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Why is the Rate of Entrepreneurship Among African Americans so Low?





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In honor of Martin Luther King Day, I thought it would be appropriate to address the low rate of entrepreneurship among African-Americans.

White Americans are twice as likely as African-Americans to be in business for themselves. That’s a clear fact shown by all the data available. Even more puzzling, and troubling, is the fact that this ratio hasn’t changed sinced 1910, even though the lives of African-Americans have changed dramatically since that time.

Take, education, for example. The civil rights movement of the 1960s dramatically improved the average level of education of African-Americans in this country. In 1940, Whites were more than three times as likely as Blacks to graduate from high school (26.1 percent to 7.7 percent). In 2000, this ratio was much smaller, with 83.6 percent of Whites and 72.3 percent of African-Americans making it through high school graduation. Similarly, in 1940, 5.4 percent of White men completed college, as compared to 1.4 percent of African-American men. In 2000, 28.5 percent of White men, and 14.2 percent of African-American men, had competed college.

So what’s going on here? Why have we made huge strides in improving the lot of African-Americans, but done virtually nothing to allow them to catch up to Whites in their rate of entrepreneurship? The experts and the politicians have put forward a bunch of reasons, citing weak social networks for business formation, a lack of parental role models, lesser interest in starting businesses, and a bunch of other things. (The interest in entrepreneurship argument is actually completely untrue. African-American high school students are more interested in starting businesses than White high school students, and African-American’s begin the start-up process at a higher rate than whites.)

The true answer is very simple. It’s money. The average Africican-American simply doesn’t have enough money to start his own business. Even though starting the typical business doesn’t take much capital – about $25,000 – the amount of capital that is required is quite large in comparison to the median family income of an African-American household. This amount of capital is no problem for the typical White prospective entrepreneur to come up with. In 2000, the typical net worth of a White household was $79,400. However, it is a lot of money for the typical African-American household to scrape together because, in 2000, the typical net worth of an African-American household was only $7,500.

In other words, starting a business takes 2.8 times the net worth of the average African-American household as compared to 26 percent of the net worth of the average White one. And, the main source of capital for starting a business is an entrepreneur’s savings. As a result, many African-American would-be entrepreneurs simply can’t come up with the money that they need to start businesses, depressing the African-American start-up rate.

So don’t believe the myths, know the reality.

* * * * *

About the Author: Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of seven books, the latest of which is Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By. He is also a member of the Northcoast Angel Fund in the Cleveland area and is always interested in hearing about great start-ups. Take the entrepreneurship quiz.

28 Comments ▼

Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

28 Reactions
  1. [ The true answer is very simple. It’s money. ]

    I wouldn’t call that the “true” answer without some more study. What’s the average savings of a entrepreneur? Do they get a lot from friends and family? What about government loans? What about other low income groups, do they have low levels of small businesses as well?

  2. Have you seen any evidence that investors are starting to cater toward this new category of potential start-up companies?

  3. I think it’s deeper than that. Blacks don’t have easy access to money. When you talk about the net worth of people, most of that comes from home ownership. There is a larger percentage of Whites that are homeowners than Blacks.

    Most people don’t have $25,000 saved up, but people can tap the equity in their home. In that regard, Blacks just don’t have the same access to cheaper money. If Blacks are able to even get a loan, odds are that they’ll get it at a higher interest. The sub-prime lending debacle is a prime example of that. Let’s just be honest, until Blacks are treated the same, the statistics you quoted will probably be same in another 60 years.

    But you’re almost right, it all comes down to easy access to cheap money.

  4. While I understand and get your reality. My reality is that I live in Southern CA and have worked with Start Ups for 10 years. I a Pacific Islander , Yes I am often the darkest guy in the room but I have a white business partner. While a major investor is black, a board member is black and a former investment banker.

    So yes it would be great if there were more black or African American Entrepreneurs but hey I got a few on my team.

    By the way I use the term Black because there are actually Black Americans that are not African.

  5. Professor Shane, it is NOT about money.

    I strongly disagree with your conclusion.

    The reason that, we, African-Americans (although I prefer black American ie white American) are not more entrepreneurial is the same reason why we lack in education, housing, careers and money overall.

    JUST TO BE CLEAR – of course not all AfA but in comparison to whites.

    It is because many black Americans still have a slave mentality.

    This mentality is one of dependency on the government, a defeated attitude and one that does not allow one to rise above difficulty. Sure, there are MANY AfA who have risen above their meager or even bad circumstance – Condi Rice is one. Collin Powel (although from the Caribbean) is another example and there are many more as you know.

