Financing Minority Entrepreneurship

Abstract

Racial disparities pervade America’s socio-economic fabric: minorities lag in educational attainment, employment, income and wealth. Minorities are also underrepresented in the entrepreneurial space. For example, although minorities account for thirty-eight percent of the population, they own just nineteen percent of businesses. Despite numerous initiatives to promote minority business ownership, racial disparities in entrepreneurship have been stubbornly persistent through time.

This Article analyzes one of the major barriers that minorities face in undertaking entrepreneurial ventures. Informational asymmetries are especially pronounced when entrepreneurs attempt to raise money for their nascent businesses. Traditionally, social networks have offered an effective way to address the informational asymmetries that potential investors face when evaluating startup investments. Most minority entrepreneurs, however, lack access to these kinds of helpful social networks.

Recognizing the links between startup financing, information asymmetry, and social networks offers an analytic framework that can explain why minority entrepreneurs struggle in financing their businesses. This framework also suggests why current programs designed to address racial disparities in entrepreneurship have failed and offers guidance for new kinds of programs that are more likely to succeed in facilitating the financing of minority-owned businesses.

Keywords: Entrepreneurship, Racial Disparities, Small Business Financing, Access to Capital, Market Discrimination