How a new Minority Business Accelerator grant program can close the racial entrepreneurship gap

Contents 

• Summary
• Challenge
• Limits of historic and existing policies
• Policy recommendation
• Conclusion

Summary

A modest investment of $125 million over five years could initiate a network of business accelerators that promote growth for minority-owned businesses through enhanced access to capital, business networks, and supply chains—helping fuel more equitable economic growth and wealth-building in regional economies. These accelerators would build upon recent momentum among coalitions of economic development groups, entrepreneurship support organizations, major corporations, anchor institutions, and philanthropies that are making new commitments to support and scale minority-owned businesses. The new challenge grant program would enable the creation of new accelerators or provide scaled-up support to existing entrepreneurship support organizations that focus explicitly on entrepreneurs of color with scalable business ventures.

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Challenge

The COVID-19 pandemic has put the economy under historic distress and millions of small businesses at risk.¹ As of October, over half of small business owners reported operating at a lower capacity than before the pandemic, and more than half expected it would take at least six months to return to normal operating levels, if ever.²The near-term pressures from the COVID-19 recession have intersected with a second crisis that is longer-standing and equally damaging: the racial disparities in business ownership that undermine the nation’s economic dynamism and exacerbate wealth inequities. Nationally, Black and Latino or Hispanic Americans represent about 28% of the population, but only 8% of the nation’s business owners with employees.³ The U.S. could have millions of more businesses and jobs if Black and Latino or Hispanic Americans owned employer businesses at the same rate as white Americans.

Existing disparities do not reflect the intrinsic desire or talents of entrepreneurs of color themselves, but rather the structure of the systems they navigate. There are no differences between racial groups in their entrepreneurial capabilities or interests, as measured by degree of confidence, capacity to learn, appetite for risk, creativity, and determination.⁴ Prior research shows that a variety of factors adversely impact people of color as they consider starting and growing businesses, including disparities in educational attainment, personal wealth, access to mainstream capital, and exposure to entrepreneurship in family and social networks.⁵ Removing the pernicious race-specific barriers that tax the nation’s entrepreneurship base would likely enhance dynamism and productivity. McKinsey & Company estimates that if Black-owned businesses achieved revenue parity with their white-owned peers within their industries, it would add about $190 billion to the annual U.S. GDP.⁶ New efforts that prioritize Black and Latino or Hispanic supply chain businesses could also help meet a surge in demand among large corporations to improve vendor and supplier diversity.

Relatedly, the racial wealth gap in the U.S. is large and persistent, and it stands to reason that enhanced resources and policy changes that close entrepreneurship gaps could help close wealth gaps in Black and Latino or Hispanic communities—particularly, efforts that focus on business ownership in industries poised for scaled growth.⁷ The reverse dynamic is also the case: Limited access to generational wealth (the byproduct of past injustices) means that would-be Black entrepreneurs begin with less capital and fewer capital networks (particularly risk-based equity capital) to start and grow their own businesses.⁸

Explicit federal policies to support small business creation and growth in communities of color have a clear rationale. Because structural barriers undercut business ownership in Black and Latino or Hispanic communities, intentional federal policies that support Black and Latino or Hispanic entrepreneurs and business owners would likely help further the dual mandate of creating a more prosperous and just national economy.

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Limits of federal policy approaches

Before reviewing the current limitations of federal policy, it is important to review the general conditions that allow for small business growth. Starting and growing a business is an extremely complex, iterative undertaking. Small businesses rarely can succeed in isolation, and are more likely to grow when surrounded by other entrepreneurs, investors, and customers who are open to collaboration and knowledge sharing.⁹ The most important relationships for small business owners tend to concentrate in the same city or region, because so much of entrepreneurial success is rooted in the in-person social exchange of ideas, information, and resources. As Brad Feld and Ian Hathaway argue, “geography plays a central organizing factor” in small business ecosystems.¹⁰

