While most countries strive to encourage entrepreneurship, data shows clear divisions in who actually goes on to become an entrepreneur. There have been numerous studies highlighting the gender divide in entrepreneurship, but research from Duke University suggests there is an equally stark ethnic divide.
The researchers cite data showing that just 5% of the Black population of America owns a business, which is nearly half that of the white population. They argue that the traditional narrative to explain this discrepancy revolves around wealth gaps and access to capital, but they wanted to test if this was really the case.
Explaining the gap
The researchers built on previous research that collected racial data on startup activity to ponder whether Black entrepreneurs were struggling to generate business ideas or simply lacked the confidence that their ideas would succeed. They also looked at Hispanic and women entrepreneurs as these groups also lag behind white men in terms of creating businesses.
In total they quizzed over 50,000 people, with the responses suggesting that Black people were generally more likely to consider a business idea than their white peers. What’s more, they were just as confident in the likelihood that their idea would succeed as their white peers.
So the lacklustre startup rates among Black entrepreneurs is not due to a paucity of ideas or a lack of belief in them. To dive further into why this might be, the researchers broke down the entrepreneurial journey into four stages:
- The first stage sees people begin to talk about their ideas with friends, family, and colleagues to see whether others think it to be a good idea.
- Assuming they get general approval from others, the second stage sees that idea begin to be fleshed out and a business plan created.
- The third stage then sees the idea tested in the market, with prototypes trialed and feedback solicited.
- The last stage is when the business takes shape and financial and professional advice is sought to make the venture real.
A leaky pipeline
The researchers had expected there to be barriers in the latter stages as this conformed with the traditional narrative, but that didn’t paint the entire picture. Indeed, the data showed that there wasn’t really any noticeable difference between Black and white entrepreneurs in those latter stages.
Instead, the gaps emerged far earlier on in the process, with the biggest issue emerging when it came to soliciting feedback from friends and other people in our social networks. This gap was especially pronounced in terms of sharing one’s idea with friends, which was much less likely for Black entrepreneurs.
Sadly, even those who did share their idea with friends were less likely to ultimately start a business, which suggests that the feedback they got wasn’t particularly encouraging. This hypothesis was supported by the fact that startup rates were comparable when Black entrepreneurs spoke about their ideas with expert strangers.
Social barriers
The researchers strongly believe that social and psychological barriers are likely to play a bigger role in the lower startup rates among Black entrepreneurs than financial or societal ones, although they accept that there is no data to directly support this hypothesis.
“There may be a fear of talking to personal connections about an idea that may not succeed, but there may be a knowledge gap within the community itself,” they explain. “Or it could as well be that the individual had a stronger conviction in the first place, and that’s why they went out and found an expert stranger to talk to.”
Suffice it to say, access to expert strangers has an inevitable social dimension to it, with the data suggesting that high-income Black entrepreneurs were far more likely to have access to such expertise than their lower-income peers, which points to an important nuance of the wealth divide beyond simply access to financing.
Policy direction
All of this points to a relatively inexpensive policy intervention that could significantly increase the likelihood of Black entrepreneurs turning their ideas into businesses.
Mentoring schemes and other community-building programs could offer an inexpensive and accessible means of supporting Black entrepreneurs in getting feedback and advice around their ideas before progressing to the developmental stages of their business.
Of course, these findings should not suggest that there are no issues with financing, as research from Brigham Young University showed that minority entrepreneurs typically get poorer access to bank financing than their white peers.
While these systemic biases will take longer to root out and change, the provision of mentoring support to a wider audience is something that can, and should, be introduced as soon as possible.
“If getting the nudge from the expert is so helpful, then promoting more advice-seeking channels could be a pretty low-cost way of having an impact on entrepreneurial outcomes in traditionally underrepresented communities,” the researchers conclude.
