking entrepreneurs in the City. When she first launched her dress company, she felt like she was going at it entirely on her own. “Nowadays, I know about Taza, that helps me feel safe,” she says. “I do not feel alone, and I know that…I will be guided.”
Revenue as a Recipe for Growth
Chester Williams’ path forward was made possible by the New Orleans Mobilization Fund, which is how I learned of his story. For Williams, the biggest barrier to growth was insufficient cash on-hand to take on City contracts. Those were the jobs he’d need to win in order to build a stable revenue stream and grow – though public sector contracts also involve longer-term, more unpredictable payment schedules. The recently launched Mobilization Fund, which Living Cities has invested in, provides people of color-owned businesses with working capital loans to bridge those long months until payment comes. When Williams’ application was granted, his business practically changed overnight. Within two weeks, he had scored a major contract with the Regional Transit Authority. That boosted his gross revenue enough to qualify for Goldman Sachs’ 10,000 Small Businesses program.
The Mobilization Fund also includes that critical element of business coaching. Williams’ loan agreement requires him to periodically meet with underwriters for support. He credits this component with turning him from an electrician into a true businessperson. They’ve helped Williams get serious about collecting on his invoices, something he struggled with before. Now, he’s motivated by the knowledge that paying back his own loan enables the Fund to generate new loans to other local entrepreneurs. Today, Williams employs a staff of eight, and when he spoke about his business it was with excitement and confidence about the future.
Each of these efforts is powerful on their own, but they also create a snowball effect. Knowing someone in your network who is an entrepreneur may make you more likely to follow suit, according to another study from the Kauffman Foundation. Low rates of entrepreneurship by people of color in the past pose a current challenge, making it more difficult for people of color to find footsteps to follow. But for every person of color who can surmount these hurdles, the next crop of potential entrepreneurs gains exposure to another powerful example.
In light of Kauffman’s new report, I have steadfast confidence in the promising efforts I’ve seen making strides toward reducing these disparities and redefining America’s democratic capitalism. But I’m more convinced than ever that we have to scale up. The statistics make clear the gravity of the problem. But the experiences of people like Williams—entrepreneurs who have beat the odds—show that targeted solutions can not only transform individual lives but also positively impact economic outcomes at the local, regional and eventually, national scale.