Meet America’s New Small-Business Owners: Ex-Cons
Business + Economy

Meet America’s New Small-Business Owners: Ex-Cons

iStockphoto/The Fiscal Times

After Cedric Hornbuckle, age 37, served eight years in prison for drug dealing, he knew finding a job in the real world would be difficult—studies have found that any criminal record can cut someone’s chance of finding a job by nearly one half. So in 2008 he decided to forego the uncomfortable job interviews and resume workshops, and started his own moving company called Moved by Love. “I always had the [entrepreneurial] mindset; it was just that I used it in bad ways,” he told Portfolio last year. “I knew all about profit margins and managing people; it’s just what I did was illegal.”

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With prison costs gouging holes in state budgets and the U.S. economy in need of more entrepreneurs, five graduate students at the University of California-Berkeley recently came up with a creative solution—they plan to match private investors with former offenders looking to start their own business. Offenders’ bios and their business plans would appear on a website, with lower risk candidates (those with sound plans and solid evidence they’ve reformed) commanding lower interest rates, and investors would bid on each plan like an online auction. To ensure that the ex-con entrepreneurs stay on track with their business plans, the students want state governments to act as intermediaries, divvying out the loans in small installments based on performance, and to offer insurance against total loss.

The graduate team thinks states would reap huge benefits from getting involved. To cut prison costs, legislators are looking for ways to reduce the recidivism rate, and a wealth of research shows that jobs keeps them off the streets. A 2008 study by the Safer Foundation found that just 16 percent of Illinois ex-prisoners employed for one year committed another crime, compared with 54 percent for all released prisoners in the state. Since offenders have a harder time finding jobs because of their records, helping them launch businesses could save states millions.

The idea of turning prisoners into entrepreneurs has been gaining ground in the last decade. The Houston-based Prison Entrepreneurship Program (PEP), which helped Cedric Hornbuckle launch his business, started in 2004 when a former Wall Street investor toured a prison. Her visit convinced her that even the most unsophisticated drug dealers have abilities that could make them good executives—like an understanding of market competition, team management, profitability, and risk management. And a 2002 Journal of Labor Economics study concluded that drug dealing has a statistically significant effect on the future probability of self-employment. Young people who dealt drugs were 11−21 percent more likely to choose self-employment in later years than were young non-drug-dealers.

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PEP offers a five-month business education course to selected prisoners before release, an entrepreneurship school after they get out, and other kinds of practical help like housing and professional clothes. Some donors also invest in graduates’ startups (though the arrangements are outside program auspices, so the program doesn’t offer guarantees or insurance to investors).

PEP graduates attract financial backers, says chief development officer Jeremy Gregg, because the program gets results. Graduates’ official recidivism rate within three years is less than 5 percent, compared with about 25 percent in Texas overall and 43 percent nationwide. PEP has graduated more than 700 men to date, and at least 106 of those have launched small startups—a carpet cleaning company, a t-shirt printing business, and a specialty leather goods venture among them. 

One graduate, Jeffrey Offutt, was released in 2008 after being locked up for three years on a burglary charge. With the help of a startup loan from a PEP investor, he bought a printing business in 2009. Since then, JITA Printing’s profits have soared—$17,000 in 2009, $125,000 in 2010, and $280,000 last year; this year, he’s shooting for $550,000 to $600,000. Instead of adding to the unemployment rolls, he’s shrunk them by hiring three staff.

In a world of background checks and offender registries, a criminal record might seem like a detriment to a new venture, but Sandra Martin, founder of the prison reentry web site Reentry Central says that businesses run by ex-offenders don’t necessarily have a harder time than others building customer loyalty. “Unless you’re going into a business like providing domestics in someone’s home, we haven’t found any problems,” she says.

But the jury is still out on these relatively new prisoner entrepreneurship programs. There’s been little evaluation of their effectiveness, says Nancy La Vigne, director of the Urban Institute’s Justice Policy Center. One problem she cites is “creaming”—given scarce funding, many re-entry programs target the most promising ex-prisoners, who might have succeeded anyway. Programs could generate a bigger impact by helping those who are at higher risk, she says. But if offenders do relapse, their businesses stand a good chance of failing, which could scare off investors. 

The Berkeley students haven’t yet marketed their proposal—it’s still words on paper. And PEP’s Gregg says it takes more than just money for ex-prisoners to succeed—they need housing, medical care, transportation, and mentors to really turn their lives around.

Still, the Berkeley team thinks harnessing the private sector makes sense as both an investment and a deficit reduction strategy.. They foresee the auction system attracting investors looking for the bigger yields that come with higher risk, especially if backed by a government guarantee. And with the U.S. prison population at 1.6 million, the potential market is huge. Connecting the two, they hope, will profit both lenders and the country.