An unemployment line, Photo Courtesy of Flickr/The Patron Saint
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
About the Author
Just so you know, Medicare was supposed to top out at around 6,000,000 when it was created. It has added about six more zeros since then.
If we wait 270 days (Around Jan 20, 2013), the train may not have left the station, but the point is we were waiting on the BUS.
If just one percent (20,000) of the Black firms in America contributed $1,000 to a capital fund over the course of a year, it would create a bigger pool of money than Mitt Romney started Bain Capital with, or about 1/25 the amount the taxpayers lost in the Solyndra project.
Blacks financed their entreprenurial efforts through pooling their own money and created viable businesses and jobs for their communities back when segregation mandated as such. So it can be done again with or without any type of crowd-sourcing from external sources. Every other ethnic group arrives in America, pools their resources and create jobs within their group so why in 2012 are Black still asking folks who don’t want us to prosper to help us do so?
AMEN, BRAH!
The crow funding projects I have seen look a lot like miniscule DONATIONS out of the goodness of someone’s heart with little or not expectation of profit in return.
If a company out there in need of hundreds of thousands can raise through crowd funding, no one on the planet would be happier (nor more shocked and amazed) than me.
The “Jobs Act” in my opinion is irrelevant for Blacks because it only applies to corporations and nobody in his right mind is going to invest in a company with zero employees, an average (according to that same census report) revenue of $75,000 and no company stock for that investor to hold in his or her safe deposit box.
The act will, however, create thousands of new “alternative” brokerages that will make a ton of money helping those companies prepare themselves for entry into the IPO (Initial PRIVATE Offering).
Even then, the money won’t be from Black businesses, but form the government programs that WILL be set up to pay for implementing the law.
Finally, 270 days after April 25 would make the kickoff date for publication of the rules a couple of days after the presidential election.
What would stop a President Romney from issuing executive orders negating or circumventing the law?
What would stop a reelected Barack Obama from saying “The economic conditions have worsened since April and we are unable to provide the funding for implementation of this law”?
Your comments are right n! We have the power to fix all these economic problems that plague or community, and the funding of our own by our own SHOULD be the easiest and fastest way to do it, but my experience and the evidence of decades of research don’t look very promising for that to happen.
If we won’t finance our own then why would anyone else do it?
Why should they?
This is really good information that all African Americans need to know. We have such a long way to go to come up to par with entrepreneurs of other races but at least we need to know where we’re starting from. I will share this info with our readers.
Usually I do not read article on blogs, however I wish to
say that this write-up very compelled me to try and
do so! Your writing style has been surprised me. Thank you, quite nice post.
A really smart investor looking to make his/her mark could if linked with programs like Project21 that are bringing prospective investors together with Black start-ups could literally cherry pick and establish a portfolio in a niche ignored by the others.
http://www.collaborativenewventures.com is another place to consider as well.
Thanks Janine. What is most astounding to me is the fact that this information isn’t well known. That’s because Black journalists and editors don’t know this information. It’s because the mainstream media isn’t concerned with this information. I’ve contact numerous mainstream media about this issue. Even the venerable Poynter Institute, which is known for training journalists, has elected to ignore this issue.
Without proper coverage, this issue of severe economic distress across Black America, remains relatively unknown. Unlike the Trayvon Martin case, which had a significant amount of organized movement to elevate it to the level of national discourse, Black journalists and media aren’t familiar enough with how job growth and wealth creation occurs in America, so they fail to cover it, write editorials about it, produce columns on it and discuss and debate it in the way they have latched onto the Trayvon Martin story. That’s an issue with which they are quite familiar. Yet, while both Trayvon and President Obama’s signing of the historic JOBS Act deserve significant coverage, only one has received it.
The problem with media ignoring a historic issue is that millions of Americans for whom that issue has significant impact will remain in the dark about it. I applaud Dominion of New York for understanding the importance of economics and its impact upon Black Americans, and being willing to cover this important issue, as well as discuss and debate it in the public square. I hope to see other Black-owned media follow Kelly Virella’s leadership.
Mike;
Maybe the Black journalists have been too busy preparing themselves to defend Obamacare.
I guarantee they have published reams of information detailing the perceived benefits of that law.
I think the mainstream press is not interested because they know it is just a feel good legislation created to give the impression that the congress knows something about how business works.
