• Navigator
  • Entrepreneurship and Innovation
  • National

What is the Economic Case for Supporting Under-Represented Entrepreneurs?

September 13, 2022 Christa O. Franzi, CEcD

BIPOC entrepreneurs work on a project

It is well known that entrepreneurs and business owners of color have and continue to face significant hurdles starting, sustaining, and scaling new businesses. You’ve probably seen some of the recent stats supporting this case:

  • Between February and April of 2020, Black business ownership dropped by 41% (Committee on Small Business)
  • The proportion of US VC funding given to startups with at least one Black founder has fluctuated between 0.8% and 1.3% since 2017 (Crunchbase)
  • In 2021, 70% of white-owned firms received the total amount of PPP funding they applied for, compared to just 55% of Asian-owned firms, 44% of Hispanic-owned firms, and 31% of Black-owned firms (Small Business Credit Survey)

However, there is optimism headed into 2022. For example, according to the Kauffman Foundation, from 1996 to 2021, the proportion of new entrepreneurs of color in the US increased by about 20%. Additionally, Hello Alice reported a 84% of Black businesses are projecting growth compared to 69% of non-Black business owners.

The broadening demographics of entrepreneurs and growing success presents an opportunity for communities to invest in new ventures and markets.

But What’s the ROI?

The role of economic developers is ever expanding and for some, supporting small businesses and entrepreneurs of color is just one of the many new items being added to an already very full plate. While there are undoubtedly countless just reasons for supporting under-represented entrepreneurs and small business owners, such as closing the racial wealth gap and uplifting minority communities, there are clear economic reasons as well. When ventures owned by people of color succeed, so too does the economy.

We helped illustrate this case last year for the State of Rhode Island where we partnered with EntreWorks Consulting to complete a Small Business Ecosystem Assessment. Currently, Rhode Island is lagging on many indicators of minority entrepreneurship, including the share of minority-owned businesses in the state.

The question then became what would happen in the Rhode Island economy if minority business participation increased from 7.4% to meet the national rate of 18.3%?

To model the economic impact, we assumed that the number of non-minority businesses will remain the same and looked at the number of minority owned businesses that would need to be added to achieve this ratio. In other words, we assumed in this hypothetical scenario that the total number of businesses will increase because of an increase in the number of minority businesses, only.

Here’s the change we modeled:

  • New Businesses: 3,052 new minority businesses would be needed in Rhode Island for minority businesses to be 18.3% of all businesses
  • New Jobs: There are an average of 7.4 employees per minority owned business in Rhode Island currently. We assumed that if 3,052 new minority owned businesses were added, an associated 22,652 new jobs would be created
  • New Earnings: The current average payroll per minority business is $229,371. If 3,052 new minority owned businesses are added, there will be over $700 million in new payroll/earnings going into Rhode Island’s economy

This new economic activity would ripple through Rhode Island’s economy, resulting in 42,788 jobs, over $1.2 billion in earnings, and nearly $2.7 billion in sales.

It is important to note that Rhode Island is working hard to lessen this disparity and build a more inclusive, equitable economy. Governor McKee’s Rhode Island Rebounds plan includes major new small business investments, Rhode Island Commerce is leading the rollout of many new financing tools, and a new statewide network, funded via the US Small Business Administration’s new Community Navigator Program, is leading a new effort to better engage and support entrepreneurs of color.

Why it Matters

We have a long way to go and a lot of hard work to do in our communities and across the U.S. to achieve an inclusive economy. However, this simple modeling exercise demonstrates that if we are successful in breaking down barriers and supporting underrepresented business owners and entrepreneurs to achieve their goals, significant economic growth will follow.

So, what can economic developers do to create more inclusive entrepreneurial ecosystems? First and foremost, engage with the undersupported entrepreneurs and business communities to deeply listen and understand their needs. Meet them where they are at – visit their businesses, attend events, etc.

Next, it helps to understand the historic reasons barriers exist and look at actions other communities are taking to reduce these barriers.

Click Here 

to see some of the resources I keep close by when doing this work. Some of the resources are specifically focused on strategies and actions that foster inclusive entrepreneurship, and others are more focused on entrepreneurial ecosystem building more broadly.