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6.10.99  
A Q&A with Earl Graves: Building Black Clout with Banks
The publisher talks about redlining and his new fund for hot minority-owned businesses

It's tough for any entrepreneur to get a loan, but African-American small-business owners have long felt that they get a particularly raw deal.

In March, Federal Reserve Board Chairman Alan Greenspan raised the issue at a Fed conference in Arlington, Va. Several studies, he said, showed that banks reject minority-owned businesses disproportionately, even after factoring out such objective criteria as credit history. Greenspan's rebuke to such lenders: When they discriminate against profitable minority-owned businesses because of prejudice, they only hurt themselves.

Earl Graves, publisher of New York-based Black Enterprise magazine welcomed Greenspan's acknowledgment but didn't wait for it to spur action. He recently created a private investment fund with the help of Sanford I. Weill, chief executive officer of Citigroup Inc. The Black Enterprise/Greenwich Street Corporate Growth Fund is looking for hot minority-owned businesses that have grown beyond the startup phase and generally have annual revenues of $10 million or more. So far the fund, which has yet to make any investments, has attracted more than $86 million from General Electric Pension Trust, IBM, and Travelers Group.

Graves spoke with Business Week Online's Jeremy Quittner about lending practices, his fund, and other issues affecting African-American entrepreneurs. An edited transcript of their conversation follows:

Q: What do you make of Alan Greenspan's recent acknowledgment that, according to Fed studies, rejections of minority-owned businesses for loans are disproportionate to those of white-owned businesses?
A:
It lends credibility to what Black Enterprise has been saying for an awfully long time: That racism is alive and well in this country. When you have someone of his reputation saying that, it lends credence to the fact that if this country is going to live up to its potential, then [racism] is going to have to go away.

Q: How do minority entrepreneurs overcome the practice of redlining neighborhoods?
A:
[African Americans] don't have to do business with someone who will not recognize the importance of you as an entity and your overall community. When you have 35 million African Americans in this country, their dollars do make a difference. Why do business with a bank that is not going to be responsive?

Most of the banks that have dealt with inner cities and small-sized businesses were really motivated to do so by the Community Reinvestment Act. When I started my business, I was able to get a loan from a New York bank for $150,000. One hundred percent of it was guaranteed by the Small Business Administration. The CRA really does guarantee to a great extent that the person making the loan is going to be very well covered -- either through the SBA or some other way...Historically, these institutions are getting some other abatement and some other kicker for doing what they ought to do anyway.

Q: How likely is a man who operates a grocery store or dry cleaning chain to actually organize a boycott? How is a small minority-owned business actually going to pressure a supplier or a bank?
A:
The question is not who do we punish for not doing business with us, but who do you reward because of their responsiveness. Which banking institutions can point to a demonstrated commitment to doing business with African-American entrepreneurs? Bank of America, formerly NationsBank, is a great example of a financial institution that has demonstrated their desire to do business with African-American entrepreneurs.

Boycotts are a short-term tactic in response to specific discriminatory practices of a particular company, not an ongoing strategy of doing business. Also, boycotts are more effective when used against companies dependent on individual consumers. Very few, if any, lending institutions fall into that category. The better long-term strategy is...to reward and encourage positive behavior. That means providing a competitive advantage and additional market-share to those companies supportive of...you. That gives unresponsive companies two choices: They can voluntarily surrender that advantage to their competitor, or they can attempt to do a better job of competing for your business.

How do you identify and support those companies that are making an effort to establish a positive relationship with African Americans? The NAACP's answer to this question, for example, is to provide African Americans with information...Their Economic Reciprocity effort provides a report card for companies in a given industry. So far, they have released report cards for the hotel and the telecommunications industries.

Q: What about minority-owned businesses without a particular link to a neighborhood, say those in the technology industry or telecommunications? Are they subject to the same difficulties getting financing as businesses linked to a particular neighborhood?
A:
No. It is so much simpler. They have a little better opportunity for access to capital based on the nature of their industry and the fact that most of the principals themselves have a track record and a strong potential client base. If you have something that even sounds like it is going to make money,...the chances of that company making it are going to be better than somebody starting out with some new franchise, or dry cleaning chain, or bakery chain. Technology companies...become colorless, to an extent. I am not saying that one wants to become colorless. I am just saying they get beyond that very quickly.

Q: How many black businesses are actually in the technology sector? Are black businesses really part of Silicon Valley, or are they really more focused on nontechnology sectors?
A:
Yes, they really are part of the industry, and they are not just limited to the periphery. A great example of this is this year's Black Enterprise Industrial Service Company of the Year, St. Louis-based World Wide Technology, a $135 million company which develops and deploys various hardware, software, and Internet technologies. About 20%-25% of the nation's largest black-owned industrial/service businesses are technology companies; This is a trend that has been emerging since the early 1980s.

Q: Can you name some hot technology companies owned by black entrepreneurs? Any that have received venture-capital financing?
A:
There are far too many to be summed up or listed in a single answer. One company we've written about recently in Black Enterprise is TechWave, a company which provides businesses with E-commerce solutions...The Seattle-based company, which supports more than 15,000 online stores...has secured more than $30 million in venture financing, which it used to acquire other tech companies. The chairman of TechWave is Dwayne Walker, a former Microsoft executive.

Q: What does a business need to show to get money from your fund?
A:
They have to have a credible track record of earnings. The point is that we are going to look beyond your color... It is not our intent to start out with finding [a white-run company], but if we found a piece of business where we thought we were going to have a good return and thought it was going to come back to us manyfold, we would take a look at it. Having said that, we expect people to have the same vision we do. We are clearly not talking startups, and we are clearly not talking real estate development. We are looking for businesses that start with $10 million in revenues. If you get to $30 million, you should not have to knock on our door, but...we will look at businesses that have revenues well beyond that.

Q: Once a minority business has become prosperous, is it an obligation to distribute the wealth, so to speak, and give other minority businesses and vendors a break by using them?
A:
I don't think a black business is supposed to become a commune. [Yet] we have an obligation back to our community.

Q: Does a fund that focuses on black businesses run the risk of getting misused? For example, white-owned businesses that choose a figurehead CEO who is a person of color. Such things have happened with the government set-aside programs.
A:
I have been following these businesses for 30 years. Contrary to what the white community might think, we don't all talk to each other every night. But if there is a significant [African-American] business in this country that is doing something, I will know about it.



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