Entrepreneurship is an engine of growth for our economy, and presents one of America’s most viable paths to financial security for business owners and their families. There’s no question it’s a risky undertaking—one that fails 50 percent of the time within the first five years—often draining personal financial resources in the process. But when entrepreneurs are successful, businesses become a source of family wealth that can transfer to future generations and often produce innovative societal benefits. That is why it is essential to take stock of potential barriers to success, as well as of the disparities in who becomes successful. With that understanding, we can take action to ensure that our ecosystem of support works for everyone—because right now, it doesn’t.
We Need Diverse Entrepreneurs
As our demographics change, we will need entrepreneurs of all backgrounds to meet shifting needs. According to AARP’s research, in 2018 people ages 50 and older spent 56 cents of every dollar in the United States, and by 2050 that number will increase to 62 cents of every dollar. Meanwhile, the global and U.S. population is aging; in the United States alone, 10,000 people turn age 65 every day, so a vast new market is emerging, creating a massive need for older entrepreneurs from all backgrounds who can understand this demographic and meet its needs.
For some groups, entrepreneurship may be the only opportunity available to finance daily living expenses and plan for a secure retirement.
Fortunately, in some respects the entrepreneurial landscape is equipped to answer the call. People ages 45 and older represent 80 percent of all small business owners, and entrepreneurs in this age group have a much higher success rate in establishing and growing a business—a 50-year-old founder is 1.8 times more likely to successfully grow their business than is a 30-year-old founder. Entrepreneurial activity has increased steadily for people ages 55 to 64, with a 10-percentage point increase from 1996 to 2020, even though most entrepreneurship support is directed toward younger entrepreneurs. While we all benefit when business owners represent the diversity of our communities, older entrepreneurs often have the knowledge, experience and social networks necessary to build a business with staying power, and can become mentors and build complementary businesses to support younger entrepreneurs.
Accompanying Trend: Entrepreneurs Emerging Despite Uneven Playing Field
Meanwhile, another interesting thing is happening within the entrepreneurial ranks, though not quickly enough. Since 1996, there has been an increase in new entrepreneurship among Blacks, Asians and Latinos, driven by need and market opportunity, while White entrepreneurial activity has declined. But the ecosystem of support—from business plan development to obtaining financing—works differently and is less effective for entrepreneurs of color than it is for their White counterparts. And while that’s of great concern for many reasons, one reason not always considered is that with age- and race-based discrimination affecting older people of color in the workplace and job market, entrepreneurship may be the only opportunity available to finance daily living expenses and plan for a secure retirement.
Inequity is a tremendous obstacle in the entrepreneurial world. Gaps in knowledge and networks can prevent a small business from growing. For example, procurement contracts help small business owners scale over time, but many entrepreneurs of color lack knowledge and information about how to secure contracts, such as from local government, universities and large companies.
The pandemic has demonstrated how important broadband access and digital skills are to small businesses, particularly in rural areas. Many businesses had to pivot quickly from brick-and-mortar storefronts to e-commerce. We saw high failure rates among businesses that couldn’t make that switch—either due to inadequate broadband access or lack of digital skills to support online operations. There are large disparities in digital skills between Blacks and Whites of all ages, but disparities are largest for older people.
‘Black business owners hire people from the community and invest in those communities at higher rates than do White business owners.’
COVID-19 also struck small business owners of color ages 45 and older particularly hard as they were less likely than White business owners to have cash reserves. And older Asian business owners have struggled the most to reopen, for reasons yet to be understood.
To ensure that people of color can start, scale and sustain businesses, we need to understand and fill the gaps in the ecosystem. The United States’ system of support for entrepreneurs—the entrepreneurship ecosystem—includes guidance on developing a business plan, establishing mentorship networks, accessing financing through loans or venture capital, gaining access to customers and even broadband—all potential focal points of discrimination or access issues.
Prioritizing Equity in Investment Opportunities Works
It is well-documented that entrepreneurs of color tend to have fewer sources of capital and are denied loans from banks at higher rates than are White entrepreneurs, and they feel discouraged from seeking financing. This means that entrepreneurs of color more frequently must invest their own savings—often taking immense risks such as depleting their 401k plans—or turn to friends and family for financing.
We must prioritize equity in our entrepreneurship investment opportunities. Yes, it’s the right thing to do, but also it will lead to strong returns for everyone—families, communities and the broader economy.
By increasing support to entrepreneurs of color, we can increase financial security and create pathways to building wealth. A recent report from the Federal Reserve Bank of New York demonstrates that Black small business owners ages 45 and older are nearly five times more financially secure than traditionally employed Black counterparts. Moreover, the success of Black business owners tends to flow right back into localities, creating a circular flow of returns. Black business owners hire people from the community and invest in those communities at higher rates than do White business owners.
This dynamic ripple effect, one that flows in multiple directions, can grow, if we nurture it. We can do that through improved access to financing, networks, information and training.
Capturing this opportunity will require collaboration among many stakeholders—policymakers, the financial services industry, researchers, advocacy organizations and minority business support organizations, to name a few. Importantly, also at the table must be older entrepreneurs from diverse communities. If we can design support systems for them, the returns will be great for everyone.
Melissa Grober-Morrow, MPA, is director of Thought Leadership–Financial Resilience at AARP in Washington, DC.