Policy Summary 

Minority entrepreneurs are far more likely to rely on self-financing as opposed to having access to commercial lending. As a result, they are historically undercapitalized which affects the number of businesses founded and their survivability. This policy would allocate significant funding to entrepreneurs of color to help galvanize small businesses through grants, rather than loans. Additionally, the policy targets specific reforms to programs and regulations that would create a more equitable finance landscape.  The set of policies are aimed at bridging the startup capital gap and eliminating the racial wealth gap through business ownership. 

Case for Equity

Entrepreneurs of color are historically undercapitalized and under-resourced as compared to white entrepreneurs (Austin, 2016). For example, Black entrepreneurs typically start with a third of the capital with which white entrepreneurs begin. This reality is further compounded by a range of institutional and cultural barriers to entry faced by these entrepreneurs including predatory lending, institutional discrimination, and lack of network access (McKinsey, 2020). With each successive downturn in the economy, firms owned by women and people of color disproportionately suffer negative impacts (Klein, 2017). Just two months into the COVID pandemic, nearly half of Black businesses had been closed by the economic fallout. Even after recovering, the losses were twice as high as the number of white-owned businesses that sufferance the same fate (Sasso, 2020). 

This disparity illuminates the dire need for a capital infusion for entrepreneurs of color on a massive scale to address decades of disinvestment and to eliminate the racial wealth gap. Undercapitalized minority firms are disproportionately sole proprietorships and as such, they are less likely to have employees as compared to white-owned firms. Addressing their capital needs can spur not only business growth but also spur job creation in communities of color. 

Return on Investment

Return on Investment for this policy is rated as MEDIUM

 

The lack of cost-benefit analyses specifically examining business finance programs for minorities makes it difficult to surmise the potential impact of this set of policies. However, the available research does point to insights regarding how these policies might perform. For instance, a 2014 study demonstrated that entrepreneurship is a mobility enhancer for African Americans as they are more likely to move into higher income brackets as compared to African American non-entrepreneurs and show the similar likelihood of upward mobility as white entrepreneurs (Bradford 2014).  Moreover, studies suggest that the US could add 9 million additional jobs to the economy and boost national income by $3 billion if minority firms were to achieve growth rates and hire at the same rate as white firms (Austin, 2016).  It is well known that small- to medium-sized businesses are the engine of growth for the American economy. The influence of people of color on the direction of consumer tastes and in major segments of many consumer markets further speaks to the untapped growth potential for the entire economy. 

 

Research Base

The research base is rated as being MEDIUM for this policy area due to the research gaps.  

The overwhelming majority of the research in this field focuses on the barriers to entrepreneurship for people of color. As such, we have a lot of knowledge about what hampers the founding and growth of minority business ventures, principal among them access to capital. However, very little is known about the efficacy of strategies aimed at addressing those barriers because that is a much smaller field of research. There is an established area of research the examines the role of minority set-asides, which confirms the efficacy of this strategy in addressing wage gaps and business success (see Chatterji et al 2014). Attention has recently turned to examine the role of venture capital in addressing the needs of minority entrepreneurs, but there remain large gaps in this space as well. Case studies form a significant portion of the available research, but there is a need for more research that is quasi-experimental or experimental in nature (e.g., randomized control trials). 

State & Local Ease of Implementation

This policy is rated as having an EASY level of implementation difficulty

Generally, the policy has been proposed as a federal level intervention, although the ability of such a fund to be established at local, state, and federal levels speaks to its adaptability.  The growth in private sector funds of this type is further testament. The policy faces significant opposition politically. Organizationally, it would not necessarily require the creation of new structures or major reforms since  infrastructure exists at the federal as well as local levels (although potential expansion would be necessary).

Major Policy Implementation Steps

Inventory businesses to identify any patterns with respect to industry/sector, geography, size, capitalization, and other factors, determine the needs of existing businesses, and identify strategies that could increase minority business formation. The City of Philadelphia in 2019 released an RFP that is instructive in its focus on minority businesses, and the City of Asheville completed a disparity study in 2018 focused on minority business opportunities.

