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The driver of racial gaps in entrepreneurship

Research from Professor David Robinson found some underrepresented communities are less likely to share their business ideas within their networks

Published: May 10, 2024 11:10:29 AM IST
Updated: May 10, 2024 11:19:50 AM IST

The driver of racial gaps in entrepreneurshipImage: Getty Images

Research on racial gaps in entrepreneurship is often focused on the structural barriers to the resources necessary to start a business. But a new working paper from finance Professor David Robinson of Duke University’s Fuqua School of Business argues that some psychological and social determinants may also play a role in the very early stages of the entrepreneurial journey, especially for the Black community.

In “Why Aren’t There More Minority Entrepreneurs,” Robinson and Victor Bennett of the University of Utah, examined the possible causes behind racial and gender disparities in launching businesses.

“Understanding racial differences in startup activity has been an important question for a long time in entrepreneurship research. I felt that the question took on more importance in the wake of the events surrounding the death of George Floyd in 2020.  That’s when Victor and I first started to work on this question.”

Examining the pathway to startups

Data shows that only 5% of the overall Black population owns a business, compared with more than 9% of the white population.

While wealth gaps and barriers in access to capital are traditionally believed to explain racial differences in business ownership, the researchers wanted to test how race may affect potential entrepreneurs across all the steps in their path to create a company.

To do so, the authors built upon previous research from Bennett and  Fuqua Professor Aaron “Ronnie” Chatterji, who had surveyed a representative sample of the U.S. population about such steps and had collected racial data, Robinson said.

The researchers wondered whether Black people were more or less likely to generate business ideas and more or less confident that the ideas would succeed. They also measured the same variables for the Hispanic population, and for women, which also lag behind white men in founding companies.

Also read: The middle class of business: Building enduring ventures

The responses from the 51,827 people surveyed by Bennett and Chatterji between 2015 and 2017 showed that Black people are more likely than white people to consider a business idea, while reporting no significant difference in confidence that the idea would succeed.

And yet, among the respondents who did consider a business idea, Black people were less likely to eventually open a business, the research found.

To understand why ideas weren’t being launched, the researchers analyzed four fundamental stages entrepreneurs go through in their journey:

  1. the “socialization” of the idea, or speaking to friends or others in their network
  2. the “codification” of an idea, such as creating a business plan
  3. seeking market feedback, for example building prototypes
  4. seeking financial and professional advice

A difference in early steps

The authors were expecting that access to capital or getting market feedback and professional guidance could be barriers.

“But we were really surprised that this just wasn’t the only story,” Robinson said.

In fact, the researchers didn’t see any significant difference between Black and white population in the late stages before creating a startup, including the codification of the idea and speaking to potential investors.

“Black people didn’t show any clear gaps in the hard information skills that are required to start a business,” Robinson said.

Also read: Startups, here's how to survive the freezing funding winter

Where racial differences really surfaced, he said, was at the very early steps of the entrepreneurial journey, that is when the idea is shared with friends.

The researchers found that Black people are less likely than white people to share the idea with friends, although they are more likely to speak about it with expert strangers. Among those who considered a business idea and shared it with friends, Black people were less likely to eventually start a business, according to the findings. However, when they shared the idea with expert strangers, no racial differences can be found in business formation, Robinson said.

“What this suggests to us is that perhaps there are some social or psychological costs in airing the idea within the immediate community,” he said.

Robinson also said the data doesn’t allow researchers to pinpoint any direct cause of the racial gap.

“There may be a fear of talking to personal connections about an idea that may not succeed, but there may be a knowledge gap within the community itself,” Robinson said. “Or it could as well be that the individual had a stronger conviction in the first place, and that's why they went out and found an expert stranger to talk to.”

The researchers also found that among high-income Black people who spoke to expert strangers, the rate of business formation is equal to that of white people, while the same doesn’t happen with low-income Black respondents, a fact that may again speak to a wealth divide in access to information and financing.

Also read: 3 traits of successful market-creating entrepreneurs

Potential policy interventions

If talking to an expert outside a person’s network “dramatically attenuates the racial difference in startup activity,” then this research may suggest some easily actionable insight for policymakers, Robinson said.

Inexpensive policy interventions like mentorship or community-building programs may provide the initial “soft information” entrepreneurs need to gather before moving on to more expensive steps, he said.

He mentioned the example of the Kauffman Foundation’s 1 Million Cups program, where aspiring entrepreneurs talk to established business experts in their community.

“Programs like these can be a very effective mechanism for addressing structural differences in entrepreneurship,” Robinson said. “If getting the nudge from the expert is so helpful, then promoting more advice-seeking channels could be a pretty low-cost way of having an impact on entrepreneurial outcomes in traditionally underrepresented communities.”

[This article has been reproduced with permission from Duke University's Fuqua School of Business. This piece originally appeared on Duke Fuqua Insights]