Approximately 20% of small enterprises fail within the first year, about 50% of businesses survive to reach 5 years old, and 70% go belly up after 10 years.
These figures have remained essentially consistent over time. And contrary to common belief, the survival rate curve is also quite consistent across industries.
There is no sector in which the percentage of startups that fail is clearly higher.
However, the numbers for African-Americans tend to be even more dismal. According to CNBC, within the first 18 months, eight out of 10 (or 80%) Black-owned enterprises fail.
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Sales, earnings, employment, and survival rates for Black-owned enterprises are significantly lower, so business owners usually have little choice but to close shop. Also, those who do succeed usually don’t expand or grow as quickly as companies owned by people of different ethnicities.
Factors That Lead to the Demise of Black Businesses
After working with entrepreneurs and investors for over a decade, we've had deep conversations around the challenges Black entrepreneurs face. A research paper published in 2014 titled “22 Reasons Why Black Businesses Fail” cited 11 structural, six cultural, and five psychological reasons as to why Black businesses have a high failure rate.
Although quite dated, some reasons mentioned in the study remain relevant in assessing problems with Black businesses today in both the United States and Canada. Coupled with what we've learned from being a part of this community, and listening to both entrepreneurs and investors, here is a list of the most important ones we've observed:
Structural
1. A poor business plan where some entrepreneurs fail to communicate to lending institutions exactly what need their business is supposed to fill or its potential value to the market.
2. A sub-par presentation of their business plan where the story isn't told well, essential financial data is left out, or not enough industry background is added to clearly explain the opporuntity for an investor.
3. Insufficient financial capital to support the firm until it can begin to generate sufficient revenue and sustain the business.
4. Absence of Black owned financial institutions in the community to provide financial support during critical periods of the business cycle when others won't due to discriminatory lending practices.
5. Existing funding organizations not living out their mandate of funding minority businesses but instead having lots of meetings and little distribution of funds.
Cultural
6. Racial discrimination by non-Blacks in different areas of the business (actual sales, public relations, legal/financial support, etc). so the enterprise doesn’t get the community support it needs.
7. A lack of mentors or lack of network to access resources in the field of entrepreneurship.
8. Ineffectively utilizing resources that are available for entrepreneurs because Black entrepreneurs are not tapped into the network or are unaware of how to access these resources.
Psychological
9. Fear of harm or reprisal as some successful Black entrepreneurs are subjected to attacks or harm still today, not only in the past such as the “Black Wall Street” attack in Tulsa, Oklahoma back in 1921.
10. Immediate gratification syndrome where some entrepreneurs spend whatever profits they make carelessly to satisfy their desires, so they are unable to reinvest in their business to facilitate growth.
Many variables dependent on the individual entrepreneur factor into the failure of Black businesses. Yet, it can’t be denied that systemic pressures continue to exert a major influence on such abysmal outcomes.
Despite the aforementioned reasons to fail, uber successful Black entrepreneurs like Sheila and Robert Johnson, Oprah, Daymond John, Chris Gardner, Janice Bryant Howroyd, David L. Steward, Angela Samuels, Wes Hall, Alicya Sinclair, Vivian Kaye, and many others serve as great reminders that anything is possible with patience, prudence, and persistence.
There are many other small businesses that couldn't be listed here, that serve as proof that we as a community can continue to build each other up, and provide the resources, advice and support needed for each other to thrive in business. But the institutions that should support us need to do their work too.
The BlackNorth Initiative
After acknowledging the existence of systemic racism in Canadian workplaces, the Canadian Council of Business Leaders Against Anti-Black Systemic Racism and the Canadian Association of Urban Financial Professional (CAUFP) formally committed to the BlackNorth Initiative in 2021.
The pledge made by CEOs from over 450 businesses to the BlackNorth Initiative involves a commitment to the hiring of more Black people in leadership roles. It also plans to promote education aimed at preventing workplace microaggressions directed at Black employees.
As of February 2022, nearly 70% of Black Canadians say they’ve seen some real improvements reflecting the goals of the initiative. This is great news, especially in light of this month’s celebration of Black Business Month in Canada.
However, the work is far from over and the BlackNorth Initiative continues.
The Need for Continuing Work and Support
As evidenced in the Black Canadian experience of the BlackNorth Initiative, it is only through a direct and institutionalized approach that real change can happen. In this case, it’s all about stamping out systemic racism and discrimination that not only affects Black employees but also the success of Black-owned enterprises.
Without reforms in the law and institutionalizing diversity, equity, and inclusion (DEI) initiatives, Black people will continue to experience failure or limits to what they can accomplish in life — whether it be in business or their chosen career.
If you’re working on eliminating racism in your organization or institution, or wish to improve your DEI initiatives, please book a call with us at Tough Convos.