lack Americans are no strangers to entrepreneurship. But sheer numbers of entrepreneurs do not translate into fast-growing companies that create jobs.
Case and point: The Bureau of Labor Statistics data show a 60 percent spike in Black entrepreneurship between 2002 and 2007, equivalent to 1.9 million Black-owned businesses. However, more than 1.8 million of those businesses were sole proprietors with zero employees. Thus, it’s no surprise there’s zero job growth and chronic high unemployment across Black America. According to a 2010 report published by the Kauffman Foundation, nearly all net new job growth in the nation since 1980 has come from “high-growth” growth companies, those whose revenues grow quickly.
To add insult to injury, the nation’s 1.9 million Black-owned businesses combined produced less than 1 percent of the nation’s GDP. And that was at the height of entrepreneurship in Black America … before the economic collapse.
Why do our businesses stagnate? Many reasons have been put forward, but one that is critical —lack of funding — will very soon have a potential solution.
High-growth entrepreneurship often requires the risk of significant capital investment in the beginning of a company, in the seed stage, where the difference between the life and death of an idea depends upon the availability of capital to sustain the business long enough to reach critical milestones. Without enough capital to maintain the startup through the “Valley of Death,” where entrepreneurs start their race against time and depleting cash reserves to reach a sustainable stream of revenue, the vast majority of these risk-taking job creators will watch their ideas die in the incubation or “seed” stage.
Funding is so essential to the process of innovation that Steve Blank, professor of entrepreneurship at Stanford University said in his Secret History of Silicon Valley, “Silicon Valley would still be a bunch of engineers working in their garages without a culture of risk capital.”
There is no “culture of risk capital” in Black America. But this month, President Obama signed into law a bill that could change that.
The JOBS Act
The JOBS Act (Jumpstart Our Business Startups), signed into law on April 5, 2012 allows entrepreneurs to raise money — through a process called “crowdfunding” — from people previously ineligible to participate in certain types of investments. For communities and entrepreneurs that have historically been disconnected from investing in private companies, the law is a boon.
“It’s difficult to raise funds because we are not in Silicon Valley where there are many investors that understand technology,” said Andres Montgomery an African-American tech entrepreneur who is CEO of his start-up Dreem Digital in Salem, Oregon.
The former Microsoft principal leads an award-winning team of experienced developers who deliver customized mobile education applications to K-12 schools, yet struggles to raise much-needed capital to grow his company.
“Our area understands agriculture so it’s a challenge to get a bank or investors that look to do collateral-backed financing (a tractor) to understand funding IP (intellectual property),” Montgomery said.
“The flip side is if we were in Silicon Valley our cost would be much higher — at least double — and the competition for attention would be more intense, since there would be many more tech startups to compete with. Crowdfunding allows investors that like the idea, but are not part of the VC (venture capital) community, to participate in an idea they like with less risk,” Montgomery said.
How Entrepreneurs Raised Money Before the JOBS Act
Before the JOBS Act, companies could raise money by soliciting the general public only under two circumstances: 1) hire a specialist to prepare expensive documents explaining the investment and submitting those documents to the Securities and Exchange Commission (SEC) for approval before soliciting the public, or 2) after soliciting the public, sell only to people who are SEC-qualified accredited investors. To qualify, investors had to have a net worth of $1 million and a minimum of $200,000 in annual income for the two most recent years, along with a reasonable expectation of future income at that level in the upcoming year.
To find people who meet these criteria, new companies often turned to angel investor networks — groups of accredited investors organized to find high-growth investment opportunities.
The Angel Capital Association (ACA) – formed in 2006 — is the national trade association for these groups of risk astute seed stage investors. Today, the ACA website declares 160 angel group members with more than 7,000 accredited investors. The ACA boasts a wing, supported by the Kauffman Foundation, which educates newly formed angel groups and individuals. But such groups of SEC accredited investors typically target nearby geographic regions and prefer familiar networks and frameworks. Nationally, there aren’t enough of these angel groups to hear pitches from all the entrepreneurs seeking to raise money. So the odds are low for everyone. But for minority entrepreneurs, the odds are worse.
Only one ACA angel group in the nation is founded by black Americans. One focus of the Minority Angel investment Network (MAIN) is to increase the amount of quality deals arranged with minority-led startups. Despite the low flow of high-growth investment deals in the pipeline, MAIN remains optimistic about the