While the percentage of Americans running a business has stagnated at 6.2 percent over the past two decades, Latinx founders have rocketed from 6.5 percent of all entrepreneurs in 2001 to 15 percent as of 2019, making them the fastest-growing demographic among all U.S. entrepreneurs. This bright spot for the American economy is dimmed, however, by these businesses' failure to scale.

Latinx founders own 350,000 businesses with employees in the United States, and these businesses create nearly three million American jobs, according to research I led with Stanford University's Latino Entrepreneurship Initiative (SLEI). Still, only 3 percent of these Latinx-owned companies ever reach over $1 million in revenue, compared with 9.2 percent for non-Latinx businesses.

Average revenue by age of firms owned by Latino founders versus those owned by non-Latino founders

Put simply, Latinx-owned businesses start smaller and stay smaller.

As of now, we don't definitively understand the reasons Latinx founders aren't scaling their businesses at the same pace as their non-Latinx counterparts, but we have gleaned some insights about the nature of the divide.

Money matters

Revenue seems to play a role in Latinx founders' inability to scale their companies at the same rate as their non-Latinx counterparts, and the effect begins at the conception of their businesses. Per SLEI research: In the first two years of operation, Latinx-led companies have a revenue that's about 20 percent smaller than non-Latinx-owned businesses, and that delta grows to as much as 35 percent as the companies age.

At first glance, data from Inc.'s annual list of the 5000 fastest-growing companies in America supports this observation. Even though the number of companies helmed by Latinx CEOs has increased from 160 in 2016 to 180 in 2019, the total revenue for these companies has decreased -- from $8.1 billion in 2016 to $5.9 billion in 2019. And the average three-year growth rate for these companies, which differs from year to year, is down from 529.7 percent in 2016 to 447.7 percent in 2019. (The average for the entire 2019 Inc. 5000 was 536.8 percent.)

According to SLEI, the growth gap seems to be uniform across industries and despite motivating factors for founding a business.

Financing also plays a key role. The Inc. Entrepreneurship Index, which is Inc.'s quarterly measure of the health of the U.S. startup economy, shows that access to capital has increased slightly for small businesses since the Great Recession.

However, SLEI's research shows that Latinx founders tend to have fewer financing opportunities than entrepreneurs from other ethnic groups -- and when they do, the amounts they receive are generally lower. Moreover, Latinx founders are more likely to have their profitability negatively impacted by lack of access to and cost of capital. Lack of access to funding for a small business typically means it can't leverage the assets it needs -- the new hires, new equipment, better marketing, improved manufacturing partners, and so on -- to scale to the next level.

Percentage of firms negatively impacted by the cost of or difficulty  accessing capital

What's more, because of this difficulty accessing funding, Latinx founders have become more reluctant to seek it. Fifty-four percent of Latinx entrepreneurs avoid seeking extra capital for this reason, compared with 45 percent for non-Latinx founders, according to the Latino Entrepreneurship Initiative.

Leveling the playing field

According to research I led with the Kauffman Foundation, the U.S. economy would add one million employer businesses and nearly 9.5 million jobs if only minorities could start and grow their businesses at the same pace as non-minorities.

Some organizations are keenly aware of this gap and are working to better understand and close it. The Aspen Institute, for example, hosts a forum on Latino Business Growth that has advocated for changes that include rightsizing assumptions about Latino entrepreneurs. The idea is to present Latinx businesses to investors, the media, and other partners in the startup ecosystem as the thriving enterprises they are, and not as anemic ventures with special needs. It also advocates using community anchor institutions, such as universities and local banks, to aid in training and resource development for Latinx founders. The institute estimates that improving the system for Latinx founders could yield an additional $1.4 trillion to the U.S. economy.

The Latino Business Action Network (LBAN), a nonprofit entrepreneurship organization based in Palo Alto, California, assists Latinx entrepreneurs in scaling their companies via continued education and financing opportunities. It has helped more than 500 Latinx-owned companies grow to a combined $1.3 billion in revenue since its inception.

As an increasing percentage of the startup economy consists of Latinx-led companies, closing this gap is not just smart business, says Mark Madrid, CEO of LBAN. "It's an economic imperative for the United States."

Published on: Jan 21, 2020