Henry Childs II is the national director of the Minority Business Development Agency, an agency of the U.S. Department of Commerce that promotes the growth of minority-owned businesses through the mobilization and advancement of public and private sector programs, policy and research. Childs spoke with MMG about the challenges faced by minority-owned businesses and new initiatives underway at MBDA.
Q. What are the unique challenges faced by minority entrepreneurs?
Access to capital is a huge challenge for minority-owned businesses. Less than 10% of venture-backed companies have a female founder. Just 1% of venturebacked founders were black; the same is true for Hispanic founders.
The numbers aren’t any better for assets under management. According to a Knight Foundation report, just 1.1% of the $71.4 trillion assets under management is in the hands of women- and minority-owned firms. Whether we’re talking about private equity or real estate trusts, hedge funds or mutual funds, there is not a single field with more than 5% of its assets managed by women- or minority-owned firms.
Lack of funding disproportionately impacts women of color. Women, particularly black women, are the fastest growing group of entrepreneurs. And women-led businesses are outperforming their male peers in many VC portfolios. But, according to a Project Diane study, since 2009, startups led by black women have only raised .0006% of the $424.7 billion in total tech funding. MBDA is addressing this issue by establishing an Enterprising Women of Color initiative to find creative ways to get capital in the hands of women of color.
Q. What obstacles do minority-owned businesses face when seeking capital?
A small percentage of venture capital-backed founders are minorities and the percentage of minorities in decision-making roles with venture capital is low. Entrepreneurs often raise funds from friends and family. However, African Americans and Hispanics have average net worths that are much lower compared with white Americans. This lack of capital and generational wealth can present significant obstacles. There is also a perception that funds managed by diverse-owned firms do not perform as well as non-diverse funds. This false perception that either minority-owned firms or investments in minority startups are riskier investments perpetuates the gaps in diversity. Data shows that diverse-owned firms typically perform as well as non-diverse firms.
Q. Has the volume of private capital available today translated into more investment for minority-owned companies?
I don’t think that it has, but there are several things happening this year that could change that. One is the opportunity zone legislation, which was established by the 2017 Tax Cuts and Jobs Act. The law encourages investment in economically distressed communities, which is an excellent vehicle to connect investors with minorityowned businesses. To help investors make informed decisions, MBDA plans to create a database with a list of minority-owned businesses that a user can filter based on location or company size. It’s a critical piece that’s missing. Right now, even if a PE firm wants to invest in a minority-owned company, they often have trouble finding qualified minority-owned businesses.
Q. MBDA recently celebrated its 50th anniversary. What’s ahead for the organization?
I am laser-focused on two things: helping minority-owned businesses get to size and scale, and advocating for the 11 million minority-owned businesses operating today. According to the U.S. Census Bureau, minority-owned businesses are growing at a much faster rate than non-minority-owned businesses, but only 2% of all minority-owned businesses have annual gross receipts of $1 million or more. My goal is to increase that number. MBDA plans to do that by leveraging technology, policy, strategic investments and data. If we get those three ingredients right, in five or 10 years we could be having a very different conversation.
For the first time ever, MBDA is investing in a virtual business center. The platform creates a capability for MBDA to provide greater services to the 11 million minority-owned businesses. Additionally, for the first time, MBDA is opening an Office of Policy, Analysis, and Development. The goal is for MBDA to be a onestop shop for data on minorityowned businesses.
Lastly, I am very excited about MBDA’s global markets initiative. MBDA is moving to expand its global footprint. According to the 2007 Census SBO report, minority-owned businesses are twice as likely to export compared with non-minority firms. In addition, minority firms are more than three times as likely to have businesses generating 100% of all their sales in exports compared with their peers.
This article originally appeared in the July/August 2019 issue of Middle Market Growth.