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

Jan. 21, 2008 (Small Business Trends delivered by Newstex) -- 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 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 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.

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