Earlier this summer, the Brookings Institution hosted an event titled “Supporting Black-owned Businesses to Drive Economic Development.” The event opened with Brookings Metro Senior Fellow Andre Perry presenting new data on opportunities to support Black-owned businesses in progressing economic development. This was followed by a panel moderated by Tynesia Boyea-Robinson, President and CEO of CapEQ Impact Investing Advisors, that further discussed the associated challenges and potential responses for policymakers and philanthropists within the changing legal landscape.
Panelists included Erika Seth Davies, CEO of Rhia Ventures; Stacey Bowers, Director of the Office of the Advocate for Small Business Capital Formation, U.S. Securities and Exchange Commission; Patrice Green, Vice President of Programs, Surdna Foundation; and Alphonso David, President and CEO of Global Black Economic Forum.
As discussed throughout the event, there are many benefits to investors supporting Black-owned businesses, including addressing the racial and generational wealth gap in the United States while also notably vitalizing the economy. According to the Federal Reserve, the average minority household earns “about half as much as the average White household and own(s) only about 15 to 20 percent as much net wealth” in total. Within this framework, Black business owners are shown to be 12 times wealthier than their minority counterparts, with employer-firm ownership contributing to higher wealth than non-employer firms across all racial backgrounds.
When given the opportunity to grow, Black-owned businesses greatly progress the economy. Recent research shows that “if just 15% of Black-owned businesses are able to hire one more employee, the American economy could grow by $55 billion.”
If so many advantages exist to owning and supporting Black businesses, then what are some factors behind the gap? Here are some of the barriers to entry for Black entrepreneurs that the panelists discussed:
- Access to Capital (lower personal net worth and unconducive lending practices)
As noted above, Black and minority populations generally have lower rates of overall net worth in comparison to their White counterparts, highlighting a financial challenge for starting a business. Building upon this, White individuals are disproportionately more likely to receive loans. These higher loan rejection rates for Black individuals also act as a powerful deterrent from applying in the first place for other Black entrepreneurs.
- Low Childhood Exposure to Business
Across many industries, the more individuals are exposed to particular fields in their youth, the more likely they are to enter them. Just as studies over the years have found that increased childhood exposure to STEM courses leads to increased interest in STEM-related careers, the same can be seen when discussing entrepreneurial pursuits. Three well-known avenues by which this ‘transfer of entrepreneurship’ can take form are through inheritance of family-owned businesses; transferred wealth accumulated from previous generations’ entrepreneurship and reinvested into new endeavors; and the acquisition of valuable entrepreneurial knowledge from working in family-owned businesses.
The last avenue, accrued knowledge and first-hand experience, is shown to have the highest level of impact. With this being said, only 6.8% of Black Americans reported working for a family business, whereas 11.4% of White Americans had. This gap is typically attributed to most business owners today being born in the 1950s and 1960s when most Black parents were not afforded the space for entrepreneurial pursuits. That being said, “employer-firm ownership rates nearly triple among Black Americans who did grow up with a family-owned business compared to those who did not.”
Erika Seth Davies noted that considering all of this data to create meaningful change in the market requires shifting the conversation from how illustrative these examples of disparity are to viewing these areas as opportunities for growth and expansion. Davies recommends two ways to do this: increased education and investment.
- Education
Stacy Bowers noted in the panel discussion that it is “crucial to be armed with knowledge when starting a business.” Bowers’ office at the SEC primarily assists minority-owned, women-owned, rural and natural disaster area small businesses and investors by equipping them with educational resources on raising capital, a crucial component of helping entrepreneurs enter into the marketplace.
- Intentionality and Diversification in Investing
Davies centered much of her commentary around promoting intentionality in investing and moving capital. Creating opportunities for minority populations through investments would allow the business landscape to change. More diverse investors can also supplement this transformation. Several panelists noted throughout the discussion that the more diverse investors a marketplace has, the more diverse businesses are being invested in.
Black-owned businesses stimulate the economy and represent expanded American entrepreneurialism with high growth potential. Increased entrepreneurship in minority populations has meaningful societal and economic impacts, especially regarding better socioeconomic conditions and a boosted economy.