California recently passed a Bill requiring venture capital (VC) firms to disclose diversity data about their portfolio companies in an attempt to increase transparency and make the industry more equitable. Even more recently, President Joe Biden visited Milwaukee to voice support for Black-owned business ownership. Per the Atlantic, 60% of all American entrepreneurs are white males. Black people comprise 13% of the U.S. population; yet they own only 7% of all businesses.
Black participation in entrepreneurship is also skewed in relation to other ethnic minority groups. Data from the Ewing Marion Kauffman Foundation reveal that over the last 25 years, the share of new entrepreneurs who are Hispanic or Latino nearly doubled, as did that of those who are Asian. In contrast, the share of new entrepreneurs who are African American increased from 8.4 to 10.1%.
According to the Center for Global Policy Solutions, pattern recognition by private financiers has created a funding bias that has destroyed opportunity within communities of color. FastCompany reports that just 1% of all VC funding, an estimated $2.3 billion of a total of $215.9 billion in 2022 (and dropping by 45% from 2021) went to Black-founded companies. Such systematic racism has perpetuated economic inequalities, the average net worth of African-Americans being only $11,000 compared to $144,000 for their white counterparts.
Diversity in entrepreneurship is important for innovation. According to the Small Business Administration (SBA), 99.9% of small businesses with fewer than 500 employees are minority-owned. Minority founders tackle often-ignored issues thought to impact only a small community but can be scaled up for the mass market. There is a plethora of evidence to suggest that investment in women and multicultural entrepreneurs yields above-market returns. Per the Center for Global Policy Solutions, America is losing out on over 1.1 million minority-owned businesses due to discriminatory financing practices and a bias towards companies primarily operated by white males, and, as a result, foregoing over $9 million potential jobs and $300 billion in collective national income, which is why it is important to level the playing field.
Why are Black people underrepresented in entrepreneurship?
They have historically suffered from a lack of access to both tangible resources like property and finance, and intangible resources such as social networks, self-confidence, and track record that are key to the successful exploitation of entrepreneurial opportunities. Notwithstanding Republican presidential candidate Nikki Haley’s recent failure to mention slavery as a cause for the American Civil War, the fact remains that decades of institutional theft due to the lack of freedom to earn degrees and incomes and hold property have stripped the community’s ability to pass down wealth to the next generation.
Black people have strong motivations for entrepreneurship like any other ethnic group, yet, low incomes and negative stereotyping by banks due to the lack of collateral and low levels of home ownership have translated into relatively low access to capital, impacting the readiness to implement business ideas. According to The Washington Post, Black workers have seen the lowest wage gains of any group since the Great Recession. The typical Black family has just 1/10th the wealth of the typical white one. For roughly the same percentage of the overall population in 1863 when Black Americans owned one-half of 1 percent of the national wealth, today they own just over 1.5 percent.
To be sure, according to the Culture model of ethnic enterprise, some minority groups are considered to be more predisposed towards entrepreneurship, strong cultural values such as self-sacrifice, self-denial and hard work being the hallmarks of entrepreneurship in those communities. Asians in the developed West, for example, are commended for their ‘entrepreneurial spirit’. However, the ability to tap family labor is not critical as all small businesses work long hours. Family does not always enhance business prospects; family can also constrain business development.
The use of family labor in some communities is sometimes more visible due to their engagement in traditional businesses. Indeed, Black people’s participation in the skilled sectors cannot be overlooked. Yet, evidence is far from compelling. According to TechCrunch contributor Duane Dennis, who attended both the Massachusetts Institute of Technology Global Founders’ Skills Accelerator (GFSA) program and the HAX accelerator in Silicon Valley, there were very few minorities in both cohorts, with four Black people out of about 50 founders in GFSA and no minorities among 15 companies in HAX.
It is not that policy efforts in the U.S. are blind to the cause. The SBA has played a pivotal role in expanding outreach and stepping up minority entrepreneurs’ access to capital and social networks. In 2023, the number and share of SBA-backed 7 (a) and 504 loans going to Black-owned businesses more than doubled since 2020. According to a 2020 Morgan Stanley survey, 61% VC firms signaled increased commitment to diversity in the aftermath of Black Lives Matter. Yet, according to Backstage Capital, an early-stage VC firm that has funded 200 companies led by underrepresented founders since 2015, Black founders are often overlooked despite being as qualified as their white, male counterparts.
So, what can be done to level the playing field for Black entrepreneurs?
First, it is critical to invest in early entrepreneurial education. Classes and accelerators hosted by educational institutions can go a long way towards providing the necessary knowledge, skills, social networks, and even seed capital, to conceive and execute business ideas without a traditional family background in entrepreneurship. Financial aid packages aimed at subsidizing higher education through scholarships and low-interest rate loans can cultivate an entrepreneurial spirit and foster risk-taking among aspirants from marginalized backgrounds.
Second, funding innovations that address pressing social and sustainable problems, including those focused on underrepresented areas, can help to attract a diverse range of founders committed to building multicultural teams. Such an emphasis can complement public disclosure of the diversity profile of VC firms’ portfolio companies as one of the key markers of performance. Third, and relatedly, increasing diversity and representation among the investor community can aid the identification of promising entrepreneurs from communities of color.
Finally, as consumers of the innovative new economy, we can do our part by rewarding the initiative and hard-earned enterprise of Black founders. If the recent uproar over Nikki Haley’s plain lack of reference to slavery as a cause of the Civil War is indicative, our own role in a climate of growing social consciousness cannot be dismissed, but only if we don’t shy away from acknowledging the blatant oppression and discrimination that Black people have historically suffered.