Diversity

Assessing Access: Obstacles and Opportunities for Minority Small Business Owners

By Robert L. Johnson, Founder & Chairman, The RLJ Companies

As an entrepreneur, I know first-hand the challenges minority entrepreneurs face. I also know the talent, dedication, determination and vision that minority entrepreneurs possess in their desire to become a part of and a contributor to the American Dream. But the simple fact of economic reality in America is that minority Americans are significantly and disproportionately underrepresented in access to capital to start and fund entrepreneurial enterprises due to years of racial and economic discrimination.

Please make note of a recent study by the Economic Policy Institute which found that the median net worth for African Americans was $11,800 compared with $118,000 for whites. When home equity was subtracted, African Americans had $300 in net assets while whites had $36,000. This gap is likely to widen as employment stagnates and as the mortgage crisis costs some black families their homes.

Without question the lack of access to capital and capital formation are the principal factors holding back opportunities for minority businesses and as a consequence wealth and job creation within the minority community. In my opinion, there are two crucial political and philosophical issues that first must be confronted and resolved before capital can be effectively directed to minority Americans in this society.

The first question is: Why do Federal, state governments and major U.S. corporations define minority ownership as owning or holding 51% equity?

The answer usually offered is a 51% equity requirement prohibits so-called minority “front companies or shams” from gaining access to government preferences. But why do we assume minority companies are fronts? The answer is painfully obvious and it is partially why we are all here today. We know that minorities as a whole lack access to capital and therefore are unlikely to raise sufficient equity capital to control a company without outside financial assistance. But whose fault is that?

Think about this for a moment: As a business person your goal is to grow in scale and value. How do you accomplish this if your company cannot raise outside equity if it exceeds your 51% ownership requirement? Why not the debt market you might ask? Lenders have only one goal, a repayment of debt with interest as quickly as possible. On the other hand, and I know this to be a fact, strategic equity partners seek to combine investment and operational synergies with the minority company to maximize long-term growth and value.

I suggest we let market relationships decide and base ownership not only on equity control but other factors. Such factors could be: Is the minority the founder of the company? Is the minority the key revenue driver in the company based on his or her intellectual capital, i.e. Oprah Winfrey?

What about considering voting control in different classes of stock that give more votes to the minority or board control where the minority has the right to appoint the board majority. Or simply drop the equity requirement from 51% to 10% to recognize what we all agree is the true problem, the disparity in capital access that minorities face when launching a business.

This leads me to my second point. Is there a compelling national interest for helping minority businesses and what are its limitations?

If the goal is to foster minority businesses as opposed to small businesses, how do we address the Supreme Court’s compelling national interest test? The Court ruled that any government-sponsored economic preference to minority businesses should be “narrowly tailored” so as not to cause reverse discrimination. Justice O’Conner, writing for the majority, in the Adarand case, stated that there was no compelling national interest in favoring a minority contractor for a highway construction job over a majority company.

If this precedent dictates our approach to minority business development it will forever, in my opinion, restrict minority access to government-sponsored business opportunities.

We agree that due to past discrimination minorities can’t compete on capital formation, on experience or scale without capital, and are unlikely to win most competitive bids without an advantage or preference.

In conclusion, let me state that I don’t have a ready politically acceptable answer to these philosophical quandaries, but I am enough of a business person to know that the free market place, left to its own devices, will not solve this problem.

I don’t believe the government can promote minority ownership by placing restrictions on their start up potential by requiring an “unconditional 51% ownership.” I don’t believe the government can say it’s critically important to have minority businesses succeed in the marketplace and on the other hand declare there is no compelling national interest to favor these businesses.

I hope that I have provided some framework for a debate and I know I am committed to work to achieve a viable consensus on how to grow and expand minority business ownership and opportunities in America.

Thank you.

7 Comments

Comments

MM says:

So true Fredric. We preach and repeat the mantra, each one teach one, now is the time to step up and reach back and invest in our businesses and start ups. and…support them.

@Fredric You hit the nail on the head…

I'm with ya Fredric.. But I believe too much emphasis is put on relying on government assistance to capital resources… I believe and maybe naively that there is enough talent, brain power, and money in our community to figure out how to raise our own capital and relinquish the need for extensive government help…

Basically we need to turn inward instead of looking outward…

Very interesting take. I agree that relying on government-backed capital does contradict the notion that our government is supposed to be for everyone. It is a shame that the fear of reverse discrimination passes as an excuse to seriously look at the issue.

With that said, what responsibility or framework can individuals like yourself, Oprah Winfrey, Tyler Perry, Michael Jordan, Bob Parsons, John Rogers, Cornel West, Will and Jada Pinkett Smith, Tiger Woods, and others with elite capital status establish for small minority-owned businesses?

While its true that all Black people don't know each other or think alike, is it naive to believe that these savvy minority business owners would collude to start a VC fund or private equity pool aimed at startups?

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