    The other reason, which has parts of all the above in it – is how parents raise their children. Many black (and white for that matter) parents do not spend time with their children and do not take the time to TRAIN THEM (training is key) how to be responsible citizens, how to be respectful of women, how to wait for gratification and not have it “instant”, and have respect for authority.

    I could go on, but it’s not all about money. Sure money is a PART of it. But there are poor white folks as well who have come from nothing to be something. Andy Grove (Intel) was not a rich man growing up (as I recall). The former president of Coke or Pepsi started off cleaning bottles when he first came from Cuba.

    I STRESS AGAIN this is NOT all black Americans but again comparing to whites only – a greater proportion of blacks are “down” than “up”.

    If more of our children are going to be entrepreneurs we must train them early about business, economy, working hard, saving money, making wise choices and learning from failure. My son was about 5 years old maybe 9 – I can’t remember – when he want to one of my speaking engagements. He was about 12 years old when he helped me at a large NYC exposition. He wants to be a foot ball player – but trust me, when he’s 21 he’ll have a range of exposure to life and will have the intellectual tools to make the right decision for himself (while still needing to learn more about life of course).

    Why is there so much black on black crime in the streets? Why are there so many young girls with no fathers raising children? The two are connected.

    Why when a black youth shoots a cop – you hear the mother saying her son was an angel? Lack of responsibility and taking it upon oneself is lacking.

    I’ve probably written too much. But black folk don’t need money we need loving families with parents who will train children. A great and inspiring woman / man has the best chance of coming from the child of great and inspiring parents.

    In any case being an entrepreneur is NOT for everyone – but the day we have better educated children. The day we have children trained to be respectful, resourceful and hard working is the day we’ll have more black entrepreneurs.

    One thing I like about Barak as opposed to other “black leaders” is that he’s not playing the race card in this political race – he’s just saying vote for me.

    Trust me – if a black guy or a white guy has a great idea, service, product the MARKET will vote for the “winner”. Neither needs a ton of money – just resources and access which is available to all.

    Ramon Ray, Editor & Technology Evangelist, Smallbiztechnology.com (who just happens to be a black American)

  6. I guess a lack of money and a lack of access to money can be blamed for anyone not starting a business, no matter what their colour or ethnic background.

    I do not for one minute want to belittle the lack of money, because as anyone in business will tell you it really is an issue, however, a lack of money does not need to stop you.

    Bootstrapping, bootstrapping for business refers to starting a business on a shoe string, if not less, it’s a way of doing everything with little or no money, now granted if your business idea requires machinery, equipment etc this is not so easily done, but money nor access to it should really stop anyone starting a business, not if they truly have a passion for what they do.

    There are many advisers, just like us, who help businesses, and you know what, some of them have very little money, but they have a dream and a passion and that will carry you some of the way.

    So bootstrap your business idea, find an adviser to partner you and hold on to the dream , because when it gets tough, and it will, the dream is what will get you through.

    Do a Google search for ‘bootstrapping for business’ it will throw up all sorts of links and helpful references.

  7. “It is because many black Americans still have a slave mentality.

    This mentality is one of dependency on the government, a defeated attitude and one that does not allow one to rise above difficulty. Sure, there are MANY AfA who have risen above their meager or even bad circumstance – Condi Rice is one. Collin Powel (although from the Caribbean) is another example and there are many more as you know.

    The other reason, which has parts of all the above in it – is how parents raise their children. Many black (and white for that matter) parents do not spend time with their children and do not take the time to TRAIN THEM (training is key) how to be responsible citizens, how to be respectful of women, how to wait for gratification and not have it “instant”, and have respect for authority. . . ”

    Well said Ramon. I totally agree with the above statements. The dependency, defeated attitude – and need for “instant” gratification – coupled with upbringing. Without a parent encouraging the child and reminding them that they can do – and be – anything they want. . .the child doesn’t have the confidence to drive towards dreams, goals and aims – regardless of color.

  8. I find these statistics suprising, because I’ve always had a very high level of exposure to successful Black entrepreneurs – personally and professionally. I think that many things are going on here – but education and money are certainly two of them. I’m an entrepreneur, and own and operate a small PR agency (In the spirit of Martin Luther King Day – tell a friend: Mastermindpr.com. If it weren’t for my husband (educated and financially secure), my threshold for risk would be much lower, as he provides a financial safety net for our family. However, because I’m educated and skilled in my profession, if my business failed, or I changed my mind about operating one, I could easily pop back into a senior corporate PR job, dust myself off and keep on going. Not everyone has that luxury, and practical concerns are king, like, “How am I going to put food on the table?” or “How do I keep the lights on this month?”

