A new study from the Federal Reserve Bank of Cleveland finds businesses started by Black entrepreneurs tend to have a higher percentage of return on investment than their white and Hispanic counterparts.
“Entrepreneurship is often seen as a pathway to prosperity,” said Barış Kaymak, one of the authors of the study.
The report finds Black entrepreneurs average a 20% annual return on investment compared to 17% for Hispanic entrepreneurs and 15% for white entrepreneurs.
But total income disparities still exist because white entrepreneurs tend to have more money invested in their businesses than Black and Hispanic entrepreneurs, yielding a larger total return.
“The racial gaps in entrepreneurial income has a lot more to do with the amount of investment than how effectively those investments are utilized,” said Kaymak.
While the return on investment percentages ranks highest to lowest - Black, Hispanic and white - Kaymak said that order is flipped when it comes to engagement in entrepreneurship - the likelihood someone from that demographic would start a business.
According to the study, 15.4% of white households hold some form of equity stake in a private business or farm – compared to 6.4% of Hispanic households and 5.9% of Black households.
“Perhaps you would have thought that the return on investment was not very high and that was the reason why these communities were not engaged in entrepreneurship as much. But we’re saying that it’s not true,” Kaymak said.
Kaymak said one of the reasons Black and Hispanic communities have lower entrepreneurship rates is because those demographics face more challenges in finding funds to start a business.
“It’s more of an issue about the supply of funds than the demand for funds,” Kaymak said. “Entrepreneurship at the end of the day is risky business. Black and Hispanic households may not be able to afford to take on such risk.”
He said startups often lean on family and friends for capital, which is often easier for white entrepreneurs because of the disparities in net worth and income level.
According to the study, white households on average have a net worth seven times greater than Black households and five times greater than Hispanic households.
Kaymak said Black and Hispanic entrepreneurs more often have to rely on riskier investments, such as collateralized loans.
“This kind of highlights more the lack of investments rather than the efficacy of those investments,” Kaymak said. “How we might want to go about encouraging more entrepreneurial investment depends on whether the bottleneck is in the availability of funds or if it’s in the households capacity to take on risk.”
