CEO and co-founder of Rheaplyoverseeing the company’s growth, sales, operations and vision.
Starting a business is difficult.
Most new founders jump in because they have a pretty good idea: a better product, an improved business model, or key ideas that the existing market hasn’t addressed. Thinking, “There must be a better way,” is a common prelude to the eventual creation of an entity.
But then reality hits. A new business and its early founders must create, market, and sell a product or service that likely competes directly with existing offerings. In B2B or B2B2C models, first market pull does not only depend on superior marketing and product or service quality. Indeed, building relationships with customers is key to adoption and growth.
Now imagine you are a racial minority and starting your first B2B business.
This company could benefit from certain advantages: an excellent offer of early products, first-hand information on customer needs and a diligent thinking team. But, undoubtedly, this founder will not have an established set of potential adopters or a sufficient network. The primary reasons for this vary, but historical and systemic racial gaps in business ownership, business leadership, and finances continue to impede the progress of minority founders. Look no further than the disproportionate differences between the African American population (13.4%) and their representation in the business world (only four Fortune 500 companies have black CEOs).
In 1972, the National Minority Supplier Development Council (NMSDC) was established to advance Certified Minority Business Enterprises (MBEs). It aims to alleviate systemic racial barriers faced by minority business owners through the MBE certification, which has been adopted by nearly all municipalities, states and federal agencies, as well as many businesses under larger programs. broad diversity of suppliers.
These programs aim to diversify an organization’s supplier base; simultaneously, they help minority founders identify early adopter organizations that would see a new diverse vendor as a benefit rather than a risk. Like NMSDC membership, participation in supplier diversity programs requires MBE certification, which is currently defined too narrowly. Therein lies the problem and the opportunities for change.
MBE certification excludes minority owned and operated businesses
Currently, MBE certification requires a minority business to be at least 51% owned, operated and controlled. “Ownership” of the business is established by proving one of the following:
• 100% of the assets of a sole proprietorship.
• At least 51% of the interests of a partnership.
• At least 51% of each class of voting shares and 51% of all outstanding shares, determined by the percentage that would be distributed to minorities if the company were liquidated.
• At least 51% member interest in an LLC.
“Control of the business” is established if the minority individual is “the final decision maker for all aspects of the business”.
Let’s take a concrete case: I am the CEO and co-founder of a company, and I am African-American. I am both the final decision maker on all aspects of the business (100% control of voting rights) and the main shareholder. In particular, I do not hold 51% of the stakes in the company. By NMSDC criteria, my business is minority-operated and controlled, but not minority-owned; thus, my company is not eligible for MBE certification and hence its supposed benefits.
Why is this important?
Like many minority startup founders, I hope to establish early traction through supplier diversity programs. Past performance established in large organizations comes with additional market traction, venture capital funding, growth and scale. Being MBE certified would also benefit our clients. Companies must maintain a certain level of MBE spending before they can be considered for any government contracts. In addition, subcontracting with MBE certified suppliers offers companies tax advantages.
However, in direct experience, my company’s lack of certification makes it more difficult to secure early pilots of our technology through the procurement processes of potential client organizations.
My position is not unique. As with any start-up, when we finance our growth through fundraising, we sell shares to investors or grant shares to the first employees. And despite how many minority employees or executives I might hire, if outside investments were sold to non-minority investors, our company would never be eligible for MBE certification, despite being minority operated and controlled. , and would completely lose supplier diversity programs.
Additionally, many minority business owners do not apply for MBE certification due to the lengthy process, high application costs, and associated fees to retain the services of an attorney.
MBE certification also requires applicants to submit tax records for the two years preceding the submission of the application. This prevents young business owners from immediately applying for MBE certification. Without certification during those difficult founding years, it is nearly impossible for minority owners to gain support from supplier diversity programs.
Proposed solution to increase accessibility and inclusiveness of MBEs
To make the MBE certification more accessible, I offer a simple solution.
While the practice of certifying businesses as at least 51% minority owned, operated and controlled as MBEs should continue, it should not be the only test. I recommend changing the certification determination to a multi-pronged test (two of the four requirements below if the company is not 51% minority owned):
1. The CEO or minority chairman is the major shareholder (owns more shares than any other stakeholder).
2. The CEO or minority chairman controls the company (retains more than 51% of the voting rights).
3. The majority of company leadership positions (C-suite positions) are held by minorities.
4. A person belonging to a minority is a founding member and currently employed by the company.
Additionally, companies can support diversity within their supplier base by creating their own evaluation criteria. Google, for example, has its own application and assessment process for applicants from minority businesses, rather than requiring third-party or government certifications. More companies should take this route.
Of the dozens of minority founders I know of, none are MBE certified. It shouldn’t be. Shifting the definition of ownership to a multi-pronged test could allow more minority founders to achieve MBE certification, participate in supplier diversity programs and become more mainstream in our national business community.
Forbes Business Council is the leading growth and networking organization for business owners and leaders. Am I eligible?