Most academics and economic development professionals agree that the three key barriers to entrepreneurial success for minorities and women are 1) a lack of management knowledge/expertise, 2) a lack of access to capital, and 3) a lack of access to networks. Let’s take the lack of access to capital problem and break down its layers a bit so that we can identify the proper solutions.
A lack of access to capital is really more of a symptom of other problems than a problem in and of itself, which is important because, if you treat just the symptoms and not the underlying problems, you won’t be able to achieve meaningful, long-term impact. Minorities and women face barriers to accessing capital not as prevalent for white male entrepreneurs for three key reasons:
Firstly, they don’t have access to the networks and relationships that make accessing capital easier. In the startup realm, angel investors and venture capitalists invest almost exclusively in founders to whom they get warm introductions. If minorities and women can’t get those introductions, they can’t access that capital. On the debt side of things, a great relationship with a banker who will explain your options and go the extra mile for you can also be immensely helpful.
Secondly, minorities and women are less likely to be able to self-fund, raise a friends and family round of financing, or be attractive borrowers because they and their friends and family are more likely to have poor credit, little collateral, and less disposable income and/or savings. This makes self funding or a friends and family round unrealistic and a loan riskier and less attractive for the lender and more expensive (if approved) for the borrower.
Finally, there is straight racism and sexism. A number of studies have shown that identical loan applications are more likely to be funded if the borrower is white vs. black and that identical startup pitches are more likely to be funded if pitched by a white male.
Understanding these three key components to the access to capital problem is essential if we want to develop strategies to level the playing field because those strategies must address these causes of the gap in access to capital or they will not be sustainable nor will they have long-term impact.