Business formation by minorities and people without wealth: Research brief

 
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From the Scholars Strategy Network, written by Colleen Casey, University of Texas at Arlington.

 

Small businesses, including “mom and pop” shops that operate in local urban communities, have been key drivers of U.S. economic growth, and fostering entrepreneurship is often seen as a good way to draw minorities and people of modest means into the economic mainstream. But successes have been few and far between for programs such as the Economic Opportunity Loan Act of 1965 that have tried to help less privileged minorities get financial support for start-up businesses. To realize potential gains, much remains to be learned about how best to help aspiring entrepreneurs, regardless of race or wealth. My research explores the role of community-based organizations as a critical new contributor.

Inequality, race, and entrepreneurship

Most entrepreneurs draw from personal financial resources to finance start-up businesses. But studies of communities and firms across the country reveal that would-be minority and low-wealth entrepreneurs face an uphill struggle. For example, they may have very limited access to credit, which in turn restricts the capacity of minority businesses to contribute to growth in urban communities.

Because most financial resources for start-up activities come from an entrepreneur’s own personal savings or wealth — including resources from jobs, savings, investments and real estate — minority and less-privileged entrepreneurs start out at a disadvantage. U.S. data for 2007 reveal that the net worth of high-income African Americans was substantially less than that of middle-income whites; and fully one-quarter of African Americans reported zero financial assets or wealth. Additional data from 2009 put the median net worth of Hispanic and African-American households at $6,325 and $5,677, respectively, compared to $113,149 for white households. Minorities have lower incomes and higher poverty rates than whites, and are less likely to own their homes or cars or enjoy income from investments.

From social networks to community-based organizations

In recent decades, social networks have been understood as an important contributor to entrepreneurial success. The concept of social networks is simple and can be easily summarized by the old adage, “it’s not what you know, it’s who you know.” At various points in life, most people benefit from connections to others in their social networks. People get information or leads on job opportunities. And would-be entrepreneurs can learn about possible investors or programs where they might get financial support not otherwise available. But not all social network connections are equal. The ones that help the most are “resource-rich,” meaning that they provide access to information or resources beyond those a person, including a would-be entrepreneur, already possesses.

Recent entrepreneurial programs stressed resource mobilization through networks:

  • The George W. Bush administration cooperated with the National Urban League to create an entrepreneurship network, and the Obama administration has tried to stimulate start-ups in economically disadvantaged communities using a national network of public-private business incubators.
  • During the recent economic crisis, the Small Business Administration made a number of grants to community-based groups to link small business owners to lending programs or investment resources.
  • In 2010, a series of small business forums hosted by the Federal Reserve System highlighted initiatives that connect small businesses to one another and to lenders.
  • Community-based organizations facilitate peer mentoring to help Hispanic and African-American entrepreneurs meet the extra challenges they face.

Network approaches presume that entrepreneurs can overcome financial barriers by building networks and activating connections to find financial resources. But many communities plagued by racial segregation and low income also lack informal resource-rich networks. Consequently, resources from community-based organizations may be needed to fill the gaps.

I have examined a random sample of 1,214 nascent entrepreneurs who started firms in 2005, using nationally representative data from the Panel Survey of Entrepreneurial Dynamics. Using statistical techniques, my study identified a number of factors that might influence entrepreneurs’ choices and accomplishments. Low-wealth entrepreneurs who report support from community-based organizations did better than other entrepreneurs at gaining access to financial support from banks or venture capitalists. This is in comparison to other low-wealth entrepreneurs without such support. Furthermore, support from community-based organizations was more helpful to low-wealth entrepreneurs than help from government. In short, community-based organizations appear to play a pivotal role in helping less-privileged entrepreneurs get access to the resources they need to launch and expand nascent businesses.

Lessons

Policies and programs that aim to facilitate entrepreneurship by minorities and those without significant personal wealth can make headway by using community-based groups and organizations as conduits to banking institutions and investors. In fact, entrepreneurial opportunity programs may fall short without activating the sorts of connections and resources community-based organizations can marshal. Researchers need to learn more about exactly what works best. What is the optimal scale of community efforts and can those that succeed in one urban area be replicated elsewhere? Community organizations working to build connections and link entrepreneurs without wealth to new resources are certainly no panacea. But available evidence suggests they can make a real difference, amplifying ongoing efforts to spread entrepreneurial opportunities by governments, banks, and social reformers.

Realted research: Read more in Colleen Casey, “Critical Connections: The Importance of Community-Based Organizations and Social Capital to Low-Wealth Entrepreneurs,” published in Urban Affairs Review, 2014, Vol.. 50, No. 3; and “Low-Wealth, Minority Enterprises and Access to Financial Resources for Start-Up Activities: Do Connections Matter?” Economic Development Quarterly, 2012, Vol. 26, No. 3.

 

The author is a member of the Scholars Strategy Network, where this post originally appeared.

Keywords: African-American, Hispanic, Latino, entrepreneurship, research brief

    Writer: | Last updated: January 26, 2015

     

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