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Barriers to Black entrepreneurship widen the wealth gap

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From left: Alfa Demmellash, CEO of Rising Tide Capital; Brandon Andrews, co-founder of Gauge; and Gayle Jennings O'Byrne, co-founder of the Wocstar Fund, discuss what needs to happen to support Black entrepreneurs. Photo: John General/CNN

(CNN) — One of the best ways to build wealth in the United States is to own your own business. But just 2% of businesses with employees are Black-owned, according to a report from the Alliance for Entrepreneurial Equity.

And that has played a big part in widening the racial wealth gap in the US. Black households, which made up nearly 16% of the US population, held just under 3% of overall wealth, the Federal Reserve’s 2019 Survey of Consumer Finances found. White households, by contrast, held nearly 87% of the wealth but only represented 68% of the population.

While there has been no lack of entrepreneurial ventures among Blacks in the United States, systemic racism and a persistent lack of adequate support and funding has made it much harder for Black-owned businesses of all sizes to thrive, according to a panel of experts who spoke at an event co-sponsored by MIPAD and CNN Business.

“The issue is not starting the business, but being able to keep the businesses afloat, being able to help the businesses grow and scale over time,” said Brandon Andrews, co-founder of Gauge, an AI-enabled mobile market research platform.

In the first half of 2021, just 1.2% of total US venture dollars went to Black entrepreneurs.

That dearth of funding can be attributed to “all those -isms and biases that have built up over the 400 years that we’ve been part of this country,” said Gayle Jennings O’Byrne, who co-founded the Wocstar Fund, an early stage investment fund that invests in tech innovation ventures led by women of color.

But the discrimination is subtle, rather than overt, O’Byrne said. “It looks like, ‘Hey, great job. That’s an awesome idea. Keep going. Come back to me, you know, a year from now. I’d love to see how you’re doing. Hey, stay in touch.'”

And it’s not just a lack of funding for promising start-ups. It’s the lack of sustained support for micro businesses that make up the lifeblood of communities.

“How do we empower those micro businesses? How do we ensure that they have access to capital? How do we ensure they have access to business education?,” Andrews asked.

Doing so is also likely to help keep a community afloat. “We know that Black business owners and Black entrepreneurs tend to hire from their community, hence spreading the economic benefit,” said Kenneth Ebie, executive director and chief development officer, Black Entrepreneurs NYC.

Rethinking what it means to get a “return” on investment from these small businesses is essential if the goal is to strengthen communities and local economies, said Alfa Demmellash, CEO of Rising Tide Capital, a non-profit that teaches business development skills to entrepreneurs from historically marginalized communities.

“We don’t just need a handful of successful millionaire-billionaire entrepreneurs. Communities of color are actually enabling communities. We saw this during the pandemic. It’s like if you are sitting at home and you needed that food to be brought to you, who’s cooking the food? Who’s driving that truck? Who’s bringing it to your home? Who’s cleaning your home? Who’s taking care of sanitation? It’s literally our livelihoods,” Demmellash said. “They’re the essential workers and they’re essential entrepreneurs. They create culture. They create livelihoods. …. [But they] are invisible and are never invested in because that’s not seen as having great [investor] return.”

To that point, O’Byrne noted, investment in those Black-owned small businesses can also take the form of making a business recommendation, or being intentional about using someone’s services or only hiring contractors that have a diverse leadership team.

Rules about start-up investing exclude most minorities

If you don’t run a business, you can still build wealth by getting in on the ground floor of a start-up raising capital. But for Blacks and other minorities there is a barrier to entry known as the “accredited investor rule,” Andrews noted.

“Most people in our communities literally are legally barred from doing it in the United States because of that accredited investor definition,” he said.

The Securities and Exchange Commission requires that anyone wishing to invest in an early-stage company have a net worth over $1 million, excluding their primary residence, and an income of more than $200,000 for individuals ($300,000 if they have a spouse or partner) in each of the prior two years and an expectation that their income in the current year will be the same.

“So there’s, again, systemic oppression that’s there that keeps our communities from having access to even spend our money on our businesses in the way that we might do otherwise,” Andrews said.

— CNN Business’ Laurie Frankel contributed to this report

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