Contact:
Barbara Pruitt, Kauffman Foundation, 816-932-1288, bpruitt@kauffman.org
Kauffman Foundation research shows stark racial differences in later-stage capital injections and firm success
(KANSAS CITY, Mo.) February 26, 2009 – While previous research shows that nearly three-quarters of all new U.S. firms inject capital in their second or third year of existence, detailed information from a recently-released Kauffman Firm Survey (KFS) is the first to outline dramatic differences in the capital injections of black-owned firms compared to white-owned firms in the early, formative years after the business begins.
The research paper, titled Patterns of Financing: A Comparison between White- and African-American Young Firms, is fourth in a series of KFS studies. The KFS surveyed nearly 5,000 businesses founded in 2004 and tracks them annually over their early years of operation. The survey focuses on the nature of new business formation activity and characteristics of the firms and owners over time. This dataset provides a rich picture, and a first-time glimpse, of the early capital structure decisions of new firms.
According to 2005 U.S. Census Bureau data, the median level of net worth among blacks is $6,200, eleven times lower than whites. Because personal wealth can be invested directly in the business or used as collateral to obtain business loans, low levels of black personal wealth may be detrimental to securing capital. Evidence shows that, at startup, black entrepreneurs experience higher loan denial probabilities, pay higher interest rates than white-owned businesses and have low levels of startup capital.
"The KFS is a vital research study for helping us understand how African-American firms are affected by later-stage capital injections and access – or lack of access – to capital markets," said Robert E. Litan, vice president of Research and Policy at the Kauffman Foundation. "Having less access to capital not just at startup, but also in subsequent years, could have a detrimental effect on black-owned firms' long-term performance. We know that, even in the first few years of operations, entrepreneurial firms are highly reliant on external debt markets. Because of that reliance, we already can see the negative impact of the economy on businesses in the KFS, and it stands to reason that black-owned firms may be hit doubly hard, since they have less access to capital markets."
Alicia Robb, Kauffman Foundation senior research fellow and one of the paper's authors, recently published a book with MIT Press entitled, Race and Entrepreneurial Success: Black-, Asian-, and White-owned Businesses in the United States, which addresses similar topics. While the research for the book used data for established companies, rather than startups, both datasets showed that the most significant factors contributing to a firm's level of success are its startup capital and the owner's education level and business experience.
"The KFS data provided new insights by looking at firms from the earliest stages," Robb said. "As additional years of data become available over the eight years of the KFS study, we will have a first-time picture of capital structure and capital injections over time, as well as the sources and subsequent levels of success in black- and white-owned firms. Additional research will help us see the full impact on the survival and success rates of these entrepreneurial firms, which are key to economic recovery."
- About 55 percent of white-owned firms have debt financing in their startup year and in the follow-up years, while only 47 percent of black-owned firms do the same.
- White-owned businesses have more than $80,000 of initial capital on average, while black-owned businesses have less than $30,000 startup capital.
- Black-owned businesses rely much more on owner equity than do white-owned businesses—56 percent compared to only 34 percent in white-owned businesses.
- Outsider debt (informal investors, venture capitalists, etc.) accounts for more than 40 percent of the white-owned business financing, but makes up just 27 percent for black-owned businesses.
- Black-owned firms rely more heavily on owner equity to finance the operations during the second and third years, but continue to have lower financial injections than white-owned firms (less than half the amount of financial capital than white-owned businesses in both years).
A follow-up to the KFS study, which will examine the first four years of these nascent firms, will be available in spring 2009.
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