Leveling the Playing Field for Black Entrepreneurship

The keys to generating wealth through business ownership: funding, expertise and a coordinated business ecosystem

Black-owned businesses were among the hardest hit during the pandemic, closing at a much higher rate than other businesses. COVID-19 highlighted and deepened disparities between Black businesses and other businesses, making the need to support these communities more pressing.

But Black entrepreneurship is making a comeback. In 2021, applications for new Black-owned businesses grew at the fastest rate in 26 years. Supporting these businesses and ensuring they generate wealth for their owners and their communities was the focus of a panel co-hosted by Capital One and Boston Consulting Group at the inaugural Black Economic Alliance Solutions Summit on March 21. 

“We want to understand what it really takes to support [these] business owners and for them to realize the wealth gains that non-Black and Hispanic business owners are gaining,” said panelist Shena Ashley, President of Capital One’s Insights Center and Vice President of Community Impact and Investment. 

Business ownership and wealth-building in Richmond, Virginia

To kick off the panel, Ashley and Kedra Newsom Reeves, Managing Director and Partner at the Boston Consulting Group (BCG), shared early findings from their research exploring Black and Hispanic business ownership in Richmond, Virginia. Small businesses play a critical role in the local economy of this midsize city: 65% of overall employment in Richmond is accounted for by businesses employing fewer than 250 people. 

The research, sponsored by Capital One Insights Center, found that 35% of Black and Hispanic business owners achieved at least $188,000 of wealth—the median wealth of white families in the US—over the course of their business ownership, closing the racial wealth gap for themselves. Half achieved at least $100,000 of wealth.

But wealth growth through business ownership is not a guarantee, and entrepreneurship can be particularly risky for Black and Hispanic entrepreneurs. The Richmond report found that non-business owners actually grew more wealth over a five-year period than business owners.

“Entrepreneurship is a pathway, but it's not for everybody and there has to be certain levers that are pulled at the right time,” said Melissa Bradley, Founder and Managing Partner of 1863 Ventures. The Richmond report sought to identify those levers.

“We really tried to dig into what drives wealth,” Reeves said. “And it wasn’t industry, necessarily. It wasn’t even prior wealth. It was initial and growth funding, capabilities and expertise, and a coordinated ecosystem.”

External funding is critical for growth over time

Businesses that stick around longer are more able to bring consistent revenue and good jobs to their communities. The Richmond study found that the businesses that were able to stay open for 10–15 years saw nine times the wealth creation than those that had only been open for five years or fewer. 

But it takes significant capital to sustain a business, and because Black and Hispanic entrepreneurs are often not beginning from the same financial starting place as their white counterparts, they need additional institutional supports. External sources of funding—whether CDFIs, grants or traditional loans—are of particular importance for Black and Hispanic business owners, who on average have less access to individual and family wealth. 

“Funding is…critical,” said Reeves. Black and Hispanic entrepreneurs “may not have family-and-friends networks that we can pull from.”

Indeed, Richmond businesses that received external growth funding were more successful at generating wealth than businesses that did not receive growth funding. But there were disparities in access to external funding as well: during the study period, Black and Hispanic businesses received an average of $19,000 of external growth stage funding, while businesses owned by people of other races received an average of $39,000. 

Most successful businesses are supported by “invisible scaffolding” 

While funding is key to sustaining a successful business, accessing available funding at both the initial and growth stages can pose significant challenges for Black and Hispanic-owned businesses. 

“At the seed stage, I see so many people fall out of the pipeline,” said panel moderator Morgan DeBaun, BEA Advisory Board Member and Chief Executive Officer of Blavity, Inc. “For small business owners, so many people struggle to even navigate how to get a loan." 

Bradley said that, in her experience, mentorship and stewardship are what differentiate small businesses that grow from those that don’t: it’s important to “have folks who are willing to reach back and say, let me tell you how it's done.” 

From left to right: Melissa Bradley, 1863 Ventures; Morgan DeBaun, Blavity, Inc.; Samantha Tweedy, Black Economic Alliance; Shena Ashley, Capital One; and Kedra Newsom Reeves, Boston Consulting Group

Access to such advising and mentorship is a critical and often overlooked component to supporting Black and Hispanic business owners, who may not have the same level of access to an ecosystem of mentors and advisors as their white counterparts. A 2021 survey of 1,500 local businesses in New York City found that less than 40% of Black entrepreneurs had access to mentors to help start and grow their businesses.

Reeves noted that, in the case of most successful businesses, “you have consultants, you have accountants, you have lawyers. Any business—to be successful and grow over time—needs these supports.” 

Ashley added that, contrary to popular narratives about entrepreneurship, few businesses are actually started by “the lone entrepreneur in his basement. They have some scaffolding around them . . . And we just want that same scaffolding to be there. To help someone when they go in and ask for their first loan, to know what to ask for, what their books should look like, to be prepared to enter that conversation.” 

Bradley closed the session with a reminder that the specific needs of Black businesses are often overlooked due to a lack of data. “We need a lot more research,” Bradley said. “We are oftentimes historically overlooked, not just in access to capital, but in terms of data. There are nuances here . . . the fastest growing segment of entrepreneurs are Black women, but we are the most underfunded.” New research shows that Latino-owned businesses are also rapidly becoming a larger part of the business landscape.

Having even more robust data about small businesses—based on race, ethnicity, gender, geography, age and type of business—will make it more likely for institutions to understand how to best support the businesses that need it most. 

The Richmond study is one step in this direction. View the full report and recommendations for supporting Black and Hispanic businesses. 

About the Capital One Insights Center

The Center combines Capital One research and partnerships to produce insights that advance equity and inclusion. As a nascent platform for data and dialogue, the Center strives to help changemakers create an inclusive society, build thriving communities and develop financial tools that enrich lives. The Center draws on Capital One’s deep market expertise and legacy of revolutionizing the credit system through the application of data, information and technology. 

Disclaimer 

This material has been prepared by the Capital One Insights Center, a non-partisan center for objective research and insights, and is provided solely for general information purposes. Unless otherwise specifically stated, any views, analysis or opinions expressed herein are solely those of the Capital One Insights Center’s staff, researchers and listed partners (if applicable) and may differ from the views and opinions expressed by Capital One Financial Corporation, other departments or divisions of Capital One Financial Corporation, or its affiliates and/or subsidiaries (Capital One). Information has been obtained from sources believed to be reliable. 

Analysis and conclusions constitute the Capital One Insights Center’s judgment as of the date of this report and are subject to change without notice. Furthermore, the analysis and views will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring, after the date of publication. 

Any opinions expressed herein should not be construed as an individual recommendation for any particular customer or client and is not intended as advice or recommendations of particular securities, financial instruments, market conditions or strategies. Capital One Financial Corporation and its affiliates and/or subsidiaries may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

 

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Article | November 7, 2022