Black and Hispanic Americans are applying to start new businesses at record rates. This is reason to celebrate, of course. But one can't measure "success" by solely looking at start-up rates.
We must aim higher, setting our sights and supports on generating wealth. Doing so can ensure the potential of business ownership to close the racial wealth gap and expand the economy.
The potential of business ownership to build wealth and promote upward mobility is backed by years of data, though the evidence is less clear about the potential for historically underserved populations, including Black and Hispanic entrepreneurs. One study found that liquid wealth does not meaningfully increase for Black and Hispanic businesses owners in their first four years of ownership. And evidence shows that Black-owned businesses are less likely to remain open for more than four years.
Our recent study–a collaboration between Capital One Insights Center and the Boston Consulting Group–further confirmed that longevity matters.
Surveying businesses in Richmond, Virginia, we found that Black and Hispanic business owners who kept their businesses open for five to 10 years grew their wealth by nine times more than those in business for less than five years. And Black and Hispanic owners of businesses with at least $500,000 in revenue grew their wealth by three times more than those with lower revenues.
But wealth creation was not a guarantee. Between 2017/18 and 2022, Black and Hispanic business owners in Richmond gained an average $17,000 in wealth, while non-Black and non-Hispanic owners gained an average $66,000. What’s more, the wealth of Black and Hispanic business owners grew slower than the wealth of Black and Hispanic residents who didn’t own a business.
That should give us pause and help reiterate the risk involved in starting a business.
Fortunately, entrepreneurs don't need to shoulder all that risk on their own.
Business ecosystems–the invisible infrastructure of mentorship, business networks, and technical assistance–exist to support business owners. Our study found that a coordinated business ecosystem is one of three critical drivers for boosting wealth creation through business ownership. The other conditions are initial and growth funding and the owner’s capabilities and expertise.
Financial capital is key, but efforts to advance business ownership should also consider the importance of business knowledge and social capital. Many business owners in our study said they lacked accounting and tax knowledge critical to grow their businesses. And they needed help knowing who to work with, where to find resources, how to price goods and services and how much to pay vendors, among other requests.
Although Richmond is home to a wide range of public, private, and nonprofit entities that can help local businesses address these needs, Black and Hispanic entrepreneurs still face barriers to access – and many do not know these resources exist. More could be done to increase awareness, such as a centralized database or compendium of support programs.
Stakeholders could also improve their support for Black and Hispanic business owners by promoting greater coordination and collaboration across organizations, connecting to businesses earlier on, offering sector-specific support and targeted skills training, and leveraging technology to scale the delivery of technical assistance.
Doing so can help businesses make the leap from just generating income to generating wealth. Efforts to support small businesses should define success by nothing less.
