How Cities Can Help Entrepreneurs of Color Scale Up

Written by Kim Zeuli and Kathleen Shea, ICIC. This blog was originally published on Governing.

The structural challenges that entrepreneurs of color face are well-documented, and disparities in business ownership are stark: While minorities make up 38 percent of the U.S. population, only 19 percent of businesses are minority-owned. Minority-owned firms earn less than half the revenue of non-minority-owned firms, and few are on a trajectory to become Fortune 500 companies. Yet most programs focused on supporting entrepreneurs of color target small-business creation, which leads to a self-perpetuating cycle that limits wealth building and may be exacerbating wealth inequities.

As cities’ leaders have increasingly recognized the role that minority-owned businesses play in building local economies and creating wealth in disinvested neighborhoods, new efforts have been launched to help support entrepreneurs of color, especially those in high-growth sectors.

In Chicago, for example, the Blackstone Challenge was launched in 2017 as a three-year, $3 million effort to advance entrepreneurship in underserved communities. Led by World Business Chicago and supported by the Blackstone Charitable Foundation, the Blackstone Challenge funds organizations that recruit and support entrepreneurs of color as well as women, veteran, and immigrant entrepreneurs.

JPMorgan Chase’s Entrepreneurs of Color Fund provides financing for Community Development Financial Institutions and other nonprofit lending partners to provide alternative sources of capital to grow minority-owned businesses. Piloted in Detroit with the Detroit Development Fund and the W.K. Kellogg Foundation, the Entrepreneurs of Color Fund has been expanded to Chicago, San Francisco, the South Bronx and greater Washington, D.C. Between 2015 and 2018, more than 200 minority-owned business received $9.5 million in capital through the Fund.

Yet more needs to be done. We highlight five interventions that city leaders should prioritize to support entrepreneurs of color and help them grow the scale of their businesses:

1. Build more capacity for entrepreneurial support: In our study of six major metro areas, we found that incubators and accelerators focused on supporting entrepreneurs of color do not have sufficient capacity. For example, in Atlanta, 11 incubators and accelerators serve only 34 percent of the city’s entrepreneurs of color. Entrepreneurs of color typically lack the robust social and professional networks needed for high-growth businesses.

2. Target support in sectors with high demand from large buyers:Contracts with large organizations and government agencies are critical for entrepreneurs in high-growth sectors. Yet we continually hear that finding qualified minority-owned businesses that have the capacity to take on large contracts is a challenge in most cities. More assistance from entrepreneurial support organizations (ESOs) should be targeted to building the capacity of minority-owned firms in industries or sectors that are in high-demand by these large organizations or government agencies.

3. Create more-inclusive industry-specific ESOs: Increasing access to industry-specific ESOs (such as those focused on food manufacturing or high tech) for entrepreneurs of color is critical, since these kinds of ESOs provide access to tailored, powerful networks and targeted capital. Entrepreneurs of color are not participating in this type of ESO at the same rates as their white male counterparts. This is particularly true for high-tech incubators and accelerators.

4. Invest in new partnerships for a comprehensive approach:Collaboration is needed among existing organizations to address the three primary structural challenges faced by all entrepreneurs but which are particularly difficult for entrepreneurs of color: access to management education, capital (money), and contracts and new customers (markets) — the three Ms. Most programs focus on supporting only one of the Ms and operate independently from other programs. One notable exception is the new Ascend 2020 program, now operating in 10 U.S. cities and growing.

5. Ensure access to growth capital from multiple sources: Because of capital-access challenges, entrepreneurs of color are more likely to enter industries with low capital requirements and high failure rates rather than high-growth sectors. More startup and growth capital needs to be available to entrepreneurs of color, and they need support accessing a broad range of sources — not just more venture capital but also equity infusions from corporations and impact investors.

The economic imperative for supporting entrepreneurs of color is clear. Only by removing barriers to growth for minority-owned businesses can city leaders maximize the impact of efforts to catalyze job and economic development.