Due to these factors, regional economic development efforts have emerged over the last two decades to spur entrepreneurship through “ecosystem-building” strategies. Yet, as Dell Gines and Rodney Sampson have written, “little work has been done to ensure this strategy is inclusive for both people of color and their communities.”¹¹More recently, coalitions of economic development groups, entrepreneurship support organizations, major corporations, anchor institutions, and philanthropies have made new commitments to support and scale minority-owned businesses in local communities. Corporations and philanthropies committed nearly $2 billion in 2020 to support minority-owned businesses.¹² These individual actions represent notable progress, but will not result in systemic change unless they are channeled through broader entrepreneurship ecosystem-building strategies.¹³

This local momentum stands in sharp contrast to current federal policy approaches, which have several well-documented limitations when it comes to supporting minority-owned business growth. These include uneven access for minority entrepreneurs to Small Business Administration (SBA) capital sources and limited uptake of the SBA’s 8(a) program¹⁴; insufficient authority and funding for the U.S. Department of Commerce’s Minority Business Development Agency (MBDA) to deliver technical assistance and entrepreneurial support¹⁵; and lack of accountability for meeting federal agency procurement targets for businesses owned by people of color.¹⁶

There is a fourth challenge: Federal small business policies and programs are currently unprepared to support emerging solutions at the local level to build racially inclusive small business ecosystems. Currently, the SBA and Economic Development Administration together invest less than $40 million annually in supporting local small business ecosystem-building, a tiny sum compared to the $23 billion in loans that the SBA provided in FY2019.

The federal government has traditionally viewed itself as a lender to small businesses. But for relatively modest resources, it can improve on its role as a lender and regulator by providing critical institutional support to inclusive, bottom-up entrepreneurship and small business strategies.

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Policy recommendation

Given the importance of inclusive ecosystem-building as an economic strategy, the next administration and Congress should create a new Minority Business Accelerator (MBA) grant program that supports the creation of new accelerators and existing ones. This program would address one key component of the small business universe: businesses with at least $1 million in annual revenue that are poised to increase in scale and revenue, and thus become key drivers of the nation’s net job creation, productivity growth, and wealth generation. By explicitly supporting minority business acceleration—specifically, scalable business to business (B2B) or business to government (B2G) business models—the MBA program would help address legacies of systematic racism and long-standing neglect.

The proposed MBA program would not create a system of federal regional offices, differentiating it from the nation’s network of Small Business Development Centers and Manufacturing Extension Partnerships. Rather, it would invest in a network of existing or new regional accelerators. This approach avoids a one-size-fits-all solution by tailoring responses to the needs of each local community. Instead of duplicating existing work, this program would leverage federal dollars alongside existing local corporate, philanthropic, and government investment in entrepreneurship support organizations that want to help minority-owned businesses grow.

Generally, accelerators support companies through education, mentorship, and access to financial resources. The MBA program would layer in additional capacities across the country. Most critically, it would focus on those intermediaries best prepared to support Black and Latino or Hispanic entrepreneurs that have long faced significant barriers to growth capital (specifically risk-based equity capital) and lack access to competitive and more profitable business opportunities, “deal flow” networks, investors, and many other critical business relationships and connections. These shared experiences and challenges are especially pronounced for minority entrepreneurs, and are best addressed by an accelerator staff that is aware of these barriers and ready to solve them.

Regarding targeting, minority business accelerators could support minority-owned businesses with at least $1 million in annual revenue. These businesses include those poised to scale as suppliers to major anchor institutions (e.g., large- and mid-cap corporates, universities, local and state governments, hospital systems), as well as certain consumer-facing businesses with significant growth potential.

Accelerators can enable this growth in two ways. First, a highly experienced staff can prepare minority business owners to meet the needs of large customers and sizeable business opportunities, thus increasing the likelihood that businesses could win supply chain contracts with local anchor institutions. Second, the accelerator can connect businesses to the operating capital needed to execute against these larger supply chain opportunities.

