Minority And Women Entrepreneurs: Building Capital .

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POLICY BRIEF 2015-03Minority and Women Entrepreneurs:Building Capital, Networks, and SkillsPOLICY BRIEF 2011-02 MAY 2011MARCH 2015W W W. H A M I LT O N P R O J E C T. O R G

ADVISORY COUNCILThe Hamilton Project seeks to advance America’spromise of opportunity, prosperity, and growth.We believe that today’s increasingly competitive globaleconomy demands public policy ideas commensurate withthe challenges of the 21st Century. The Project’s economicstrategy reflects a judgment that long-term prosperity isbest achieved by fostering economic growth and broadparticipation in that growth, by enhancing individualeconomic security, and by embracing a role for effectivegovernment in making needed public investments.Our strategy calls for combining public investment, a securesocial safety net, and fiscal discipline. In that framework,the Project puts forward innovative proposals from leadingeconomic thinkers — based on credible evidence andexperience, not ideology or doctrine — to introduce newand effective policy options into the national debate.The Project is named after Alexander Hamilton, thenation’s first Treasury Secretary, who laid the foundationfor the modern American economy. Hamilton stood forsound fiscal policy, believed that broad-based opportunityfor advancement would drive American economic growth,and recognized that “prudent aids and encouragementson the part of government” are necessary to enhance andguide market forces. The guiding principles of the Projectremain consistent with these views.Hamilton Project iltonprojectwww.twitter.com/hamiltonprojGEORGE A. AKERLOFKoshland Professor of EconomicsUniversity of California, BerkeleyLILI LYNTONFounding PartnerBoulud Restaurant GroupROGER C. ALTMANFounder & Executive ChairmanEvercoreMARK MCKINNONFormer Advisor to George W. BushCo-Founder, No LabelsKAREN ANDERSONPrincipalKLA StrategiesERIC MINDICHChief Executive Officer & FounderEton Park Capital ManagementALAN S. BLINDERGordon S. Rentschler MemorialProfessor of Economics & Public AffairsPrinceton UniversitySUZANNE NORA JOHNSONFormer Vice ChairmanGoldman Sachs Group, Inc.JONATHAN COSLETSenior Partner &Chief Investment OfficerTPG Capital, L.P.ROBERT CUMBYProfessor of EconomicsGeorgetown UniversityRICHARD PERRYManaging Partner &Chief Executive OfficerPerry CapitalJOHN DEUTCHInstitute ProfessorMassachusetts Institute of TechnologyMEEGHAN PRUNTY EDELSTEINSenior AdvisorThe Hamilton ProjectCHRISTOPHER EDLEY, JR.The Honorable William H. Orrick, Jr.Distinguished Professor; FacultyDirector, Chief Justice Earl WarrenInstitute on Law & Social PolicyBoalt School of Law, University ofCalifornia, BerkeleyROBERT D. REISCHAUERDistinguished Institute Fellow& President EmeritusThe Urban InstituteBLAIR W. EFFRONPartnerCenterview Partners LLCJUDY FEDERProfessor & Former DeanMcCourt School of Public PolicyGeorgetown UniversityROLAND FRYERHenry Lee Professor of EconomicsHarvard UniversityCEO, EdLabsMARK T. GALLOGLYCofounder & Managing PrincipalCenterbridge PartnersCopyright 2015 TheBrookingsInstitutionCopyright2011The BrookingsInstitutionALICE M. RIVLINSenior Fellow, The Brookings InstitutionProfessor of Public PolicyGeorgetown UniversityDAVID M. RUBENSTEINCo-Founder &Co-Chief Executive OfficerThe Carlyle GroupROBERT E. RUBINCo-Chair, Council on Foreign RelationsFormer U.S. Treasury SecretaryLESLIE B. SAMUELSSenior CounselCleary Gottlieb Steen & Hamilton LLPSHERYL SANDBERGChief Operating OfficerFacebookTED GAYERVice President &Director of Economic StudiesThe Brookings InstitutionRALPH L. SCHLOSSTEINPresident & Chief Executive OfficerEvercoreTIMOTHY GEITHNERFormer U.S. Treasury SecretaryERIC SCHMIDTExecutive ChairmanGoogle Inc.RICHARD GEPHARDTPresident & Chief Executive OfficerGephardt Group Government AffairsERIC SCHWARTZ76 West HoldingsROBERT GREENSTEINFounder & PresidentCenter on Budget and Policy PrioritiesTHOMAS F. STEYERInvestor, Philanthropist, & AdvancedEnergy AdvocateMICHAEL GREENSTONEThe Milton FriedmanProfessor in EconomicsDirector, Energy Policy Instituteat ChicagoUniversity Of ChicagoLAWRENCE SUMMERSCharles W. Eliot University ProfessorHarvard UniversityGLENN H. HUTCHINSCo-FounderSilver LakeThe viewsin this inpolicybrief arenotarenecessarilythose thoseThe expressedviews expressedthis policybriefnot necessarilyof TheofHamiltonProjectProjectAdvisoryCouncilor the ortrustees,officersofficersThe HamiltonAdvisoryCouncilthe trustees,or stafformembersof the BrookingsInstitution.staff membersof the BrookingsInstitution.PETER ORSZAGVice Chairman of Corporate andInvestment BankingCitigroup, Inc.JIM JOHNSONChairmanJohnson Capital PartnersLAWRENCE F. KATZElisabeth Allison Professor ofEconomicsHarvard UniversityPETER THIELTechnology Entrepreneur & InvestorLAURA D’ANDREA TYSONProfessor of Business Administrationand Economics; Director, Institute forBusiness & Social ImpactBerkeley-Hass School of BusinessMELISSA S. KEARNEYDirector

