First To The Starting Line

Educated blacks and Hispanics more likely to start businesses, but money woes squash dreams

They are writing business plans, meeting bankers, and scouting locations. Americans who are young, male, and black or Hispanic are much more likely to be involved in a business startup than other segments of the population.
According to Entrepreneurship in the U.S., a report by Florida International University, blacks are more inclined than whites of the same gender or educational background to start a business. Among blacks, those with college degrees or graduate experience are most likely to be involved in a business startup.

The dramatically higher entrepreneurial tendency is true only for startup businesses, those with no payroll history for more than three months. For new businesses, those running three to 42 months, degreed blacks and Hispanics have a smaller lead in probability of business participation over their white peers. For established firms, those operating more than 42 months, degreed blacks and Hispanics have similar or lower probabilities of participation than their white peers.

As an example, black men with graduate school experience were three times more likely than white men of similar education to be involved in business startups, twice as likely to be involved in new firms, and a little less likely to participate in established businesses.

At any given time, millions of blacks and Hispanics are involved in business creation, says professor Paul D. Reynolds, director of FIU’s Entrepreneurial Research Institute and author of the report.

“We do not, as yet, fully understand why blacks and Hispanics have more problems [maintaining] a new firm than whites,” he says. “It could be related to experience, access to funds, or the lack of a helpful social support structure. Some evidence suggests they get a lot of moral support, but they may be less successful in obtaining sophisticated business advice from their informal networks.”

But other studies do correlate black firms’ survival with owners’ education and work experience, says Cecilia Conrad, professor of economics at Pomona College in Claremont, California, and a member of the BLACK ENTERPRISE Board of Economists. “Education may be a plus because of skills you’ve acquired and networks you have. It may be a plus that will impress would-be sources of capital.”

Regardless of owners’ ethnicity or level of education, “Those most successful in making the transition from startup to baby firm seem more often to have an experienced startup team and put a lot of person-hours and money into the effort in a short period of time,” Reynolds says.

Blacks gauge their initial capital needs lower than do other ethnic groups and amass smaller amounts of startup capital, from both formal and informal investors, according to the study. Family and friends provided smaller units of capital to black businesses: Whites made 66% and blacks made 20% of informal investments less than $5,000, but for informal investments of $20,000 to $100,000, whites made 84% and blacks made 12%. Blacks launch smaller businesses, says Conrad, and smaller enterprises have lower survival rates.

Conrad says that what motivates individual entrepreneurs also factors into the racial gap in established firms. Glass ceilings push educated but frustrated

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