The model for this idea comes from Cincinnati’s Minority Business Accelerator, which has created a portfolio of 67 minority-owned businesses that have created 3,500 jobs and over $1.5 billion in aggregate annual revenue. The accelerator rigorously assesses, screens, and strategizes with minority businesses (which are considered portfolio companies) to ensure the business is ready for new anchor customers. The rigor with which the accelerator develops its portfolio ensures that corporate partners (referred to as “Goal Setters”) who desire a more racially diverse set of suppliers have access to an investment-ready set of minority-owned companies. No existing intermediary—including the network of National Minority Supplier Development Councils—provides this level of comprehensive and customized support to minority-owned businesses. The accelerator’s activities also go well beyond the technical assistance typically provided through the SBA or MBDA, and focus specifically on scalable business models.

Regional minority business accelerators would cost about $1 million per year, on average, to create a team of industry and financial experts. Drawing on Cincinnati’s experience, this annual budget would cover a dedicated staff of five seasoned professionals, each able to service 12 to 15 businesses per year. This budget also assumes operating within the existing structure of a chamber or similarly structured organization that provides back-office support for accounting, systems, marketing, etc. This overhead expense (if the accelerator were paying directly for these services) would add an additional expense of $200,000 to $300,000 annually, depending on the size of the team and portfolio.

This experience is further supported by subject matter expertise across a multitude of industry verticals with best-in-class organizations, including banks, alternative capital providers, CPA firms, law firms, investment banks, higher education, and other strategic partners. These partners work with the accelerator either as independent contractors or “loaned executives” from partner organizations that serve to complement the skill sets and experience of the accelerator’s core team.

We recommend a challenge grant that provides $1 million annually over five years to develop or sustain minority business accelerators in 25 communities, for a total of $125 million. Successful implementation will require a well-designed request for proposals from local communities that balances the following criteria:

• Corporate and institutional leaders in the local community have a demonstrated commitment or well-documented plan to support minority-owned businesses.
• The regional economy has a reasonable number of companies (minimum of 15) at the relevant scale (around $1 million in annual revenues) with demonstrated growth potential. According to the latest Census Bureau Annual Business Survey data, there are about 225,000 of these businesses nationwide, or about 22% of minority-owned employer businesses.
• Local funders—corporate, government, and philanthropic—are committed to the idea and are willing to match federal funding.
• There is a mainstream business organization that can be an effective home and champion for the accelerator (chamber of commerce, economic development organization, community-based organization, entrepreneurship support organization, university, etc.)

The MBA program could be administered by the Minority Business Development Agency, the Economic Development Administration, or the Small Business Administration. It would require a dedicated team of experts to design the request for proposals, in consultation with small business owners and the local intermediaries that are helping them grow.

The primary risk associated with this program relates to funding sustainability. The dependency on grant dollars and corporate sponsorships has become an increasing challenge for inclusive ecosystem-building strategies. Funder fatigue and modest results from well-intended but poorly funded or executed initiatives must be overcome.

To mitigate these risks, the request for proposals should reward models that can eventually transition to an operational strategy that relies on self-generated program income. Cincinnati’s Minority Business Accelerator, for example, launched a fee-for-service business model in 2018 with strong early results: Earned income exceeded $100,000 in 2018 and $150,000 in 2019, adjusting for timing differences of “success fees” that clients pay the accelerator once they receive contract revenues. Such earned income ensures that government and other philanthropic support is leveraged to create a sustainable operating model.

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Conclusion

Because the nation is facing a massive potential disruption to a well-known status quo, the COVID-19 small business crisis has inspired a historic policy response. But structural racial exclusion that limits entrepreneurship is no less insidious than COVID-19’s impact on small businesses, and because it is a status quo that’s been built up over decades, there has not been the same urgency to address it—even if closing these disparities could result in millions of new small businesses and billions in new small business revenue.

This brief proposes a five-year, $125 million Minority Business Accelerator grant program to channel and support the groundswell of local energy and investment in minority-owned business acceleration efforts—and, in doing so, bolster the nation’s economic recovery.

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