Black-owned Startup Firms Constrained in Access to Capital in Early Years of Operation

Kauffman Foundation research shows stark racial differences in later-stage
capital injections and firm success
KANSAS CITY, Mo.--(Business Wire)--
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.

About the Kauffman Foundation

The Ewing Marion Kauffman Foundation is a private nonpartisan foundation that
works to harness the power of entrepreneurship and innovation to grow economies
and improve human welfare. Through its research and other initiatives, the
Kauffman Foundation aims to open young people's eyes to the possibility of
entrepreneurship, promote entrepreneurship education, raise awareness of
entrepreneurship-friendly policies, and find alternative pathways for the
commercialization of new knowledge and technologies. It also works to prepare
students to be innovators, entrepreneurs and skilled workers in the 21st century
economy through initiatives designed to improve learning in math, engineering,
science and technology. Founded by late entrepreneur and philanthropist Ewing
Marion Kauffman, the Foundation is based in Kansas City, Mo. and has
approximately $2 billion in assets.

Kauffman Foundation
Barbara Pruitt, 816-932-1288
bpruitt@kauffman.org

Copyright Business Wire 2009