NEW YORK, NY – Equality in the workforce remains unattainable for many Americans, particularly for women and Black and Latino minorities. Disparities in pay and advancement are magnified for women of color – one study showed that in 2021, Latinas made just 57 cents and Black women earned 67 cents for every dollar paid to white, non-Latino men. Those disparities aren’t limited to pay -- there are similar inequalities for when people choose to start businesses. The complexity of the entrepreneurial process presents several opportunities for discrimination to occur and fuel this gap. In a new literature review from Columbia Business School, Professor Michael Ewens, the David L. and Elsie M. Dodd Professor of Finance, finds that women represent 12%-28% of entrepreneurs, Black entrepreneurs only account for 1%-10% of new business creators, and Latinos account for 2.4% of entrepreneurs. The three groups are the lowest among high-growth startups in the country, and Ewens argues that to close these gaps, it’s necessary to change who makes the investment decisions for new ventures and to collect more data to pinpoint the exact causes.
The paper, Race and Gender In Entrepreneurial Finance, reviewed two decades of data from multiple venture capital databases, including Pitchbook, CB Insights, and Crunchbase, as well as crowdfunding data compiled by University of Oxford professors using SEEDRS. In addition to outlining the existing racial and gender disparities in entrepreneurship, Professor Ewens focused on who invests in minority and women-owned enterprises during the multiple phases of a startup cycle. Venture capitalists and angel investors are often labeled as “gate-keepers” because they have the power to determine the small set of startups that receive external equity financing. Outside investments make up only 11.5% of minority enterprises, and preferences or biases among these investors can widen this gap when they target funding to entrepreneurs in their respective race and gender groups. Entrepreneurs could also pursue a bank loan as an alternative to capital investment, but Ewens finds that Black-owned businesses are still 50% less likely to receive funding from a bank than white-owned businesses. A third option is crowdfunding the money to jump-start a venture. Still, disparities persist there as well: Ewens’ analysis found that women make up 29.9% of small business owners and only 16% have crowdfunded investments. Ewens recommends improving diversity at the funding level: he calls for increasing the number of minority and women-led investment firms and putting more women and minorities in the position to invest in their own communities.
The paper suggests that more studies are necessary to gather more data to understand the factors creating gender and racial gaps fully. Ewens recommends an examination of how rejection or poor deal terms can explain the low rate of participation by women or minorities. He also calls for a review of how the cost of credit can differ by race and gender, and how innovative security design (e.g., debt vs. equity) could potentially reduce the gaps.
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About the researcher
Michael Ewens is a David L. and Elsie M. Dodd Professor of Finance at Columbia Business School. His is a Research Associate at...Read more.