In my very humble opinion, what I find so often overlooked in transforming blacks from consumers to producers is educating them on the entrepreneurial opportunities in the tech sector. I truly believe this can be done, and have launched a tech startup of my own to prove just that. All it takes is one to succeed for others to know that they can do it too, ie Daymond John of FUBU.
From what I’ve found in creating my startup is there are estimated 42 million black population in the US (projected to be 44.906 million in 2015), approx. 76% of blacks are already online, 38.4% are middle class and 33% own smart phones. In 2010 their purchasing power was $913 million and projected to increase to $1.3 trillion by 2013. The question is, how do we harness the purchasing power of the community, and available technology and empower blacks to create jobs within the community itself?
Blacks have to be able to compete in the tech sector if we are to lift our own out of poverty by championing entrepreneurship, education, technology and the creation of job grown in our own community! Unfortunately, I’ve run into so many no’s and brick walls reaching out to other blacks with my startup that I’m at a loss for words to describe the lack of support. What would you do?
Actually you’re a thousand times off that buying power figure, which is 913 BILLION.
When you consider that figure next to the two million Black businesses, it comes to close to half a million dollars per business.
Two questions:
1. How many of us have that much revenue from our business?
2. With that much buying power, why are Black businesses not getting more of it?
What to do?
Start by adopting a RACE NEUTRAL business model and cease the attitude that we must all rise together.
Contrary to how it looks, Whites are not united. They operate in a dog eat dog world, and they are very good at it. When they realize they are not the big dog, they locate other dogs like themselves and form a PACK, and then they morph into wolves.
We seem to prefer the lone wolf route, not understanding the principle that a pack of wolves is a dominating force in it’s little part of the forest, but a that a lone wolf is nothing but a dog.
We need to develop the predatory instinct and stop being victims.
Great Post!
Mike;
The one thing the JOBS Act won’t do is make Black businesses attractive to investors. You ow data shows these are 99.999% sole proprietors, and I have seen data indicating the average net worth is less than $100, so unless an investor is willing to wit a decade or more just for his investment to break even, I can’t see where the act will benefit the average Black company.
As a pseudo-investment banker, I am not so sure I can find a lot of Black companies that would meet the criteria of even the least discriminating investor.
Steven, I agree with your point. The vast majority of Black-owned businesses do not meet the criteria of “high-growth,” meaning 10x to 20x return on investment within 5 to 7 years for risk capital investors, such as angels and venture capitalists.
But the opportunity within the JOBS Act is the crowdfunding feature that offers another tool of capitalizing under-capitalized businesses and startups. Black Americans don’t have the infrastructure and networks to survive the bootstrapping phase without help. Angels provide seed investments, but usually after the they see a prototype. Even in this technology savvy Information Age, prototypes and demonstration of market interest has a cost someone must bear. Typically that’s the entrepreneur’s investment, along with his/her team, families and friends. Most Black Americans don’t have the luxury to tap such a network. Crowdfunding may help worthy enterprises successfully push through the bootstrapping phase.
At the end of the day, however, crowdfunding isn’t a panacea. It’s a starting point. And unless we begin to discuss it, as it is being discussed, debated and influencing the majority demographic, we will continue to miss new opportunities in the 21st century global innovation economy. Missing too many could potentially result in the loss of the entire century and cementing ourselves as a permanent underclass. I’m hopeful we can get Black journalists and editors talking about this issue and covering it, as Kelly Virella is doing and demonstrating leadership. I’m hopeful political and business leaders across Black America will discuss and debate this issue. But heretofore there has been silence, even in the face of others racing past us to create a national crowdfunding association and summits, conferences and enterprises. Meanwhile, we stand silent. It makes me very nervous for our children and grandchildren’s future.
Thanks for your remarks. Much appreciated.
This is an great article. I surely wasn’t aware of the stats stated in the beginning (1.8 million were sole proprietorships). That’s astounding! One would think that if 1.9 million businesses were opened, job creation would be the result for a percentage of these businesses. Thank you for shedding the much needed light on this. On another note, what does that say about our perceived importance of business partnerships? Sole proprietorship means it’s a “one-man show.” No business is a one-man/women show. We need help, partners, alliances, etc. Although, I think that tide has changed since 2007; in that, we successfully seek and create these partnerships.
As for the JOBS Act, I am interested in the final draft (in 9 months) but also excited about the possibilities it will open up.