Too often they lack the capital, education and connections they need
WHEN PROTESTS broke out after the senseless killing of George Floyd, an unarmed black man, by a white policeman, many Americans felt the need to speak out. Some did so in offensive ways, and so shot themselves in the wallet. “What is this like night 4 of looting with 100% impunity. The pussy Mayor and Governor don’t give a shit about small businesses, and it’s never been more clear,” wrote Michael Fuller, the founder of Fulltone, which makes effects pedals for guitars, on Facebook. After a wave of outraged responses, he issued a rejoinder: “Ahh I feel better, and flushed out some prissy boys who were raised to pee sitting down. Now I’ll delete.”
High-profile rockers announced they would never buy his pedals again. YouTubers issued videos on how to paint over his logo on their pedals. And Guitar Center, America’s biggest musical-instrument retail chain, dropped Fulltone pedals from its stores.
What next? After the furore, guitar aficionados discussed where to find black-owned pedal companies. No answers were forthcoming until Lance Giles of Oxford, Ohio meekly suggested his Dogman Devices on Reddit, a social-media forum. He offered a 25% discount and free shipping, hoping the offer would blow life into a business that had yet to take off, and went to bed. By morning, all of his stock had sold (having listed one too many, he had to ship his personal pedal). His e-mail inbox was full of would-be customers wanting to know when he would have more.
Mr Giles is now in conversations with Guitar Center about stocking his gear. But his operation is nowhere near big enough to meet such demand yet; he is thinking about financing, looking at workshop space, enlisting free legal advice from a cousin and wondering whether to take on employees or to contract out manufacturing. Having a good product is one thing; increasing output quickly is another altogether.
A “buy black” challenge, sponsored by the Black Lives Matter protest movement, began on June 19th, or “Juneteenth”, an unofficial celebration of the abolition of slavery in America. The campaign runs until July 4th. If American consumers directed just a small portion of the $13trn they spend each quarter to black businesses, that surge in revenues might help build them up. With 13% of the population, black Americans owned just 2.1% of small businesses with employees, according to a study in 2012 by the Census Bureau. Today they hold 2.1% of the country’s private business wealth, according to the Federal Reserve.
A report on black businesses conducted for the Congressional Black Caucus Foundation outlined the challenges they face in trying to expand. These could be described as a version of Ben Franklin’s purported adage—that money makes money, and the money money makes makes more money—and applied to many forms of capital. Beyond money, starting and building a business also takes human and social capital. Black Americans start with less of all sorts.
Begin with the financial sort. Average black household wealth in America—the kind that could be used to back a startup—is just a tenth that of white households. When black owners turn to banks, straightforward racist denials of loans seem to be largely a thing of the past. But a “mystery shopper” test at 32 bank branches in Los Angeles, carried out by the National Community Reinvestment Coalition, a membership organisation for small businesses, found white customers were given subtly better customer service—for example, being told more about available products and their costs. Black applicants were asked to provide more information.
When banks ask for collateral, many entrepreneurs offer up their home. But just 44% of black-only households own their homes, against 74% of non-Hispanic white households. Fewer black entrepreneurs use bank financing, as a result; they are more likely to resort to their own family savings, and to credit cards, which have the highest interest rates of all forms of business financing. Black business-owners are more than twice as likely (23%) as white ones to report that the cost of debt has a negative impact on profits. And the low borrowing limits on credit cards stunts growth potential.
As for human capital, in its simplest form it consists of education. Here Asians lead all ethnic and racial groups: 54% of Asian-Americans have a bachelor’s degree or higher; 36% of whites do, but just 22% of blacks do. And of course human-capital accumulation is closely tied to the social kind—going to a prestigious college brings not only a degree but connections that prove useful later on in getting business.
To jolt black entrepreneurship, big banks and investors have announced eye-catching promises in recent weeks. Google has announced $100m in grants, loans and investments for black-owned venture-capital and technology firms. SoftBank, which also invests in technology firms, announced its own $100m for minority-owned technology companies, and Bank of America announced $1bn for an “economic opportunity initiative” for banks lending to poorer communities. But getting such funding to the eventual recipients is harder than it sounds.
Mark Ferguson runs Innervation Finance, which helps small businesses survive the often months-long lag between delivery of their products and payment. (It buys the invoices, and pays the vendor immediately, minus a discount. Black-owned businesses report greater levels of late payment than those owned by other groups.) As a black sole proprietor of a business aiming to help other minority-owned businesses, he should be in a good position to take advantage of money being aimed at such companies. But he describes a cumbersome process of verifying that his company is indeed black-owned (to avoid “blackwashing”, in which companies pretend to be minority-owned when they are not). It took six to eight months of sometimes cumbersome work with the National Minority Supplier Development Council, the biggest verification outfit, “and that was all to verify my ethnicity.”
Lowering racial inequality requires far more than ensuring black businesses have easier access to funds. After all, just over 10% of all wealth held by Americans is in business equity. The biggest source of wealth for most families remains home ownership, and in 2019 black ownership fell to its lowest level since the 1970s.
Building wealth among black people also means reducing income inequality between races, since higher income makes it easier to save and therefore to build wealth. That requires improving how black workers fare in America’s labour market. Here, too, black entrepreneurship will be of limited help. Inequalities in income and poverty levels between races stem from a vast legacy of racism encompassing a multitude of issues including housing, schooling and discrimination. Education is the base of the pyramid for good jobs, good incomes and eventual wealth—but as things stand it is unevenly distributed and in any case takes a long time to pay its dividends.
Where black entrepreneurship might make a shorter-term impact could be in shifting perceptions. The most famous wealthy black Americans are entertainers and athletes. An infusion of consumer enthusiasm, capital and opportunity could help more people associate black success with creativity and grit at the workbench and on the company board.
When Lance Giles once looked around the websites of guitar-pedal companies, trying to find one he might like to work for, he kept thinking: “Man if I got hired here I’d be the only one who wasn’t white.” Now he has a new opportunity to expand his business—and to do his own hiring.