Why It Is Almost 6 Times Harder for Black Founders--and Why You Should Care
Updated: Nov 15, 2020
By Jasper Kuria
“We are caught in an inescapable network of mutuality, tied in a single garment of destiny. Whatever affects one directly, affects all indirectly.” –Dr. Martin Luther King Jr
“if four key racial gaps for the Black community — wages, education, housing, and investment — were closed 20 years ago, $16 trillion could have been added to the U.S. economy. And if the gaps are closed today, $5 trillion can be added to U.S. GDP over the next five years." -- Chief Economist, Citi Group
Systemic racism is even costlier than you think! Historically, the main engine for wealth creation has been business ownership . As few black people own successful businesses, unless something is done, inequality will only get worse—the lack of opportunity to accumulate capital causes wider gaps in generational wealth and life-outcomes, and an unstable society.
One of the most effective ways to reduce inequality is to increase the number of successful black-owned businesses, but the odds are overwhelmingly against the typical black founder. Here's why:
Savings: On average blacks earn much less than whites so she will not have a lot of savings to tap for seed capital.
Friends and Family Money: She is unlikely to have wealthy friends or family, the most common source of funding for a business.
Prior Successes of Her Kind: As most investors are white, there is unconscious bias and it is harder to raise capital. Professional investors “pattern match” and since there are not many successful black founders, the problem is accentuated. A prominent Silicon Valley investor has said he mostly invests in twenty-something white males with no social life because that has been his formula for success.
Home Equity Funding: She likely will not have a house or enough home equity, from which to take out a loan. Her lower income and the worse mortgage rates for blacks almost guarantees this.
Clients & Customers: Despite their talents and perfect scores, the Tuskegee Airmen had to prove themselves over and over again before being allowed to serve their nation. The situation is similar for black-owned businesses when seeking clients and customers. Robert Smith (the billionaire founder of Vista Equity Partners) recounts how he still experienced racism despite stellar returns in his first fund, and a dual Ivy League education. The typical black founder has neither.
Talent: Limited funding means she will struggle to attract talent—and discerning talent will not want to work for a business with low odds of success.
“Insider Knowledge”: Lack of contacts in the right circles to share industry-specific “insider knowledge” often required for success. Another tech luminary recently stated “I only take meetings with people introduced by someone in my network. It may sound elitist but if someone is truly an entrepreneur, they should be able to find their way to a person in my network”
Mindset: Black founders born in the US usually experience more doubt and uncertainty. To understand this, it is instructive to look at the experience of black founders who moved to the US from Africa later in life--when their core identity had formed. As there is little racism in Africa (most people look the same) and no one is telling kids they should only aspire to be rappers and ballers, the scars of life-long systemic racism are less pernicious.
Compounding all these factors has a crippling effect! To see why, let us use a simple mathematical analogy . For a business to merely survive, it needs to attain a Survival Score of 1. The score is calculated by multiplying the scores for each of the eight factors listed above, with each factor being assigned a score of between 0 and 1.
The hypothetical white-owned business that survives has 1 for each of the factors and so the result is a Survival Score of 1 (1 x 1 x 1 x 1 x 1 x 1 x 1 x 1 = 1).
If we are generous and give the black-owned business 0.8 for each of the factors, we get a Survival Score of 0.168! (0.8 x 0.8 x 0.8 x 0.8 x 0.8 x 0.8 x 0.8 x 0.8 = 0.168).
Put another way, it is about six times harder for black founders (1/0.168). In reality, the score for each factor will be lower.
Join us in working against these crippling forces of systemic racism--that affect each one us in the inescapable mutuality described by King--and move closer to a just society. Huge economic growth awaits!
 Capitalism in the Twenty-First Century by Thomas Piketty*
 Borrowed from Harvard Business School's Prof. Michael Porter in “What Is Strategy?”