Growth and Profit Potential Key Considerations in Startup Ideation Phase
The brand story behind many successful businesses often features a founder motivated to bring a unique concept or passion to the marketplace. Of course, that drive is an excellent starting point, and the secret sauce to many great ventures, but every fledgling entrepreneur also needs to check her personal enthusiasm against available data on revenue potential within a chosen industry.
This step is especially critical for Black entrepreneurs who are over-represented in industry sectors characterized by lower revenues and slimmer profit margins. Launching in these sectors can impact growth and profit potential no matter how well run the individual company. With the celebration of National Black Business Month this August, now is a good time to consider not only how to found more Black-owned businesses, but to target higher profit opportunities.
Beware low-growth, low-revenue industries
A recent study commissioned by the National Black Chamber of Commerce and Groupon confirms several challenges already well known to Black entrepreneurs. Among those surveyed, 85% said they had to overcome more obstacles than non-Black business owners including racism, not being taken seriously and limited access to capital.
There is a key step in the business development process, however, that provides greater personal opportunity to level the playing field. “Black entrepreneurs tend to make decisions in the business-ideation stage that are likely to keep their businesses small,” according to David Baboolall and Nina Yancy, McKinsey & Company consultants and authors of the 2020 report, Building supportive ecosystems for Black-owned US businesses. “Black entrepreneurs generally pursue businesses in less lucrative sectors.”
Black-owned employer businesses (those employing at least one person beyond the owner) are heavily concentrated in just a handful of industries that typically generate smaller revenues compared to other sectors. They include food service, retail trade, administrative and waste management services, construction, and healthcare and social assistance. For example, only 1% of Black women and 2% of Black men own businesses in the wholesale trade sector that drives 24% of total revenues across all industries.
According to U.S. Census Bureau data reported by McKinsey, nearly half of businesses owned by Black women are in the healthcare and social assistance sector, an industry segment that drives profit margins annually of only about 4-5%. Only 2% of Black women and 5% of Black men own businesses in the financial services and insurance sectors that drive profit margins of more than 25%.
While barriers to entry vary in different fields, targeting industry sectors with higher revenue and margins is one way to tilt the odds of greater growth and profit in your favor.
Location matters too
A historical mistrust of institutions based on patterns of discrimination in the U.S. and personal experience can also make Black entrepreneurs reluctant to reach outside their communities for opportunities and support.
According to McKinsey, 65% of Black Americans live in states that are below average on indicators of economic opportunity. Black Americans also disproportionately live in economically disadvantaged neighborhoods that may make it more difficult to access capital and gain exposure to more lucrative business opportunities and influential contacts.
Black business leaders should not have to leave their own communities to start a business (and communities of color need vibrant businesses to thrive), however physical location, including its relationship to market strength, as well as access to mentors and capital, must be considered in evaluating potential for business growth and profit.
While vetting your specific business concept is critical for all entrepreneurs, Black founders may particularly benefit from considering a wider array of industry sectors for potential business ideas, as well as exploring the role location may play in their ultimate success.
Follow the money
Conducting a thorough industry analysis (including current participants, distribution patterns, competition and buying patterns) can also help you determine whether your proposed business will launch in a segment with strong opportunity for profitable growth, a declining market, or one with razor-thin margins.
That doesn’t mean you can’t hit it big in any industry sector (after all McDonald’s founder Ray Kroc was firmly planted in food services where margins run only about 5%). But having an eyes-wide-open view of the relative profitability of various industry segments during the business ideation stage can help expand your exploration into new areas, or enable you to develop a more robust business plan acutely tuned to the relationship between anticipated sales and profits.