Kauffman Compilation: Research on Race and Entrepreneurship

[Pages:19]Kauffman Compilation: Research on Race and Entrepreneurship

December 2016

Kauffman Compilation: Research on Race and Entrepreneurship

TABLE OF CONTENTS Introduction .................................................................................................................. 2 The State of Race and Entrepreneurship Research ..................................................... 3 Kauffman Index Shows Racial Breakdown in Startup Activity....................................... 5 Including People of Color in the Promise of Entrepreneurship...................................... 6 Does Racial Wealth Disparity Hinder Entrepreneurship? ............................................. 7 Investing in Minority Entrepreneurs: An Economic Imperative for the United States... 10 Left Behind? The New Generation of Latino Entrepreneurs ....................................... 13 Expanding Latino Entrepreneurship Research ........................................................... 15 Four Ways to Spur Native American Entrepreneurship .............................................. 16

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INTRODUCTION While entrepreneurial startup activity is on the rise, entrepreneurs of color remain underrepresented and continue to have lower rates of entrepreneurship than their white counterparts do. As the United States moves closer to becoming a more racially diverse country, a continued disparity in entrepreneurial rates among people of color will lead to missed opportunities. The Kauffman Foundation has a large body of work that examines this area of research. In this volume, we have assembled an assortment of Kauffman's work on entrepreneurs of color. The compilation that follows highlights a range of Kauffman resources that discuss entrepreneurs of color, the particular challenges facing these demographics, and the practical and policy ideas to address them. For additional information on race and entrepreneur-related research beyond this compilation:

Learn more about the Kauffman Inclusion Challenge, which is designed to find, understand, and grant funds to nonprofit entrepreneur-support organizations that can help female entrepreneurs and entrepreneurs of color achieve higher rates of success.

Scan Kauffman's policy digest on Entrepreneurs of Color. Explore Kauffman's work related to entrepreneur demographics.

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THE STATE OF RACE AND ENTREPRENEURSHIP RESEARCH

A summary of race research from State of the Field, which presents the latest research on a range of entrepreneurship topics, including race, edited by leaders in the field.

Contributors: William D. Bradford and Naranchimeg Mijid

The racial categories of persons in the United States owning business can be broadly grouped into African American ("Black"), Asian, Hispanic, and White. Black-owned and Hispanic-owned firms have higher failure rates than do White-owned and Asian-owned firms. Studies find that large racial/ethnic gaps exist both in self-employment rates and business performance.

Minority entrepreneurs, especially Black and Hispanic business owners, are still underrepresented among U.S. business owners, and they also underperform compared to nonminority owners. According to the Small Business Administration, as of 2013, Black-owned firms represent 7 percent of all U.S. businesses, Asian-owned firms represent only 4.3 percent, and Hispanic-owned firms' share is only 10.6 percent. We know there is still a substantial racial and ethnic gap, and inequality persists among entrepreneurs with different racial backgrounds.

The sources of the gaps in the performance of minority firms can be examined through four key factors for successful small-business ownership: 1. The leadership of sufficiently skilled and capable entrepreneurs ("management") 2. Having sufficient financial capital to buffer losses, achieve efficient scale, and exploit

business opportunities ("money"), and 3. Awareness of and access to markets in which to successfully sell the firm's products

("markets").

Management: Large racial/ethnic gaps exist with the characteristics of minority owners. Prior family business ownership is less frequent among Black and Hispanic entrepreneurs than among Asian and White entrepreneurs. Black and Hispanic entrepreneurs also have lower education levels and fewer years of managerial experience than Asian and White entrepreneurs do. These traits result in lower success at starting new businesses, greater propensity to enter business lines with low entry barriers (thus higher failure rates), and lower business survival rates. Black and Hispanic potential entrepreneurs have made recent increases in educational attainment and business experience (in both large and small firms). These factors might reduce the gaps in the performance of new Black and Hispanic startups.

