Investing in Minority Entrepreneurs: An Economic Imperative for the U.S.
The presence of minority businesses is no small data point.
According to the National Minority Supplier Development Council, minority businesses produce more than $400 billion in annual revenue and actively employ, either directly or indirectly, more than 2.2 million people.
Additionally, minority-owned businesses contribute close to $49 billion in local, state and federal tax revenues. This translates to the contribution of over $1 billion per day in revenue to the U.S.
These business owners have the potential to create more jobs and revitalize distressed communities. The predicted demographic shifts of “minority to majority” will create a need for the ‘new majority’ to be economic drivers to the economy in order to preserve the U.S. standing as a market leader and producer.
The recommended interventions are not based on charity. The need to dramatically increase investment in minority entrepreneurs is vital to the survival of the U.S. economy.
Why Do Minorities Start Businesses?
Many members of minority communities create businesses as a last resort. Locked out of traditional jobs due to the lack of access to social capital, poor educational systems, broken transportation systems and/or systemic racism, these entrepreneurs create businesses out of necessity.
Whether full-time or part-time entrepreneurs (via “gigs”), these minority business owners see this independent revenue generation opportunity as a primary means of income.
Current State of Minority Enterprises
The positive impact of minority businesses can be seen at the national and local level. In 2014, Rahm Emanuel noted that “one half of all new businesses [in Chicago] every year are started by immigrants.”
More specifically, with Hispanics comprising 29 percent of the city’s population, they own about 22,000 businesses or 9 percent of all businesses in Chicago. In Illinois from 2002 to 2007, Hispanic businesses grew almost four times the rate of all other business owners in the state. This is no small feat.
Barriers to Access
Despite the rise in minority businesses, they still lag significantly when it comes to access to capital.
Minority entrepreneurs made up just 8.5 percent of the people pitching their businesses to angel investors in the first half of 2013, according to a report by the University of New Hampshire’s Center for Venture Research. This lack of access to capital is historical and well documented.
And while not all businesses can be high growth, this lack of access to capital trickles down to bank loans and lines of credit. Due to lack of locally based financial institutions, good credit and financial literacy, minority entrepreneurs are locked out of debt and equity capital.
Moreover, without access to well-capitalized social networks, they are also locked out of friends and family rounds as well. If minority businesses are still having an impact with disinvestment, imagine what can be accomplished with targeted interventions.
As a minority entrepreneur and investor, I have seen a few strategies and tactics that work and should be advanced in order to save the economy.
- Create access to new social networks. Leveraging technology, but also disrupting traditional networks, institutions need to invest in new social networks. Credit Suisse has created a new business strategy called New Markets. By selecting and supporting women, minority and LGBT entrepreneurs, they are building internal and external networks amongst and within marginalized entrepreneur groups to build social capital and goodwill. Credit Suisse recognizes that an investment in these emerging entrepreneurs now will have significant social and financial return as their businesses grow.
- Pursue alternative credit score models. In order to increase access to capital, it is important to help minority entrepreneurs establish credit and “extend credit responsibility.” In April of this year, Equifax Inc. and LexisNexis Risk Solutions announced the provision of alternative data for a new score, including payment history on utility bills, cable bills and cell phone bills. This new score is expected to affect more than 15 million previously unscorable consumers.
- Reauthorize and scale existing policy levers. Currently historical policy decisions like the Community Reinvestment Act and more recently, New Market Tax Credits, have been instrumental in unlocking capital for marginalized communities, and in turn marginalized entrepreneurs. It will be important to make these legislative actions permanent and not be subject to reauthorization and the polarization of politics. If it is working, don’t mess with it.
- Expand the “impact” of impact investing. As impact investing has become almost the norm, the increased interest is often driven by the successes of investment in the Bottom of the Pyramid (BoP) communities in developing countries. What if impact investing looked the BoP communities in the U.S.? As the definition of impact becomes concretized and less nebulous, it will be important to include the investment in minority communities as a core part of ESG and impact investing metrics.
- Develop a pipeline for minorities to access professional education programs. As more women attend MBA programs we recognize the positive benefit to the female students and to the institutions they attend. As the cost of professional education skyrockets, it will be important to create pipeline opportunities to support communities of color in accessing the intellectual and social capital that exists on elite university campuses, along with access to technology and invaluable team members and co-founders.
Need for Change
Understanding and supporting the needs of minority entrepreneurs is not just a moral imperative, but an economic one as well. According to the U.S. Census Bureau, the minority population is expected to rise to 56 percent of the total population in 2060, compared with 38 percent in 2015. This growth, coupled with the fact that minority owned businesses have increased over 50 percent over the last decade, means that the future economic growth of America will include this burgeoning group. Business policies and investments will need to be much more diverse than they are now to support America as an economic leader and driver in a global economy.