Minority Entrepreneurship In America
For hundreds of years in America and throughout the world, business success has been one of the best ways to measure overall wellbeing as a society. In our world today, racial minorities have not had the opportunity to achieve the kind of success as business owners needed to truly prosper. Because of factors that in many instances are almost entirely out of their control, these groups of people are under-equipped to enter into business ownership, and because they don’t have the necessary skills, they have little impetus to try and improve themselves. The major factors that prevent more minorities from becoming entrepreneurs and that limits the ones who do own businesses from being more successful are a lack of education and training for the skills needed to own a business, limited access to some of the different sources of financial assistance that are needed to successfully get a business off the ground, and the inability of prospective minority business owners to create meaningful and helpful networking connections that can be vital in the success of a new business.
The extent to which minorities in America are underrepresented in business ownership is significantly under-realized by the general population. According to the Minority Business Development Agency, a government agency operating as part of the Department of Commerce, there are 27,626,360 businesses total in the United States today, of which only 7,952,386 are owned by racial minorities. This comes out to only about 28.8% of American businesses are minority-owned. According to the U.S. Census Bureau, 37.9% of Americans are classified as non-White minorities. This means that just on the surface, it is already clear that minorities are underrepresented based on the general U.S. population demographics. The problem isn’t just that minorities own far fewer businesses than one would expect based on the overall population, it is also that their businesses tend to be far less successful than the businesses owned by non-minorities. The average revenue for a minority-owned business in 2012 was $173,552, while average revenues for a non-minority firm was more than three times that amount, at $552,079 (MBDA). Businesses not owned by minorities also employ far more people and create many more jobs than minorities do. Non-minority businesses have roughly 2.5 employees per business, while minorities only employ about .9 people per business (MBDA). The MBDA also keeps track of what these statistics would look like if they were actually on par with the total overall population. If minorities owned businesses at rates equal to the general American population, the total number would increase from just under 8 million to over 9.9 million firms, and the total number of employees at minority businesses would almost triple from 7.2 million to 20.4 million employees. Additionally, the total gross revenues of businesses owned by racial minorities would more than triple from $1.4 trillion to $4.3 trillion. On the bright side, minority businesses are growing at a rate much higher than the national average. From 2007-2012, the number of minority businesses grew 38%, the total revenues grew 35%, and the number of employees at these businesses grew by 23%. For context, non-minority businesses actually saw both their total number of businesses and employees go down over this same time period. This shows that, while the problem is still present, it is definitely getting better as time moves on.
Many business owners share similar characteristics that help them to be successful. Minority entrepreneurs tend to share these traits, with additional qualities added to make them unique. The first characteristics that minority business owners share is the reasons that they made the decision to become entrepreneurs. According to a study done by Robert D. Hisrich and Candida Brush, “[a]chievement, opportunity, and job satisfaction were the motivations listed most often” for why these people decided to start a business. Additionally, most of these business owners claim that they are not motivated by power and status, and instead want to gain less material rewards like feelings of self-fulfillment or accomplishment” (Hisrich & Brush 4). This particular statement stood out to me when I was reading this article, because in my experience in business classes and also knowing many of the popular stereotypes about people in business being greedy, I would have expected these results to be the opposite of what they turned out to be. Many minority entrepreneurs possess similar skill sets that help them to operate their businesses as well. The surveyed business owners claimed to be “most adept at idea generation, product innovation, and dealing with people; average in marketing and business operations; and weak in finance” (Hisrich & Brush 5). These results aren’t all that surprising to me, because as I will point out later on, most minorities don’t have the formal education and training needed to be proficient at more technical tasks like marketing, operations, or finance. However, the areas they do claim to be skilled at, like idea generation, innovation, and people skills, are just as crucial as the more technical skills but require far less training and tend to come more naturally to the kind of creative people who tend to be entrepreneurs.