Minority and WomenEntrepreneurs: BuildingCapital, Networks, andSkillsAmerica’s small businessesdrive job creation andform a foundational part of our country’s dynamic economy. Smallbusinesses can empower their owners, offering a source of income,independence, and economic mobility; they are an importantsource of employment in the broader economy; and they oftenprovide the vehicles for innovation.However, as minority groups and women constitute increasinglylarge shares of the workforce—now 47 percent and 35 percent,respectively, up from 38 percent and 14 percent in 1971—there isconcern that their rates of small business creation have not keptpace. Although the number of businesses owned by these groupsis growing, women and minorities are still substantially less likelyto run their own busineses than are white, non-Hispanic men. In2007 women owned just 29 percent of all small businesses, andthose from minority backgrounds owned just 23 percent. Closingthis gap in entrepreneurship is critical to the continued dynamismof our economy and economic growth for all its members, but itwill not be easy.Starting a new business can be a challenge for anyone. Would-beentrepreneurs may face a number of hurdles, including lack ofaccess to capital, insufficient business networks for peer support,investment, and business opportunities, and the absence of the fullrange of essential skills necessary to lead a business to survive andgrow. There is reason to think that racial and ethnic minorities andwomen are particularly likely to face such hurdles. For instance,minority- and women-headed households generally have lowerlevels of household wealth, which in turn can make internalinvestment and external borrowing more difficult. Other barriersthat may reduce rates of business formation among minoritiesinclude lower average credit scores and educational attainment;geographic or societal isolation from other communities andpersistent discrimination may also impede entrepreneurshipamong women and minorities.In a new Hamilton Project discussion paper, Michael Barr of theUniversity of Michigan suggests that programs to increase accessto capital, business networks, and skill development can addresssome of the issues faced by women and minority business owners.Barr recommends specific ways for the federal government toaccomplish these goals, both by improving on existing programsand by establishing new programs. Specifically, he proposesreauthorizing the State Small Business Credit Initiative anddoubling its funding from 1.5 billion to 3 billion, making theNew Markets Tax Credit permanent and expanding it to 5 billionper year, and allocating 500 million each to networking andskills-building initiatives. Together, these proposals may help toreduce the obstacles faced by women and minority entrepreneursin establishing and expanding successful business ventures.The Benefits of EntrepreneurshipNew businesses, small businesses, and entrepreneurship offer anumber of benefits for individual business owners as well as forsociety. Some small businesses tend to stay small, such as owneroperated service, retail, or hospitality businesses. These firms canstill be important generators of jobs and economic security in theirlocal communities; of the roughly 11 percent of workers who areself-employed, most fall into this group. Other small businesseshave greater growth possibilities, and can in some instances help topromote large-scale job creation and expansive economic growth.After all, every large business was once a small business.Entrepreneurship also has the potential to improve social mobility,especially for minorities. A recent study found that among AfricanAmericans, entrepreneurs were more likely than nonentrepreneursto move into a higher income group. Perhaps most importantly, thestudy found that African American entrepreneurs were as likelyto move into higher income groups as were white entrepreneurs,indicating that entrepreneurship could play a prominent role inreducing the wealth gap between whites and African Americans.Entrepreneurship may help close the gender wealth gap as well.The benefits of small businesses for the economy are alsosubstantial. The Small Business Administration (SBA) estimatesthat small businesses accounted for 63 percent of net new jobsbetween 1993 and 2013. Young firms are the primary source ofthis growth, with start-ups representing 3 percent of employmentin the United States but 20 percent of gross job creation. Thoughmany of these firms fail, the survivors still generate jobs at a ratethat is significantly higher than older firms. Small businessesare also loci of innovation: they introduce new processes andorganizational models for business operations, they expandthe range of choices for consumers, and they pursue new linesof research and development. For example, patenting smallbusinesses produce sixteen times as many patents per employeeas large patenting businesses. Given the potential of women- andminority-owned firms as well as the benefits of entrepreneurshipto business owners and the broader economy, our country standsto gain from reducing the hurdles faced by these groups in creatingand expanding their businesses.The ChallengeDespite these benefits, Barr argues that there are three distinctchallenges facing minority and women entrepreneurs: limitedaccess to capital, limited access to business networks, and limitedopportunity for business skills development.Access to CapitalAccording to a recent nationally representative survey, AfricanAmerican– and Hispanic-owned businesses start with about halfas much capital as nonminority-owned firms. Women also startwith just a little more than half of the capital with which men start.These initial disparities persist and can even grow over time, aslimited capital can constrain a business’s ability to grow.Minority-owned businesses rely significantly more on personalwealth and investments from family members than on externaldebt or equity. Some minority entrepreneurs raise capital byThe Hamilton Project Brookings3

