The Dash for Cash Summer 2000 by Cynthia Y. Franklin, editor-in-chief, The KIP Business Report

Are Black entrepreneurs getting left behind in the race for capital?

America is awash in cash. Everyday the headlines are filled with stories of the latest dot-com billionaires. Major corporations are continuously merging to form new entities with stratospheric market capitalizations. Consumers flush with increased net worth’s from their stock portfolios are on a buying binge. Even the federal government is in a position to payoff the national debt, a heretofore unimaginable occurrence. Yet with all of these signs of prosperity why aren’t Black, Hispanic, and Asian firms dancing in the aisles?

That’s because despite collectively recording triple digit growth rates over a ten year period (168% from 1987 to 1997 according to the Small Business Administration) far outpacing the business growth rates for the general population Black, Hispanic and Asian firms haven’t been able to get the attention of the capital markets. Of all the equity capital invested in U. S. firms, these businesses only receive between 1 and 2% of all investment dollars. But as previously reported on these pages, their funding needs are in excess of $144 billion a year and growing. Even with collective revenue growth rates of 343% over a ten year period, businesses of color are still sitting on the sidelines at the boundless prosperity dance.

The Wealth Gap

When it comes to Black businesses, rationales for the discrepancies abound. "Black companies are too small to generate the kinds of returns the investment community needs." "Black businesses are primarily Mom & Pop operations." "Black businesses are not clustered in sexy, fast growth industries like biotechnology or the Internet." While there are elements of truth in some of these arguments, they do not begin to address the complexity of the issue.

Although Blacks have risen relatively quickly since the end of legal segregation in 1957, it wasn’t until the 80’s that we saw an acceleration in Black wealth accumulation. Is it any surprise that in 1995 the median net worth for Blacks was $24,750 compared to $115,000 for whites? Since most entrepreneurs use their personal resources or tap family members and friends to start or grow businesses, Black business owners find themselves with smaller financial reservoirs to draw from and fewer options for funding at the start-up stage than their white counterparts. In fact, more than 66% of Black businesses start with $0 to $5,000, severely limiting their long-term viability and constraining the owners ability to generate an adequate return on their investment. The long-term impact of this undercapitalization are manifested in data comparing Black, Hispanic, and Asian firms. Blacks have fewer businesses, those businesses have lower revenues, and slower growth rates than the other two groups, (see charts below.)

The Knowledge Gap

Yet, all is not gloom and doom for Black entrepreneurs. The number of Black owned businesses increased 108% to 880,000 over the past decade while revenues surged 85% from $32.2 billion in 1992 to $59 billion in 1999.

More importantly, Black owned firms have increasingly moved away from limited-potential enterprises like barbershops, beauty parlors, and retail food stores to focusing on finance, business services, real estate, and technology related industries. Furthermore, these firms are expanding beyond traditional boundaries and serving larger market segments.

A critical reason why many Black businesses have not participated in the country’s prolonged economic euphoria is a lack of exposure to and knowledge of the three strategic alternatives available when it comes to funding for growth: angel investors; private placements; and initial public offerings.

The problem is one of both policy and information. There is a traditional bias towards debt financing in the Black community. Government policies tend to favor and encourage commercial loans to Black businesses, which leads banks, community groups, and non-profit organizations to only develop and market lending programs aimed at this group. However, most businesses need a more balanced approach. A mix of equity and debt instruments makes for sounder long-term growth potential. Fortunately, this realization is growing in acceptance.

Bridging the Gap

The U. S. Commerce Departments Minority Business Development Agency created a capital access taskforce to examine the issue of equity funding of Black, Hispanic, and Asian businesses and devise policy proposals for government, the private sector, the financial services industry, and non-profits to implement.

The Clinton Administration has proposed a set of New Market Initiatives designed to prime the pump of equity capital flowing into these firms. The administration has also called for increased funding to the SBA for its Small Business Investment Company program.

Cities across the nation like Washington D. C. are setting up venture funds for small businesses to help them through the seed or early stage of development (unfortunately many of these funds are directed only at technology or new media companies).

The surging economy has created a situation where there is more money available than deals. Consequently, communities of color are starting to get the attention of Wall Street and other investors. So while the capital markets have been slow to ask these firms to join the party Black, Hispanic, and Asian businesses may yet get their chance to dance.

The KIP Business Report is the New York metro area's leading newspaper focusing on the business and personal finance issues impacting the Black community. If you are within the New York metro area and would like a SUBSCRIPTION TO THE KIP BUSINESS REPORT, call them at (212) 961-0809