    To Ramon’s point: Without money, family support and role models, it’s much more difficult to imagine going solo. Sometimes entrepreneurship is inherited (i.e. family restaurant) or just in the family blood. My father is a private practice physician (self-employed) and my mother is a real estate investor and business owner. All they’ve ever said to me, is “Go! go, go!”

    The better question is, how can we provide better mentoring, encouragement and resources to aspiring Black entrepreneurs who are ready to go?

  9. Dawn Rivers Baker

    You know, there is a particular factual error in the post that started this conversation and I think it needs to be corrected.

    Research released about two years ago by the SBA Office of Advocacy found that, on average, small business owners report that it costs about $6,000 to start a business. In a service economy in which you can make money based on what your know or know how to do or know how to find out, starting a (virtual) business can cost practically nothing.

    Recent research from the National Association of the Self-Employed (NASE) found that only 2% of startup microbusinesses (which comprise 91% of all U.S. firms) are able to secure SBA financing, and another 4% access traditional bank financing. By far the largest source of startup funding for most U.S. businesses are (a) personal savings (57%) and (b) credit cards (12%). That covers 69% of all microbusiness startups.

    I also think it is worth nothing that while rates of entrepreneurship continue to be very low among black Americans overall, Black women are actually more likely to start a small business than their white non-Hispanic counterparts.

    It is also worth noting that, while the percent of U.S. firms that are owned by blacks was only 5% as of 2002, the NUMBER of U.S. firms owned by black grew by an astonishing 45.4% between 1997 and 2002 — another testament, I think, to how start up costs radically declined around the turn of the century.

    Personally, I pretty much agree with Ramon, up to and including an appreciation of the fact that Senator Obama has chosen not to ram his race down everybody’s throat. That said, I would expand the culprits (if we really need to sit around and point fingers), because there are almost no social institutions in poor black communities that are not dysfunctional.

    Then again, a lot of the same problems exist in poor white communities — up to and including the poor parenting. To be honest, I don’t really believe that black American poverty is very different from white American poverty, although people persist in thinking that it is. In fact, I think that if we could bring ourselves to remove the issue of race from the issue of poverty, we might collectively address the problem much more effectively.

  10. Well said, Dawn! I questioned the initial data, and you, as always, have managed to educate and enlighten.

  11. I love all the spirited discussion. There is too much agreement on this site. I like some difference of opinion and I like the way you’re all conducting it, through reason, logic and facts — not emotion.

  12. Much of the issues in the black community with regard to entrepreneurship is due to desegregation. My father, a black business owner many times over, constantly says that desegregation was the downfall of the Black entrepreneur. Prior to desegregation – black communities had black owned businesses because that was the way it had to be. Blacks could not go into a white community so they created and patronized their own businesses. You could go into a Black communities and find grocery stores, restaurants, barbers, shoe cobblers, bars – all black owned. The moment Jim Crow was lifted – out of the excitement of being FREE to go and shop anywhere – Blacks stopped buying from Blacks. They had options – usually cheaper ones.

    This is best exhibited in the HBO movie “Lackawanna Blues” which depicts a thriving self-suffcient Black community until Jim Crow laws were lifted and Blacks abandoned their own neighborhoods to LIVE FREELY elsewhere. The film shows the community become a rundown boarded up ghost town. It is quite dramatic.

    My father does not think that Jim Crow laws were good for Blacks however he believes that it forced us to be self-sufficient. Now everyone looks for a job rather than create a job for themselves. It was that FREEDOM given to Blacks that created a worker society out of Black people. It something to reflect on…

  13. Dawn Rivers Baker

    You know, prbrandingzone, in many ways, your comment proves Ramon’s point. Not to mention the fact that it’s rather silly, if you stop and think about it.

    First of all, I suspect that you’ll find we have a worker society anyway, irrespective of race. People (not just black people) in this country are educated to be employees, not entrepreneurs. And it is for that reason that most people (not just black people) believe that employment, rather than entrepreneurship, should be the rule rather than the exception.

    That is not always the way it was in this country … but I digress.

    What you say may have made sense in a time when white Americans would not buy from blacks and, often, would not sell to them either. Those days are long gone. Black don’t need to rely on “blacks buying from blacks” in this day and age; in fact, these days, it is entirely possible to operate a wholly color-blind business in which your customers never even discover what race you are.

    Or, you can choose to run a business with a racial chip on your shoulder, thereby driving many customers (of all races) away …

    If there is anything that is holding black Americans back (in a variety of ways), it is this persistence in claiming that everything that ails us is SOMEBODY ELSE’S FAULT. That attitude assumes that we have no control over our own destiny and that the only way for us to be self sufficient is to institute some sort of self-imposed trade embargo on our own communities; it is an insulting idea.