tapping into the resources of their respective communities, butthese sources may be limited. Estimates from the U.S. CensusBureau indicate that nonminorities have wealth eleven to sixteentimes that of African Americans and Hispanics. Women similarlysuffer from the wealth gap, owning only 36 percent as much wealthas men.Lack of personal wealth is doubly disadvantageous: not only does itconstrain the ability of entrepreneurs to directly invest in their ownventures, but it also makes it more difficult for these entrepreneursto obtain loans. Minority-owned businesses are approximatelythree times as likely to have a loan application rejected as arenonminority businesses. Furthermore, minority-owned businessesthat do receive loans are granted less credit at higher interest rates.In 2003 the average loan amount for a minority-owned smallbusiness was about 9,300, compared to 20,500 for a nonminoritybusiness. Minority businesses paid 7.8 percent interest, compared to6.4 percent for nonminority businesses. Women-owned businessesface similar challenges. Although they make up almost 30 percent ofsmall companies, they account for only 16 percent of conventionalsmall business loans and 4.4 percent of the total dollar value of theseloans. It is of little surprise, then, that minority and women businessowners are less likely to apply for credit; in fact, African Americanand Hispanic business owners are 37 percent and 23 percent lesslikely to apply than their white counterparts.Finally, both women and minorities receive less in equityinvestments: minority-owned businesses receive on average lessthan half the equity investment that nonminority businessesreceive. In addition, in 2001 women received only 5 percent of allventure capital investments.Access to Business NetworksIn many ways, the importance of business networks and contactsis obvious. Although it is difficult to find concrete evidence on theimpact of business networks, it is widely accepted that they canprovide participants with information and advice, knowledge ofnew business opportunities, and relationships that may prove usefulin operating a business. Minorities and women often cannot easilytap into these networks, however. This may be in part becauseprofessional networks disproportionately consist of people withsimilar backgrounds; because there are fewer successful businessesled by minorities or women, it makes it more difficult for would-beentrepreneurs in these groups to gain advice, connections, or funding.This case can be illustrated by the historical lack of venture capitalinvested in women- and minority-owned firms. Because angelnetworks are often built informally between investors with ahistory of doing business with each other, minorities may not haveas much access to this form of capital. Similarly, the increase in thenumber of women-owned firms has accompanied the growth inventure capital available to these firms. Venture capital networksalso tend to be geographically based. To the extent that minorityentrepreneurs seek to launch businesses in areas of high minorityconcentration and not in areas where venture capital investors areconcentrated, geographic isolation may reinforce exclusion fromthese networks.4Minority and Women Entrepreneurs: Building Capital, Networks, and SkillsAccess to Skill DevelopmentStudies consistently find that the education level of a business owneris positively correlated with entrepreneurship and entrepreneurialsuccess. Businesses with highly educated owners have highersales, profits, and survival rates, and hire more employees thanbusinesses with less-educated owners. Thus, the lower levels ofeducation and experience among racial minorities may be a barrierto entrepreneurship. Indeed, one report estimated that 6 percent ofthe gap in self-employment entry rates between African Americansand whites, and 30 percent of the gap between Hispanics andwhites, could be explained by differences in education levels.While women are increasingly more educated than men, anotherstudy has noted that education is more important for womenentrepreneurs, with the rate of self-employment for women risingwith education faster than it does for men.Aside from education, women and minorities also face a gapin relevant experience and the skills it brings. Women businessowners tend to have fewer years of industry and start-up experiencecompared with men, and African Americans and Hispanics haveslightly lower average industry experience and significantly lessstart-up experience compared with nonminorities. Additionally,as previously noted, the more limited access to business networksfor women and minorities means that they have less access tomentors that can impart knowledge and skills necessary forentrepreneurial development. Furthermore, one study has foundthat minority business owners are less likely to use technologythan are nonminority business owners, which may imperil theirbusiness success.A New ApproachTo address each of these three challenges, Barr offers specific policyproposals that can be implemented by the federal government.To combat the lack of access to capital, he advocates renewal andexpansion of the State Small Business Credit Initiative and theNew Markets Tax Credit. To tackle the lack of access to businessnetworks, Barr recommends additional funding through the StateSmall Business Credit Initiative to support connections betweensmall and larger businesses. To handle the development of businessskills, Barr suggests again tapping the State Small Business CreditInitiative to fund accessible, tailored skills-development programs.Using these policies, which build on existing programs andevidence, the public sector could help to spur a more level playingfield for all those who seek to start and run a business.Credit Access: State Small Business Credit InitiativeOne mechanism that Barr proposes to address the lack of accessto capital is reauthorization and modification of the State SmallBusiness Credit Initiative (SSBCI). Barr suggests that, with someadjustments in how it is administered, this program can providean important source of funding for women and minorities.Created within the U.S. Department of the Treasury (Treasury) in2010, the SSBCI was tasked with the goal of strengthening existingstate-level capital access programs and other initiatives that supportlending to small businesses and manufacturers. The governmentprovided funds have been employed in a variety of ways, but theyalways leverage private funds, stretching the value of the money. For

