Evan Avery Shields | 2012 This thesis examines the role that black entrepreneurship plays in driving economic development. Black business has seen considerable gains in growth potential in recent years. For instance, between 1987 and 1992, the number of black-owned businesses grew by more than 46% as aggregate revenues of these firms grew from $19.8 billion to $32.2 billion in the same period. In the post-Civil Rights Movement era, the black middle class similarly has seen socio-economic growth as average educational attainment, household income, and quality of occupations have all improved. However, despite this recent growth, a lack of access to financial capital for black business continues to threaten the long-term sustainability of the black community’s economic viability.
In chapter one, I use a sociological approach to entrepreneurship to first explore how ethnic groups in America uniquely perform entrepreneurship as a method of seeking economic stability. I second seek to better understand the effect that capital constraints have on ethnic enterprise. I outline three prevailing sociological theories of minority entrepreneurship, including middleman minority theory, collectivist theory and ethnic enclave theory. Though these approaches provide explanations of immigrant ethnic groups performance in entrepreneurship, namely Japanese-, Greek-, and Cuban-Americans, they do not necessarily correspond to the economic situation of African-Americans. However, the economic detour theory provides an adequate framework for understanding the issues affecting uniquely black entrepreneurs. Marginalization by segregation, discriminatory lending and capitalization behavior, and the like has affected black businesses’ capability of growth. Through an analysis of economic detour we indeed find that a lack of access to capital is chief amongst these issues.
In chapter two, I use economist Joseph Schumpeter’s theory on economic development to more firmly connect black entrepreneurial innovation through financing with black economic development. After providing a detailed analysis of the manner in which enterprises gain financing, I find that ‘information asymmetry,’ a concept describing the disparaging effects of miscommunication between entrepreneurs and financiers, leads to the capital constraints described in chapter one. I believe that black entrepreneurs under an economic detour may face a more racialized form of this information asymmetry that has disproportionately marginalized their access to capital.
In chapter three, I turn to the field of social capital theory to find solutions to the financing obstacle of information asymmetry for black entrepreneurs. I first find in my research that entrepreneurs with social ties to financiers are more likely to receive capital for their firms, than those entrepreneurs who do not. I then turn the analysis toward the financiers themselves, examining the practices of the venture capital (VC) industry in particular. I posit that the minority-oriented venture capital (MOVC), a sub-industry of VC that relies on social ties to make investment deals with minority enterprises, may be a good field for examining these social capital solutions to information asymmetry for black entrepreneurs.
I conclude the thesis with two hypotheses. First, I hypothesize that minority-oriented venture capitalists serve as brokers between investors and black entrepreneurs and help close the gap of information asymmetry during the investment deal-making process. Second, I hypothesize that minority-oriented venture capitalists are economically motivated to closure networks between MOVC funds and entrepreneurs, further closing the gap of helping overcome the asymmetry and benefit minority entrepreneurs with capital constraints. In chapter four, I provide a brief two-part case study examining both of these hypotheses in-action. I first examine two MOVC firms and how they seek economic advantage by performing brokering roles. I second examine the National Association of Investment Companies, a trade organization representing minority-oriented financing groups, and its work in closuring networks of financiers and minority entrepreneurs. Though my analysis within this case study may be limited, I conclude that these hypotheses provide grounding for further research within the field, as well as point toward further solutions toward alleviating the capital constraints affecting black enterprise’s role in black economic development.