    That is the very slave mentality that Ramon was talking about.

  14. I want to follow-up by quoting Anita Campbell:

    “I love all the spirited discussion. There is too much agreement on this site. I like some difference of opinion and I like the way you’re all conducting it, through reason, logic and facts — not emotion.”

    And then give you a great source for further studies:

    http://www.capmag.com/reason-vs-racism/

    Best Premises,

    Martin Lindeskog – American in Spirit.
    Gothenburg, Sweden.

  15. Really, I think you’ve reached a hasty conclusion. Some of it may be about money, but there’s more to it than that. I just interviewed a successful African-American businesswoman for my book (on transitions from corporate business to one’s own business), and she would disagree. She believes it’s the absence of black entrepreneurial role models. She also believes that there are growing numbers of African-American entrepreneurs, but that has only happened very recently. As the numbers grow, I expect we’ll see momentum. [Me? I’m what she undisparagingly calls one of the Blonde Blue-Eyeds.]

  16. I am the aforementioned African American woman referred to above and I must say this article leaves me extremely disappointed. Even the subject of the article is inaccurate.

    If your intent was to help African Americans because it is Black History Month, please do us a favor don’t!!!

    The U.S. Census Bureau “www.census.gov” reports that in our nation’s most recent statisical data the Rate of Entrepreneurship among African Americans is the highest in the nation.

    For the period 1997 to 2002 the ROE for African Americans was 45% compared to 31% for Hispanics, 24% for Asians, and 20% for women. It took me less the 5 minutes to search the internet to find that data. Please take a moment do the same, then correct your “facts”

    As African Americans, we are often annoyed by the fact that the media consistently reports on bad trends about us further damaging our psyche.. now even when we have great news, someone like you failed to do your homework and again manages to paint us in a bad light. Shame on you!!!

    Next time you choose to “Honor” Martin Luther King! Honor him and his legacy by doing your homework first!!!!

  17. Sharon, I’m sorry to tell you this but you have misinterpreted a statistic. What you refer to in your comment is not the rate of entrepeneurship among different racial, it is the rate of change in the rate of entrepreneurship among thos groups.

    If the rate of entrepreneurship were really 45 percent among African-Americans that would mean that every other African-American was an entrepreneur.

    The actual rate of entrepreneurship for all Americans when measured by the census is 13.1 percent of White men and 7.4 percent of White women, as compared to 5.1 percent of African-American men and 2.7 percent of African American women.

    One reason why the rate of change in the rate of entrepreneurship among African Americans is increasing fast is because it is starting from a low base. An increase of 1 from a base of 1 is a 100 percent increase. An increase of one from a base of 100 is a 1 percent increase. So you tend to get large rates of change from a low base.

    The proportion of African Americans that are entrepreneurs is much lower than the proportion of Whites that are entrepreneurs and has been every year for the past 100 years.

  18. Hi Scott,
    Because I am a rather busy African American entrepreneur..I don’t have time to belabor this point with you. And no, I did not misinterpret the statistic..Read slowly please they taught me a lot at UC Berkeley…

    I originally understood what you intended re: the overall rate of entrepreneurship compared against the general population. The problem I have with your argument is that it was incomplete.

    How could you fail to include the fact that in recent years (see the period referenced above) the fact that the rate of entrepreneurship had increased.. Perhaps you might have explored what was causing this incredible growth spurt.

    The factors you mentioned that caused African Americans to have that lower overall rate of entrepreneurship theoretically have not changed so how do you explain this amazing growth spurt in recent years.

    Let me clue you in…it wasn’t the money or lack thereof that limits African Americans from starting their business. That fact would be true for most people who want to and don’t (not just African Americans) and yes is a part of the cause but not the only one.

    When I first approached the idea of owning my business, it wasn’t the money that deterred me..it was the fact that I wasn’t exposed to many entrepreneurs so thought there was something magical I needed to know to start my business. A couple of years around a few of my white counterparts running an extremely large business quickly made me realize they weren’t any smarter than I and the rest as they say is history.

    What I know today…many, many African Americans now approach me to do the same. I know of at least 4 in the past 5 years who used my experience as an inspiration to start their own and many, many more with plans to do the same..

    I think the phenomenon is occurring across the nation and explains the census bureau results. I’ll bet 25 years from now the overall ROE you reference will be significantly different!!

    [edited]

  19. Hi Sharon, thanks for contributing. I can tell this is an important issue for you and I am glad you expressed your thoughts.

    However, I need to ask you to keep things civil. Argue the facts. Do not attack the writer personally.

    I had to take the extraordinary step of editing out your last two sentences.

