Friday, April 10, 2020

The Number of Latinx-Run Startups Is Rocketing. Their Funding Is Not. Here's Why That's a Big Problem

Written by: By Guadalupe Gonzalez Staff reporter, Inc

Unless we solve the "scaling gap," we're missing out on the opportunity to grow employment and GDP.

Latinx entrepreneurs have been starting companies at a record clip. From 2009 to 2019, a 34 percent increase in startups by these founders has made them the fastest-growing startup demographic, by a long shot. The number of startups by white entrepreneurs, by comparison, has decreased 6 percent.

So it would be reasonable to believe that Latinx employers--who are concentrated in growth industries such as transportation, construction, and leisure and hospitality--would also be enjoying funding and sales growth in the same proportion. But they aren't, and that's both a mystery and a shame. Only 3 percent of these founders have reached the $1 million mark in annual sales, according to the Stanford Latino Entrepreneurship Initiative (SLEI), part of the Graduate School of Business. That's just a third of the numbers for the non-Latinx-owned businesses, an extraordinary gap.

The data on funding is equally skewed. Although Latinx entrepreneurs apply for loans at the same rates as their peers, only a quarter receive the full amount they're asking for, compared with half of white business owners. Maybe that's the reason that some six in 10 Latinx entrepreneurs who wanted a loan didn't apply. Some of them simply assumed it would be denied, says Marlene Orozco, lead research analyst at SLEI. The difference in funding that these founders and white entrepreneurs receive "is what we refer to as the 'scale-up' or 'opportunity' gap," she says.

In January, SLEI reported that even when Latinx business owners get financing, it's under terms that are either risky or costly. For example, 47 percent of those who apply for financing get loans that are factored, which basically involves selling their accounts receivables to a lender at a discount. This means they never see the full amount of the revenue they generate.


34 percent
Increase in the number of businesses started by Latinx entrepreneurs from mid-2009 to 2019.

-6 percent
Decrease in the number of businesses started by white founders during the same period.

The scaling and opportunity gap isn't just a problem for one demographic; it causes cascading issues across the economy. How? Latinx companies now employ more than three million people and contribute nearly $500 billion in annual revenue to the economy, according to research by Inc. data scientist Arnobio Morelix in conjunction with SLEI. If these employers grew at the same rate as their white counterparts, Morelix reports, they would contribute a million additional jobs and another $410 billion in revenue annually. That's roughly 1.9 percent of U.S. GDP.

It naturally raises the question of why these founders can't get funded at the same rates as others. Peter Maldonado, the son of a Colombian immigrant who co-founded the dried meat brand Chomps in 2012, is an example of how this opportunity gap retards growth. When Maldonado needed $1.1 million to grow Chomps substantially in 2016, no bank would fund him.

Maldonado instead raised two short-term debt rounds from friends and family, and grew Chomps to more than $10 million in sales by 2017. The staff has grown from one full-time employee--Maldonado--to 18 today, and annual sales are now more than $30 million. But it took Maldonado more than five years to be able to afford a team and an office.

You could argue that Maldonado is a model of the perseverance that marks all entrepreneurs, but that misses the point. He's actually lucky, statistically speaking, in that roughly half of all new businesses fail within five years. His could have been one of them. Seeing the problem, some banks have now begun earmarking funds for outreach to founders like Maldonado.

There's one other gap that Latinx owners need to solve: awareness. They often don't know about resources meant to help them. Becoming a certified minority business owner, for instance, allows them access to government contracts. But the process requires lots of documentation that Latinx business owners may not have readily available. Likewise, businesses located in opportunity zones--which were created to push development in low-income areas--have higher-than-average growth rates. Though 14 percent of Latinx-owned businesses surveyed are based in opportunity zones, fewer than a third of them even know the program exists. Oroz­co says it's critical for Latinx owners to expand their mindsets to include large organizations like governments and corporations as potential customers, given their more relationship-oriented approach to business. Likewise, she says, "it is also important for the government and corporations to reach out and shed light on the path toward procurement."

Not every company that scales succeeds. But those that do can then boost their growth rate. Conversely, being unable to borrow and scale creates an unvirtuous cycle--Latinx companies can't scale for lack of funding, making them even less likely to get funding in the future. "If Latinx businesses continue to start small and stay small because the support doesn't exist, we'll be stuck in a holding pattern," Orozco says. "There's just going to be a new wave, a turnover of folks starting businesses and stalling them--and again not moving that needle forward."

With the economy bumping along at 2.9 percent annual growth, we need everyone moving the needle forward.


No comments:

Post a Comment