example, SSBCI funds can be used as part of a larger direct loanfrom a private lender, to invest in venture capital, or as part of apool to cover lender losses. By the end of June 2014, Treasury haddisbursed over two thirds of the 1.5 billion authorized. The first 590 million of funds supported an additional 4.1 billion in privatesector lending to more than 8,500 small businesses, a 7:1 ratio ofprivate-to-public funding. SSBCI funds are recycled as the originalloans are paid off, and thus can be used to finance additional loans.As of 2013 more than half of all SSBCI loans or investments hadgone to businesses less than five years old, and 80 percent had goneto businesses with ten or fewer full-time employees. Approximately40 percent of total loans or investments had gone to businessesoperating in low- or moderate-income communities. Many of theloans and investments made to businesses in these communitiesoperated through Community Development Financial Institutions(CDFIs), organizations dedicated to providing financial servicesto underserved communities and to promoting communitydevelopment. These institutions made more than 3,600 loans orinvestments supported by SSBCI funds, totaling 231.3 millionthrough 2013.Roadmap Congress will reauthorize the State Small BusinessCredit Initiative (SSBCI), currently scheduled to endin September 2017, with 3 billion in funding, twiceits current level and the president’s FY 2016 budgetrequest. Funding will be distributed by the U.S.Department of the Treasury based on how programshave targeted underserved groups, leveraged federalfunds, and executed data collection and evaluationprocedures. The Department of the Treasury will askthat states continue to work with partner organizationsto reach minority- and women-owned small businesses. Congress will permanently extend the New MarketsTax Credit to leverage 5 billion annually for businessesin underserved communities. The Internal RevenueService will improve administration of the programby simplifying compliance for small businesses. Theagency within the Department of the Treasury thatadministers the tax credit will reevaluate its criteriafor granting credits, increasing the focus on equityinvestments in small businesses and on funding forwomen- and minority-owned businesses. That agencywill improve its data collection and evaluation to uncovernew best practices that it will then di

Minority-owned businesses rely significantly more on personal wealth and investments from family members than on external debt or equity. Some minority entrepreneurs raise capital by .

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