Examine existing funding landscape including Community Investment Act performance of lenders in your community, sources and patterns of private capital investment, and sources and patterns of public capital investment (federal and state/local). This should include an examination of state and local tax expenditures (as well as zoning policies) to determine whether they hinder or support the growth of businesses of color. A profile of the city of Baltimore’s investment flows offers a good model.

Coordinate stakeholders including philanthropies, lenders, economic development entities, CDFIs, major corporations, and elected officials to devise a plan of action. This plan should reflect considerations for removing institutional barriers, securing new resources, and streamlining existing programs. The City of Cincinnati’s minority business development plan reflects a great model for comprehensive stakeholder engagement.

Innovations Across America

Newark, New Jersey | NJ 40 Acres & A Mule Fund 

Action Space: Private (Local/Regional)

Cost: $100 million in private capital investments

Mechanism: Regional Agreement and Private Investment Fund Creation (Resource Page Link)

The New Jersey Forty Acres and a Mule Fund (NJ FAM Fund) is a first of its kind private investment vehicle focused on making equity and debt investments in Black and Latinx businesses located or doing business within the State of New Jersey and also transforming real estate projects within New Jersey’s Black and Latinx communities. This private investment vehicle seeks to raise $100M to combat and reduce social and economic inequalities resulting from systemic racism.

Public-Private Partnerships: The NJ FAM Fund was created by a partnership of eight mayors from cities in New Jersey, with assistance from New Jersey Community Capital (NJCC) and from an advisory board. The new initiative, the NJ FAM Fund, will operate with collaboration from Newark, Orange, East Orange, Paterson, Camden, Trenton, Irvington, and Atlantic City.

  
Oregon | The Oregon CARES Fund 

Action Space: State Level (Legislative)

Cost: $62 million in CARES Act Funding

Mechanism: Enabling legislation (Link to Resource Page)

The Oregon Cares Fund is a targeted investment in the Black community from the CARES Act Coronavirus Relief Fund. This fund was designed to provide the Black community with the resources it needs to weather the global health pandemic and consequent recession. The Oregon Cares Fund is for Black people, Black-owned businesses, and Black community-based organizations.

Assessments & Plans

New York Federal Reserve
Strategies for leveraging the Community Reinvestment Act 

New Orleans 
Minority Business Disparity Study   

Dallas Federal Reserve
Business Needs Assessment in Texas  

North Carolina 
Study of COVID impacts on Black and Brown Business  

Strategies

Valley Economic Development Corporation 
Investing in the Success of African-American-Owned Small Businesses: Recommendations for Increasing Access to Capital 

Local Initiatives Support Coalition 
Tactical Guide: Inclusive Small Business Support 

References & Further Study

Chatterji, A., Chay, K., Fairlie, R. 2014. The Impact of City Contracting Set-Asides on Black Self-Employment and Employment. Journal of Labor Economics: Vol. 32, No. 3, pp. 507-561   

Green, M., and McNaughton, R. 2007. The Rise and Fall of Specialized Small Business Investment: Taking the Taxi to Oblivion.  Geography Publications  

Chatterji, A. and Seamans RHow do Credit Card Interest Rates Impact Entrepreneurship? Duke Fuqua School of Business. Accessed: March 23, 2021.  

Ogutveren Gonul, O. 2018. Encouraging and supporting minority entrepreneurship for long-term success. Entrepreneur & Innovation Exchange. Entrepreneur and Innovation Exchange. 

Sasso, Michael. 2020. U.S. Black-Owned Firms Make Surprise Comeback to Pre-Covid Level. Washington Post. Oct. 29, 2020  

Klein, Joyce. 2017. Bridging the Divide. Aspen Institute  

Algernon Austin. 2016. The Color of Entrepreneurship. Washington, DC: Center for Global Policy Solutions, August 2016.     

Barr, M. 2016. Minority and Women Entrepreneurs: Building Capital, Networks, and Skills. Brookings Institution 

Ending the War on Drugs

Environmental Justice