1. Minority and Women Entrepreneurs: Building Capital, Networks, and Skills

    April 3, 2015

    Barr.HamiltonThe U.S. has an enviable entrepreneurial culture and vibrant capital markets, which help foster small business formation, create jobs, and increase economic growth. But, at the same time, we need to do more to ensure minority and women entrepreneurs have the same opportunities to succeed as others, argued Professor Michael S. Barr at a March 11, 2015 Hamilton Project forum on expanding employment opportunities.

    At the forum, Professor Barr presented his paper, “Minority and Women Entrepreneurs: Building Capital, Networks, and Skills,” and participated in a panel discussion with Adriana Kugler of Georgetown University, Chanelle Hardy of the National Urban League Washington Bureau, and  Jared Bernstein of the Center on Budget and Policy Priorities. Glenn Hutchins moderated the discussion.

    In his paper, Barr highlights the importance of making the economy more inclusive for minority and women entrepreneurs. These groups play a valuable role in the overall economy. Minority- and women-owned businesses represent a growing segment of the entrepreneur population, and their businesses tend to be relatively dynamic. Studies also suggest that increasing the rate of minority and female entrepreneurship may help to reduce the race and gender wealth gaps, reduce income and wealth inequality, and increase social mobility.

    Yet minority and women entrepreneurs often face particular challenges, including lack of access to capital, insufficient business networks, and the absence of the full range of essential skills. For example, minority and women entrepreneurs generally have lower levels of household wealth, which in turn can make internal investment and external borrowing more difficult. Minority and women entrepreneurs are also significantly less likely to be approved for bank loans than nonminorities. Other barriers that may reduce rates of business formation among minorities include lower average credit scores and educational attainment, geographic or societal isolation from other communities, and persistent discrimination.

    The paper offers three proposals for helping minority and female entrepreneurs receive the support they need form, survive, and grow their businesses.

    The paper calls for the expansion of two initiatives to help meet the capital needs of small firms, including minority- and women-owned firms. The first is the State Small Business Credit Initiative (SSBCI), authorized by Congress on a bipartisan basis in 2010. Under SSBCI, Treasury lends federal funds to states for specific programs that leverage private lending and equity markets to help finance small business and manufacturers. Between 2011 and 2013, participating states reported expending $590 million in SSBCI funds, which, in turn, supported $4.1 billion in private sector lending to more than 8,500 businesses, including young businesses, very small businesses, and businesses in underserved communities.

    The second initiative is the New Markets Tax Credit (NMTC), authorized on a bipartisan basis in 2000. NMTC allows individual or corporate entities to receive tax credits against their federal income tax liability in exchange for making equity investments in community development entities, which are private organizations recognized by the IRS as providing investment capital in low-income communities. One study concluded that between 30 and 40 percent of investments would not have proceeded without NMTCs. Furthermore, 76 percent of NMTC projects saw growth in their annual revenue or operating budget of more than 5 percent between the date of project initiation and 2011. Due to the success of these programs, the paper argues that SSBCI should be reauthorized at $3 billion, double its current funding, and NMTC should be permanently expanded to permit $5 billion annually in new tax credit allocations.

    The paper also proposes complementing these capital initiatives with new federal support for local business networks. Specifically, it argues that as part of SSBCI, Congress should appropriate $500 million that would be used by the states to finance locally based business networks. The paper also highlights the importance of allocating resources to administer data collection and conduct program evaluations of funded networks, in order to develop evidence for proven models of business networking that could be applied on a larger scale.

    Finally, the paper argues that Congress should appropriate another $500 million as part of the SSBCI to finance skills acquisition initiatives. As part of a comprehensive plan, Professor Barr suggests funding challenge grants to develop an app for entrepreneurs that uses professionally-developed just-in-time information and peer-to-peer just-in-time advising; running rigorous experiments on the best methods to assist in skills acquisition; and supporting local government and community college entrepreneurial training initiatives. Under this model, several different approaches to skills acquisition would be considered, including just-in-time consulting services, heuristics training models, and web-based methods.

    Priyah Kaul ’15 is a 3L at University of Michigan Law School.