Here’s a thought-provoking statistic: A whopping $290 billion would be created in Black wealth if the revenue gap between what Black-owned and white-owned businesses generate were equal.
That discovery came from building supportive ecosystems for Black-owned U.S. businesses, a fresh report from management consulting firm McKinsey & Co. reveals. The research showcases the hurdle Black entrepreneurs face and provides answers that the public, private, and social sectors can implement for equitable and positive business outcomes.
The report notes the right business ecosystems can mitigate or negate the effects of structural obstacles to the business building for Black business owners, adding $290 billion in business equity. The report released in late October found entrepreneurship and business ownership — particularly of community-based businesses— are crucial ways to develop community wealth for both business owners and their employees. Further, healthy Black-owned businesses could be an essential way for closing America’s racial wealth gap, which is projected to cost the economy $1 trillion to $1.5 trillion annually by 2028.
The COVID-19 crisis has further stressed Black-owned businesses and threatens to widen the racial wealth gap. This gap includes a $200 billion revenue opportunity that Black business owners are missing out on if they were to achieve revenue parity with white-owned businesses, translating to lost wealth and up to 850,000 jobs through 2021 due to increased liquidity constraints.
Asked what were among the report’s most stunning findings, McKinsey associate partner John-Paul Julien said “our report states that while nearly 20 percent of the 12.3 million women-owned businesses in the U.S. are owned by Black women, Black women experience significant economic and institutional barriers due to their race and gender.” For example, Black women are disproportionately shut out of venture capital funding, which can rapidly fuel business growth. Women of color receive less than 0.2 percent of VC funding, and at 4 percent of funded U.S. start-ups, Black women founders are underrepresented and underfunded. Indeed, the average Black woman-led start-up that received funding raised only $42,000.
The McKinsey report also offered some potential solutions to help create more economic parity for Black-owned businesses:
Apply policies that produce equitable outcomes
The public, private, and social sectors can help remove institutional barriers for Black-owned businesses and ensure laws, policies, and practices produce equitable opportunities and outcomes. For instance, procurement practices, especially at anchor institutions and large organizations, can evolve to be more inclusive of Black-owned businesses. Along with dedicating funds to procurement from Black-owned businesses, large organizations could simplify their minority-supplier certification processes to add new suppliers more quickly and dedicate funding to supplier-development programs that can help Black-owned suppliers better participate in supply chains.
Provide equitable access to capital
To help overcome economic barriers, Black-owned small businesses (SMBs) need direct investment or equity contributions, including grants, subsidies, loans, and revenue-participation agreements. Direct investment is especially key during COVID-19. McKinsey’s analysis suggests that an additional $7.6 billion to $15.4 billion in liquidity for Black-owned SMBs in the 2020-21 time frame — less than 3 percent of the $659 billion authorized under the Paycheck Protection Program — could preserve 460,000 to 815,000 jobs, for an average of $9,325 to $33,478 per job. Funding sources are also needed for Black entrepreneurs starting up or expanding. Banks, conventional and social impact investors, foundations, and public programs could make more capital available to Black-owned businesses. Possible programs include ones that make extending capital to Black-owned businesses less risky through measures such as guaranteeing funds and programs that help entrepreneurs from marginalized backgrounds acquire more capabilities.
Build business capabilities and facilitate knowledge sharing
To conquer market barriers, Black-owned SMBs need support for building capabilities and sharing a greater amount of knowledge. The private and social sectors — particularly anchor institutions — could provide resources. That could include offering help with reskilling and upskilling Black-owned businesses’ workers to make Black-owned SMBs nimbler. Many Black-owned businesses lack the resources to hire service providers that can help them digitize their businesses, but private-sector and social-sector organizations can provide free technology services and managerial assistance.
Expand opportunities for mentorship and sponsorship
Representation and participation in networking, mentorship, and sponsorship programs can help Black entrepreneurs overcome some sociocultural barriers. Private companies should take the lead by building more inclusive teams. Further, managers at every level should consciously develop — and sponsor the careers of — more Black leaders to counteract the effects of structural bias. Indeed, only about 3 percent of current Fortune 100 company CEOs are Black, and fewer than 4 percent of those oversee departments’ profit and loss functions. Those that tend to accelerate career progression for Blacks. Moreover, unconscious bias can affect mentorship and sponsorship, because humans tend to gravitate toward mentoring people they view as similar to themselves.
Community programs can help Black entrepreneurs connect with role models and commercial networks that can help Black prospective entrepreneurs pursue business ownership with more confidence and support. For instance, the private and social sectors could facilitate networking and partnerships between established businesses and compatible start-ups.
An investment in more business ecosystems that provide Black business owners equitable access to resources and opportunities can unlock part of the $1 trillion to $1.5 trillion in annual GDP that would come from closing the racial wealth gap, the report surmises. It adds, more importantly, by making social and economic institutions supportive of a wider swath of people, stakeholders can rectify the mistrust that has developed between Black entrepreneurs and institutions.
William Michael Cunningham, an economist who runs Creative Investment Research, had mixed reactions to some of the findings in the McKinsey report. He told via email a statement in the report that “Black Americans have never had an equal ability to reap the benefits of business ownership” is correct. But Cunningham maintains that Black businesses have continued to survive and innovate in what must be considered one of the most hostile environments for Black people on earth.
“The system of white supremacy that relies on the theft of resources from Black people has severed to limit the ability of Black business owners to fully reap the benefit from their labors.”
Cunningham added the report errs in several ways. For example, he says, Black-owned businesses don’t earn lower revenues and are overrepresented in low-growth, low-revenue industries such as food service and accommodations because they want to perform poorly.
“A reluctance to use Black-owned firms outside of these industries leads to overrepresentation,” Cunningham says. “They are limited to those fields. One policy prescription is to put into place a set of government policies to eliminate these barriers.”