Getting Entrepreneurs of Color Access to the Tools of Success

Cheryl Dorsey, president of Echoing Green, at the 2018 Barclays Social Innovation Challenge in New York City. (Photo courtesy of Barclays)

After the murder of George Floyd and countless others and a contentious presidential election, much of the recent public outrage over longstanding racial injustices in the United States has rightfully focused on law enforcement and voting access. While attention on these issues should continue unabated, it's worthwhile to examine yet another manifestation of American racism: inequities in the business world.

When it comes to starting and running an entrepreneurial venture, Black Americans and other people of color face significant disadvantages. The consequences of these inequities include more than the job losses and community disruption tied to a business's collapse or failure to launch. They also undercut the potential of millions of people of color to bolster our shared economic system and address many injustices in the process.

As the cofounder and CEO of Business Fights Poverty, I have witnessed again and again how businesses can have a big impact on social issues and improve the lives of people all over the world. Entrepreneurs of color provide jobs, inspiration, and investment that empower their communities and alter the political landscape for the better.

Yet the challenges Black entrepreneurs face in the United States are extensive and intertwined with historical injustices. They are still denied or given lower bank loans at more than twice the rate of their white peers; only 1 percent of Black businesses obtain loans in their founding year and they pay higher interest rates. Roughly 20 percent of Black Americans run early-stage businesses, but only 4 percent last more than three-and-a-half years. Eight out of 10 Black-owned businesses fail within the first 18 months, according to CNBC.

COVID-19 intensified the problem. Between February and April 2020, the number of Black business owners fell by 440,000, or about 41 percent, according to the National Bureau of Economic Research. There was a 17 percent decline among whites. Additionally, there were 36 percent fewer immigrant business owners in the opening months of the crisis.

Taking steps to address these challenges is the right thing to do and could help close the racial wealth gap of $1 trillion to $1.5 trillion, but solutions aren't easy. Making a more equitable entrepreneurial ecosystem that doesn't produce such lopsided results will require addressing longstanding systemic issues.

With the recent surge in attention on racial injustices, there is an opportunity to examine how we can make progress. Business Fights Poverty—through its years of work with social entrepreneurs, leaders of color, and experts in finance and philanthropy—has consistently encountered a number of frustratingly familiar structural issues that play a big role in determining who gets access to the tools of business success.

For one, investment firms lack diversity in the make-up of their own staff. This increases the risk that bias will creep into their selection of entrepreneurial ventures to fund. If organizations are struggling to dismantle this uniformity, consider that diversity also helps with the bottom line: A Boston Consulting Group study found that companies with more diverse management teams produce significantly more revenue due to innovation. Camelback Ventures, which works with entrepreneurs of color and women, provides an example. Many of the 83 entrepreneurs of color and women who went through its fellowship have made the Forbes 30 Under 30 list. They also collectively have gone on to raise more than $50 million, and some have received support from notable organizations, including Echoing Green and the Draper Richards Kaplan Foundation.

Secondly, the peer support system for Black entrepreneurs is struggling and underdeveloped. More must be done to make it stronger to help business people of color overcome a two-fold problem: an investment ecosystem that demands they are more qualified than their white peers to access the same resources, and systemic barriers that make it harder for them to acquire the financial literacy they need. The social enterprise Village Capital shows that such peer support is possible. It has helped more than 1,000 early-stage entrepreneurs through its programs and advocates for Black-led community organizations to help Black business owners build financial and social capital. Village Capital's work may help us figure out how to build a more robust network of volunteer coaches and services providers who bring together investment firms, Black entrepreneurs, and the knowledge each needs to work well together. If that develops, perhaps investors could create a public database of entrepreneurs, advisors, and business leaders of color—something like NPR's "Diverse Sources Database."

Thirdly, start-up capital for entrepreneurs of color is too inflexible. It needs to more readily adapt to the different circumstances they face when starting a business. For example, investors should consider covering growth overheads without an exchange in equity. They could also provide capital that is low-interest or repayable over a longer time period. The mechanisms for accomplishing this can vary. It could include approaches developed in response to specific challenges or anomalous hardships, like the Barclays and Echoing Green Social Innovation Challenge. The Challenge grew out of the existing partnership of the two organizations as they sought a way to quickly help entrepreneurs of color hurt by the COVID-19 pandemic. It funded thinkLaw, a social enterprise that helps educators teach critical thinking skills. Another example comes from the venture capital firm Backstage Capital. It started Backstage Crowd, a crowdfunding platform where accredited investors can contribute up to $10,000 to companies with diverse founders.

As these examples show, a number of organizations have tried to address racial inequities in business. Much work remains to be done. We must do more to remove the structural barriers that prevent entrepreneurs of color from launching and sustaining a venture, and we must do it now. Inequities continue to roil the United States. Without a more just business ecosystem, a more just nation may remain out of reach.

Read more stories by Zahid Torres-Rahman.