THE RIGHT KIND OF CAPITAL EVERYWHERE
Business owners believe that access to capital is the most important resource for starting a business (43%) and also one of the most significant barriers to starting a business (72%). Furthermore, 33% of Americans cite funding as the No. 1 reason they have not started a business.
However, capital doesn’t flow to all deserving entrepreneurs. At least 83% of entrepreneurs do not access bank loans or venture capital when launching a business, tilting the scales in favor of those who have the wealth to create new enterprises. Women, Black, and Latino entrepreneurs must overcome additional bias and barriers to raise the funds their businesses need. While 45% of men say that getting the money to start a new business is difficult, 63% of women report the same. On average, Black entrepreneurs start with much less capital, have less family wealth to rely on, and are much less likely to get bank loans or other forms of investment than equivalent applicants who are White or of other racial identities.
The COVID-19 pandemic illuminated the role financial intermediaries play in supporting – or not supporting – entrepreneurs and small business owners. The first wave of pandemic relief for small businesses came primarily through the Paycheck Protection Program (PPP), which provided loans to businesses through financial institutions. Yet those loans disproportionately benefited small business owners and entrepreneurs who already had stronger ties to the financial system. Lenders were more likely to lend money to previous clients, yet less than 25% of Black entrepreneurs have an existing relationship with a bank.
In the past five years, 46% of White-owned businesses with employees accessed credit from a bank, compared with just 23% of Black-owned businesses and 32% of Latino-owned businesses. Moreover, just 78 out of 950 Community Development Financial Institutions, which are more likely to lend to minority-owned businesses, participated in early rounds of PPP lending. The result was PPP loans reaching only 20% of eligible firms through the first half of 2020 in states with the highest densities of Black-owned businesses.
Despite its ubiquitous media presence, venture capital – fuel for a small number of the fastest-growing new businesses – is not a fit for most startups. In fact, only 0.5% of entrepreneurs across all demographics access it. But even for those entrepreneurs whose businesses need the extra jolt venture capital can provide, securing funding can still be difficult. Three-quarters of venture capital supports entrepreneurs in only three states: California, Massachusetts, and New York. Additionally, 27% of founders who receive venture capital attended an Ivy League university. Less than 3% of venture capital investment went to women-led firms in 2019. Businesses founded by Latino and Black entrepreneurs make up just 2% and 1% of venture-backed firms, respectively.
These statistics all point to the untapped economic power that remains overlooked in entrepreneurs who are people of color, women, and rural residents. Capital must flow to entrepreneurs in every community so that populations too often left behind are given equitable opportunities to turn their ideas into businesses.
RESOURCE: The Kauffman Foundation’s Capital Access Lab is a national pilot initiative that aims to find, promote, and scale innovative investment managers, providing new kinds of capital to underserved entrepreneurs and communities. It is informed by findings outlined in the 2019 report “Access to Capital for Entrepreneurs: Removing Barriers,” which is being updated in 2021.
What can government do?
- Make a national commitment to expanding access to capital for all entrepreneurs
- Invest in local financial institutions
- Develop state and local Entrepreneurial Capital Catalyst Grants
- Protect entrepreneurs through Truth-in-Lending laws
- Unleash online tools to drive alternative funding opportunities into the Heartland