Including People of Color in the Promise of Entrepreneurship

Summary of Study

Bottom Line: There is a racial entrepreneurship gap where entrepreneurs of color remain underrepresented. White-owned firms have double the average sales of Asian, Hispanic, and black-owned businesses. Black- and Hispanic-owned businesses have higher failure rates than do white- and Asian-owned firms. There are education, financial, and family reasons for this racial entrepreneurship gap. Policies to increase entrepreneurship exposure to people of color and make entrepreneurial support organizations more inclusive can help close this gap.

Reasons for the racial entrepreneurship gap include industry differences, with black-owned businesses being overrepresented in less-successful industries (for example, in the personal services industry), as well as entrepreneurs of color starting their businesses with less capital than their white counterparts.

As the United States becomes a more racially diverse country, a continued disparity in entrepreneurship among people of color portends further economic inequality and slow economic growth. Closing this gap requires an understanding of the unique challenges that confront entrepreneurs of color and a commitment from the private and public sectors to broaden entrepreneurial opportunity.

The racial gap in entrepreneurship also holds back employment of people of color. Assuming that half of employees working at businesses owned by people of color are also people of color, a 10 percent increase in minority entrepreneurship could lead to approximately 1 million new jobs for people of color.

Research shows that education, financial assets, and exposure to entrepreneurship help explain some of the racial disparities in both entrepreneurship rates and entrepreneurial success.

  1. Education -- Entrepreneurs that graduate college are more likely to have sales totaling more than $100,000 and more paid employees than high school graduates or dropouts, yet Asian and white Americans are more likely to have college degrees) than their black and Latino counterparts.

     

  2. Assets -- More than two-thirds of entrepreneurs use personal savings as a source of funding, and more than one in five rely on family for funding, yet white households’ median wealth is 20 times larger than black households’ and eighteen times larger than Hispanic households’.

     

  3. Family Entrepreneurial Involvement -- Previous low rates of entrepreneurship among people of color can impact future rates of entrepreneurship because people who know entrepreneurs are more likely to become entrepreneurs, and exposure to entrepreneurship raises the probability of engaging in it.

Policies to close the racial entrepreneurship gap include:

  1. Increasing Exposure to Entrepreneurship -- Create internships and apprenticeships to help young people of color learn more about entrepreneurship.

     

  2. Make Entrepreneurial Support Organizations More Inclusive -- Encourage entrepreneurship support organizations, particularly when receiving government funding, to develop metrics to track entrance and retention rates of entrepreneurs of color.

Read the full report here.

Feature Charticle

Necessity Entrepreneurship by Race: Portion of New Entrepreneurs Who Were Unemployed Before Starting Their Business

Findings:

  • There is a racial entrepreneurship gap where entrepreneurs of color remain underrepresented.

  • Necessity entrepreneurs, those who create businesses while unemployed, are more likely to start businesses with lower growth potential and also more likely to be black and Latino.

  • There are education, financial, and family reasons for this racial entrepreneurship gap. Policies to increase entrepreneurship exposure to people of color and make entrepreneurial support organizations more inclusive can help close this gap.