by Steven Rogers, the Gordon and Llura Gund Family Distinguished
P rofessor of Entrepreneurship

Despite the prominence of the Fortune 500 companies, America’s economic health depends upon the success of everyday entrepreneurs.

The U.S. economy is predominantly composed of smaller businesses. Of some 22 million total companies, only 70,000 have more than 100 employees, so it’s crucial that these small- and medium-sized firms remain strong. It’s crucial for our economic health and for the health of our communities, since employment and crime display an inverse relationship: People with decent economic prospects tend to stay out of jail. (This remains true despite recent corporate scandals.)

The dynamics associated with minority and women entrepreneurs are especially interesting, both with respect to that sector’s growth and its hurdles.

The three million minority-owned firms in the United States generate annual revenues of $700 billion, an increase of 126 percent over the past decade. This revenue translates into more jobs for minorities. Research conducted by Wayne State University Professor Timothy Bates shows that the average white-owned firm located in a predominantly minority community employs a work force that is 35 percent minority. In contrast, a minority-owned firm in a minority community will employ a work force that is more than 85 percent minority.

When the study examined non-minority communities, the findings indicated that white-owned firms employed fewer than 15 percent minorities, while minority-owned firms in these same locations hired 72 percent minorities.

Clearly, this study concludes that ownership of the firm is more important to minority job creation than is the firm’s location, facts that are evident when we look at Chicago’s Austin community. Austin is a poor community of some 100,000 residents, nearly all of whom are minorities. Austin is also home to more than 6,000 small, white-owned manufacturing firms. Of the 96,000 employees of these firms, only 6 percent are minorities.

Is this a concerted effort to keep minorities out? I would be naïve to suggest this possibility has no merit. But I believe this phenomenon is primarily due to the fact that hiring at small- and medium-sized companies is often based on referrals of family and friends of the existing employees or the owner. Naturally, those people referred tend to resemble the firm’s demographics. So when minority entrepreneurs succeed, they also increase the chances of other minorities to do the same.

These dynamics hold true for women entrepreneurs, who own more than nine million companies in the United States, generating annual revenues of $3.6 trillion. These firms, with 27.5 million total workers, employ 100 percent more people than do the combined Fortune 500 firms. And women-owned businesses create jobs for other women — at rates greater than 50 percent.

Unfortunately these scenarios are complicated by gross funding disparities facing women and minority entrepreneurs. In 1997, for example, banks and other institutions loaned more than $250 billion to small- and medium-sized businesses. Less than 10 percent of that money went to firms owned by minorities or women. Over the past decade, venture capitalists have invested more than $50 billion in entrepreneurs, but less than 5 percent of that funding has gone to women or minorities.

Despite these roadblocks, minority and women entrepreneurs continue to grow their ranks. In the past decade, their numbers have increased 64 percent and 25 percent, respectively. Some 70 percent of all new startups are owned by women, and minority women entrepreneurs have posted an incredible 153 percent increase in the last 10 years.

While challenges clearly remain, it is evident that the entrepreneurial spirit is stronger than ever in the minority and women business community. And this fact lends strength to the entire U.S. economy.