Money: Racial and ethnic gaps persist in access to credit. Black and Hispanic families have lower wealth levels than White families do, which results in the lower equity levels of new Black and Hispanic businesses compared to White businesses. Black-owned and Hispanic-owned businesses experience less favorable loan application outcomes than do White-owned and Asian-owned businesses after controlling for firmand owner-specific characteristics. As a result, Black and Hispanic entrepreneurs enter industries with low capital requirements and high failure, which weakens their firms' abilities to buffer losses and financial growth if they survive in early stages.

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Markets: Minority-owned businesses are disproportionately located in urban areas and disproportionately serve ethnic retail markets.

Minority-owned firms that focus on co-ethnic retail markets do not perform as well as those that do not focus on co-ethnic retail markets.

Studies found that minority-owned businesses that cater to government markets achieve increased sales through government procurement programs; however, we still don't know the long-term effect of preferential minority business procurement programs on the viability of minority businesses. On the question of whether such programs have been positive or negative for individual firms, there is mixed evidence.

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KAUFFMAN INDEX SHOWS RACIAL BREAKDOWN IN STARTUP ACTIVITY According to the 2016 Kauffman Index of Startup Activity, the Rate of New Entrepreneurs is highest among Latinos and lowest among African Americans.

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INCLUDING PEOPLE OF COLOR IN THE PROMISE OF ENTREPRENEURSHIP Policy recommendations related to entrepreneurs of color from a Kauffman Entrepreneurship Policy Digest Increase Exposure to Entrepreneurship

Create internships and apprenticeships to help young people of color learn more about entrepreneurship. Programs like Louisville's SummerWorks that teach high schools students about starting and managing a business during the summer months of high school, can be an effective way to increase entrepreneurship among people of color.

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. This data can help identify challenges to address.

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DOES RACIAL WEALTH DISPARITY HINDER ENTREPRENEURSHIP?

A Growthology blog post

By Emily Fetsch

Entrepreneurs of color are underrepresented and continue to have lower rates of entrepreneurship than their white counterparts do. As race plays a large factor in wealth inequality, does this put potential entrepreneurs of color at a disadvantage related to starting a new business?

A paper by Ross Levine and Yona Rubinstein examines the unique traits of entrepreneurs to help answer the question of who becomes an entrepreneur. The paper shows that entrepreneurs tend to be "white, male, and come from higher-income families." But why does family wealth contribute to an individual's likelihood to become an entrepreneur? The answer: capital.

A 2011 Pew Research Center study shows "the median wealth of white households is twenty times that of black households and eighteen times that of Hispanic households." Another study by the Institute on Assets and Social Policy (IASP) suggests that two of the primary sources of wealth disparity found in the Pew Research Center study include homeownership and "inheritance, financial supports by families or friends, and preexisting family wealth."

Capital matters for those starting businesses for a variety of reasons. A business that starts from a strong financial position is more likely to be able to adapt to challenges and scale based on opportunities that arise. Startups with more initial funding are also more likely to receive additional sources of funding during financing rounds. For many Americans, capital is created through homeownership and family assets.

Homeownership

The IASP study shows homeownership is a factor in racial wealth inequality in several ways. First, through family contributions, as whites are more likely to receive inheritances or other monetary support from family for down payments. While "almost half of white Americans got money from a family source for a home down payment," nine in ten black Americans have no family financial assistance for their down payments. As a result, "white families buy homes and start acquiring equity an average eight years earlier than black families." Due to the family monetary contributions, white homeowners can contribute a larger down payment, which lowers interest rates.

Second, through homeownership rates. "Due to historic differences in access to credit, typically lower incomes, and factors such as residential segregation, the homeownership rate for white families is 28.4 percent higher than the homeownership rate for black families." While people of color tend to have lower rates of homeownership, it remains a bigger proportion of their wealth compared to their white counterparts (53 percent for people of color compared to 39 percent for whites).

Family Contributions

The disparity in family contributions exacerbates wealth disparity. Millennials have been delayed in securing full-time employment and being financially self-sufficient compared to previous

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