The biggest reason why minority entrepreneurship is lacking in America today is because the American education system is failing its minority students. According to a study done by the National Center for Education Statistics, the majority of minority students lag far behind non-minority students in almost every area at every level of school. The only racial group to be as successful or more successful than white students is Asian-Americans, due to the fact that they are the only racial minority group to be financially well off. The other racial groups, Black, Hispanic, Hawaiian/Pacific Islander, and American Indian, all fare significantly worse in school. The NCES gave tests to 4 year olds to test their letter and shape recognition, and in these tests, the four groups listed in the last sentence all scored lower on their tests than White students did. Additionally, tests were also given to 4th graders, 8th graders, and high school seniors to help test their reading and mathematics skills, and in all three age groups a vast majority of Black, Hispanic, Hawaiian/Pacific Islander, and American Indian students are considered to not be at a suitable level for the level they are at in school. A large part of these educational problems are the fault of the schools themselves. A report released by the U.S. Department of Education in 2014 found that the American public school system does a poor job in offering quality preschool programs for it’s students, especially the minorities who tend to live in lower-income areas. Also in the report is a section stating that racial minorities have significantly more restricted access to many of the Advanced Placement courses that are essential in preparing students to advance their academic careers (Department of Education). Both of these findings are very problematic because they show that for the most part, minorities do not have an equal chance to receive a quality education, which puts them at a disadvantage as early as the age of 4. This disadvantage is even more clear when comparing success in the previously mentioned Advanced Placement courses. When comparing scores for the main examination in these AP courses, scored on a 1-5 scale, on average Black, Hispanic, and American Indian students were not even .4 points away from the overall average score (Department of Education. In most subjects, students from these three groups only successfully passed these tests roughly 30% of the time, compared to roughly 60% for White and Asian-American students (Department of Education). As could likely be expected Black, Hispanic, and American Indian students also score significantly lower on the SAT and ACT tests as well (Department of Education). This in turn leads to significantly fewer minorities being enrolled in college, where the majority of business skills are actually learned. Many people might say that it is up to the individual to take responsibility for their own education. I would disagree with that assertion in this instance for two reasons. The first reason is that we can’t expect our children to know what is best for their future and hold them accountable for that. The reason that schools exist is to help them prepare to be successful when they do finally reach an age where they can be responsible for themselves, which leads me to my second point. America has not given these children a fair shot to put themselves in a position where maybe they would be able to eventually either go to college and continue their education or to go into the real world and have the skills needed to be successful. Once people go out on their own and aren’t equipped to be successful, it becomes much more difficult to be motivated enough to want to better themselves, so it is essential to do this in elementary, middle, and high schools. The best way to fix this problem is just to increase awareness that there is a problem here. I knew just from general knowledge that the public school system, especially in lower income areas, is not up to the standard that it should be, but I never knew the extent to which it damages the students attending these schools. As seen in a few of the sources cited in this paragraph, the federal government knows that there are problems, and seems to be attempting to address these issues, but, as seen in many different issues ranging across almost every area of interest, the most effective way to make things change is to get public support behind an issue. If more people knew that these kids aren’t even receiving a fair shot at bettering themselves, I fully believe that society would be able to enact some kind of positive change to at least get the ball rolling in the right direction for America’s youth.
Another reason that minorities are less successful as business owners is because they don’t have the assets or the access to those who do have the assets needed to be successful. As seen in the infographic that is in this paper, minority businesses in total only receive 43% of the funding that non-minority businesses do. There are multiple different sources of financing for a business, and minorities trail in their ability to receive funds from all of these sources. The most common source of funding for a new business is from the entrepreneur themselves, and since minorities on average have lower annual salaries than non-minorities, prospective entrepreneurs are much less likely to have the financial resources needed to start their business. The next main source for business funding is reaching out to friends and family, and again, since minorities make much less money, friends and family are far less likely to have the money needed either. This leads to minority businesses being much more likely to go bankrupt eventually. According to Rafael Efrat, who did a study on business owners who had filed for bankruptcy, “[t]he household income of minority bankruptcy petitioners was almost a quarter less than their White counterparts in the bankruptcy sample. While minority petitioners had substantially lower household incomes, they also had significantly higher numbers of dependents to support. Similarly, minority petitioners reported significantly less ownership of capital. For example, the homeownership rate among minority petitioners