Updated: Mar 16, 2020
No other group in America has had such a disproportionate role in shaping the U.S. economy over the past decade as have Latinos. Despite accounting for 17.6% of the national population, Latinos are responsible for generating over 86% of all new businesses in the U.S. over the past decade. Yet, despite the rapid rise of Latinos as a global economic power, the group continues to struggle getting access to capital. Part of the problem seems to be an unwillingness of venture capitalists to invest money in Latino businesses. According to a recent study at Stanford Graduate School of Business, fewer than 1% of companies that receive venture capital are Latino-owned.
Clearly, there is a strong financial incentive to give Latinos greater access to capital given the pervasiveness of entrepreneurship in the Latino community. Why then, do VC’s refuse to invest in this segment of American society? Researchers at the Stanford Latino Entrepreneurship Initiative think the answer may have to do with the numerous cultural and financial hurdles that are preventing these entrepreneurs from getting the capital they need.
The problem appears to be symptomatic of wider concerns about the nature of Latino businesses, which tend to be smaller in size. Marlene Orozco, one of the authors of the report, says “National banks are not willing to take the risk of these smaller companies”. However, the American economy is potentially losing out on billions of dollars' worth of added revenue every year. Making matters worse, many potential Latino business owners do not feel qualified to take out loans, so they are not even applying. Instead, they rely on the financial backing of family, friends and willing acquaintances. This results in higher than optimal interest rates. Unable to pay off these exorbitant rates, many will go out of business or find it harder to scale.
One of the most prominent reasons Latino entrepreneurs are underrepresented in the venture capital and private equity world has to do with a dearth of financial education coupled with a generalized hesitance to seek out outside funding. This can be explained by the fact only 22.6% of Latinos hold a bachelor’s degree or better versus 41.7% of the non-Latino, white population. As a group, Latinos fall behind every major ethnic group in terms of educational attainment. As a result, they experience some of the lowest levels of income.
However, such broad generalizations overlook possible heterogeneities among the Latino population. Crucially, there seems to be clear distinctions between young Latinos, notably Mexican-Americans and other Latinos. All else being equal, young Latinos seem to fare better in terms of educational attainment and career achievement. This is corroborated by the fact “86% of immigrant-owned firms with at least $1 million in annual revenues are owned by millennials (under age 34) who came to the U.S. as children”. These results seem to arise, in part, from differences in English proficiency and financial literacy. Hence, the variability in exposure to American culture appears to be a factor in affecting the size of Latino-owned businesses.
It is entirely conceivable that Latino entrepreneurs who have an easier time navigating the American financial system (due to higher English proficiency) benefit from greater sources of funding. In addition to greater English fluency, the data seem to suggest that greater levels of educational attainment and stronger social networks may explain the differences among the groups. The authors referred to this group as ‘DACA Comparable’ – Given how they are the likely beneficiaries of the 2012 Executive Action allowing the undocumented children of immigrants to work in the U.S. and avoid deportation. Since DACA Comparable individuals have greater access to vital resources, namely access to public education, a work permit, and deportation relief, it should be no surprise, then, that young Latino entrepreneurs fare better than their counterparts.
Due to the history of discrimination and injustice against the Latino community, many Latinos have developed a generalized mistrust against others which permeates all aspects of their daily lives. This is a topic that merits attention but is not closely examined by the Stanford study. After all, trust is a fundamental part of any business transaction. The fact that a majority of Latino business owners are not even applying to bank loans may signal their ambivalence toward outside funding.
This is not to say racism has been eradicated from the financial world. Admittedly, financial giant Wells Fargo made international news in 2012 when the Department of Justice ruled: “Wells Fargo was aware the fees and interest rates it was charging discriminated against African-American and Hispanic borrowers, but the actions it took were insufficient and ineffective in stopping it”. This reveals a systemic culture of prejudice and racism against the Latino community. The Stanford study assumes Latinos operate in an environment of fairness and political plurality, but the truth is far more complicated.
Financial markets are notoriously volatile and vulnerable to outside forces like politics. By focusing solely on the economics side of the equation, we ignore the larger point that America’s financial system discriminates among potential borrowers. To overcome this limitation, we must reformulate our thinking about the Latino entrepreneur and make a more concerted effort to ensure all individuals, regardless of race, gender, or education get equal access to affordable capital. This, coupled with a robust push for increasing the financial literacy of its citizens, is what will make the American economy great again.
Tony Ferrari, Dartmouth Business Review.