    Some of your other comments are borderline, if not over the edge.

    If you don’t like it, please send me an email. anita – at – anitacampbell.com.

    Thank you,
    Anita

  20. I’m coming a bit late to the discussion, via my good blogging friend Dawn Rivers Baker. I too am always fascinated by data. However, as evidenced by this discussion, numbers don’t tell the whole story. There are a lot of differences in perception and emotion which impact awareness of how to start a biz…and ability to do so. For example, here in Albuquerque, a successful African-American banker (who is very committed to helping entrepreneurs) tells me one of the challenges is the traditional distrust of banks in the African-American neighborhoods. Which, while understandable, is self-defeating. (One of my clients is an alternative lendiing group actively seeking African-American clients…and having a hard time.)

    As for it being “easy” or “easier” for white entrepreneurs to come up with $20K or even $6K – I certainly don’t see that in my work with start-ups.

    And, am I the only “white woman” who finds the term “white” offensive?

  21. I mentored a youth (Black) who is stated to be worth $20M on a bad day. “Google Ephren Taylor”

    It’s not rocket science, it’s all about tact, tenacity and providing leadership by example. , too have achieved multi-millionaire status. Yes, whites, belittled me, would not give me a chance while white bankers were giving the leadership to their sons, giving their good ol biy contracts to their sones and giving their money to white organizations that at-best, pacifies the negro.

    I have taken Black contractorzs to doing a few thousands dollars a month to $10G a week. Only in America can you pre-empt racism and discrimination by will, cunning and wit. Whites given power and authority merely because of their skin color is a dis-service to America. Paris Hilton and other who have not earned any reason to be news, are mere examples that whites will propel their own. Unfortunately, making it because of color or heirship is why America has an imbalance in wealth. Black athletes and entertainers are not a good snapshot on how to become wealthy in America, nor is investing in the stock market or getting a college edumacation the way to wealth. The true rich make it because they understand the principles that creates wealth. Residual, Commission and Leveraged income.

  22. Hi, Mary Schmidt. Perhaps this is a digression from the gist of the overall conversation (or perhaps not), but please explain: why do You find the term “white” offensive?
    Thank You.

  23. Rev. Dr. W. Edward Mitchell, Jr.

    Adilifu, if you read this; your brother, Bill, is trying to find you.

  24. i think it has to do with the result of the build up of institutional racism in the country, and the present racism available today.

    Also the fact that education wise, African American socially are not given the same level of skills. Also in terms of help from investment, also not as many as catering to to general white publiuc

  25. There are more factors than just money. Money is an important part of the entrepreneurship equation. However, there are factors such as location, drive, and resources. If an African American lives in an area that is 96% white, they can get discouraged from starting a business because there is still prejudice in the U.S. and basically a question in their mind is “Will whites utilize my services(buy my products, etc.)?”. I have personally experienced that where I live.

    Some African Americans are less likely to have learned how to tap into managerial and marketing resources(though they exist). (Marketing and management are essential to the success of any business.) They were most likely taught(while in high school) that the best thing is for them to get a job. This negatively influences their drive and motivation to pursue a dream business.

    These are not solely issues among African Americans, but also among low income individuals and other minorities.

  26. Not only is money a factor, but so is lack of entreprenuerial role models in the black community coupled with institutional racism. No one is trying to pull the “race card” here, I am speaking from personal life experiences here. Just to give an example to back up my claim, I am a woman of color, very educated, and a have a solid work history behind my belt. When I tried to establish my first business, it took me a year to write a business plan. It took so long because I did a thorough job conducting research about my industry, I took advantage of the free online courses that were offered through the small business administration’s website as well. Long story short, after spending an entire year working on my business plan, I turned to SCORE (sponsored by the SBA) for further mentoring and to have a counselor review my business plan. The SCORE counselor that I met with was an older white man. This man flat out refused to review my business plan, he would not take a look at it while I was in his office. He insisted that my plan was not up to the standards of a sample business plan that he had in his office, despite not even taking one look at my plan at all. This guy spent a good portion of the counseling session telling parables about how proposed business will fail and he also spent a great deal of time shooting down my academic credentials. People please do not say that racism is not a factor because it is; I have experienced it firsthand. When I tried to report the situation to the executive director, an older white lady, she just laughed it off, critiqued my resume and that was the last I ever heard from this woman. No return calls, nothing.

  27. With the attitudes that I experienced in the above post and on so many different ocassions with White Americans, I can see why blacks and so many other minorities are turning to entreprenuership. Not all, but some whites feel that they can treat you any kind of way on the job, in public, etc and in turn you are suppose to tolerate it. I think not.

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