was almost half the rate of that among White petitioners” (Efrat 112). This quote shows that the lower incomes of minorities has a direct impact on their ability to be successful, and is a factor in the downfall of those businesses that do fail. Minority entrepreneurs also have a much more difficult time securing outside funding as well. Bank loans are definitely the most popular form of outside business investment, and minorities have a much more difficult time successfully gaining business loans. According to a report done by Robert W. Fairlie and Alicia M. Robb for the Minority Business Development Agency, only 17% of minority-owned businesses received loans, compared to 23% of non-minority firms. This problem is accentuated even further when looking at the denial rates for loan applications. Non-minority businesses were only denied loans 16% of the time, while minority denial rates were almost triple that amount, at 42%. The problem isn’t just in being able to receive a loan though. The average monetary amount for a non-minority loan was roughly $310,000, while minority loans were less than half that amount, at about $149,000. Additionally, minorities also paid higher interest rates on the loans that they did receive, with an average rate of 7.8%, compared to only 6.4% for non-minorities. These statistics help paint the picture of a large problem. If minority entrepreneurs have fewer personal assets to use, and their families and friends also don’t have the required amounts of funding to help businesses, then the next place that they will turn to is bank loans, and as shown above, this avenue is also one that doesn’t provide them with the necessary funding to help these entrepreneurs make their business viable. According to a report done by the University of New Hampshire’s Center for Venture Research about the angel investing market, in 2014 only 24% of the businesses making pitches for angel investment were minority-owned, and only 16% of those businesses were successful in gaining funding, which is below the industry average of about a 19.2% success rate. Additionally, in the lucrative but highly exclusive world of venture capital, 87% of the entrepreneurs to receive venture capital funding are White, and 12% are Asian, leaving only roughly 1% of entrepreneurs to belong to the other, less successful minority groups. Even the minority companies that do obtain venture capital funding receive on average about ½ to 1/3 of the money that White and Asian companies receive. Fortunately, however, steps are being taken to try and fix these systematic problems. For example, there is an organization called PowerMoves that is dedicated to bringing together some of the top emerging minority entrepreneurs together for programs designed to expose them to capital and valuable business connections. Additionally, multiple different agencies in the U.S. government, like the MBDA or the Small Business Administration, and corporations like Intel, Comcast, and AOL have funds specifically designed to fund minority-owned businesses, so there are certainly steps being taken to help minority entrepreneurs overcome the financial hurdles of operating a startup.
The next major problem that minority entrepreneurs face is a lack of business connections and networking opportunities that can be very helpful during the process of starting a business. Having valuable connections can open many doors, like providing funding opportunities, receiving useful advice and help from those who have successfully launched a business, or being able to work together for potentially lucrative partnerships with more experienced and successful companies. In a paper written for the Brookings Institute, a prestigious Washington D.C. think tank, Michael Barr writes that “[b]usiness networks can help any firm to build its customer and supplier base, improve access to debt and equity finance, and provide useful advice and support. Such networks can be especially beneficial for new and smaller firms, which because of their size often have a narrower range of contacts. Moreover, peer networks may be particularly valuable for entrepreneurs facing similar problems, or located in the same communities. Women- and minority-owned businesses often cannot effectively access business networks even though they might benefit the most from them” (Barr 6). This quote shows the importance of having connections in the business world, and so the fact that many minority entrepreneurs don’t have these valuable connections is very detrimental to their chances of being successful. There are many ways that the business community is trying to fix these networking problems. As mentioned above, PowerMoves is doing a great job of connecting up and coming entrepreneurs with established, successful business owners to create just the type of connections that can prove to be so valuable. Another way to fix this problem is just to raise awareness that minority business owners are out there and attempting to find people to help them. The general American population has never heard of some of the best emerging entrepreneurs across the country, and so promoting them and getting more people to learn about the outstanding ideas that these people have could only be a positive thing in the long run.
When I decided to look into using this subject for my research paper, I knew that there were problems in the world of minority-owned businesses. However, I wasn’t really aware of why these problems existed. Through the process of formulating and writing this paper, I have become much more knowledgeable about the problems that are facing minority entrepreneurs in America today. Ultimately, one of the best ways to fix this problem is to educate more people about the real problems facing millions of American entrepreneurs, because public awareness has shown throughout time to be one of the most effective ways to get things done, and fixing this problem is without a doubt in the best interest of every American. A diverse and integrated business society can only bring good things with it, because having numerous people from different backgrounds can make the whole world a healthier and more productive place.
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