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Despite recent gains, Minnesota’s entrepreneurs of color face persistent barriers

Among Native Americans and people of color, barriers can limit the financial returns of business ownership

May 28, 2021

Authors

Ben Horowitz Project Director, Community Development and Engagement
Michou Kokodoko Project Director, Community Development and Engagement
Katherine Lim Economist, Community Development and Engagement
Alene Tchourumoff Senior Vice President, Community Development and Engagement
Despite recent gains, Minnesota’s entrepreneurs of color face persistent barriers
Getty Images/Thomas Barwick

Article Highlights

  • Entrepreneurs of color own a greater share of Minnesota businesses than in the past
  • Businesses owned by people of color tend to be smaller and generate less revenue
  • Better data could illuminate barriers entrepreneurs of color face
Despite recent gains, Minnesota’s entrepreneurs of color face persistent barriers

Business ownership among Native Americans and people of color in Minnesota is increasing at a rapid pace. By building wealth through entrepreneurship, the state’s racially and ethnically diverse entrepreneurs could potentially reduce persistent racial and ethnic gaps in income and wealth. However, Native Americans and people of color are still underrepresented among business owners relative to their share of the state’s adult population. The businesses that are owned by Native Americans and people of color tend to be smaller and have lower revenues than those owned by Whites, and persistent barriers to expansion—including limited credit access—may inhibit their success. Our analysis of current statistics and research in this area highlights both recent trends and longstanding barriers—and points to a need for more detailed data.

People of color and Native Americans own more Minnesota businesses than ever before

The best data available show an explosive increase in business ownership among Minnesotans who are Native Americans or people of color1—a designation that we use here to include Asians, Blacks, and Latino/as. In 2017, Native Americans and people of color owned 11.1 percent, or roughly 58,000, of the 522,144 businesses in Minnesota—nearly twice the rate in 2007, when they owned 6.3 percent, or roughly 31,000, of the total 496,657 businesses in the state. (See the table below.) Over that period, the annual growth rate in the number of firms owned by Native Americans and Minnesotans of color was 6.5 percent, well above the 0.1 percent annual growth in firms owned by White Minnesotans. (See Figure 1.)

Minnesota businesses by race/ethnicity of owner
Note: Business figures for 2007 are from the U.S. Census Bureau Survey of Business Owners and for 2017 are from the U.S. Census Bureau Annual Business Survey and Nonemployer Statistics Detailed (NES-D) tables. Comparisons between 2007 and 2017 are subject to changes in methodology between the underlying data generation. For example, the NES-D tables are based on administrative data records rather than survey results. Population figures are total U.S. Census Bureau estimates for the state resident population. Employment data are from Quarterly Workforce Indicators, U.S. Department of Labor, and include employees. Ownership is categorized using the majority ownership share, and owners reporting multiple races are counted in all categories, so subgroups may not add to the total. Native American- or person-of-color-owned firms have less than 50 percent ownership by White, non-Latino/a owners.
*Cells are suppressed due to small sample sizes and changes in methodology that led to difficulty in comparing figures over time.
  2007 2017
  Businesses Share of population (ages 20–64) Businesses Share of population (ages 20–64)
Racial/ethnic group Number Share Number Share
All 496,657     522,144    
Native American or person of color 31,074 6.3% 14.0% 58,119 11.1% 18.9%
Latino/a 5,002 1.0% 3.8% 11,656 2.2% 4.9%
Black, non-Latino/a 12,083 2.4% 4.4% 26,506 5.1% 6.1%
Asian, non-Latino/a 11,274 2.3% 3.7% 18,100 3.5% 5.2%
Native American, non-Latino/a * * 1.0% 1,357 0.3% 1.0%
White, non-Latino/a 446,991 90.0% 86.0% 451,494 86.5% 81.1%
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The increase in business ownership among Native Americans and people of color in Minnesota occurred alongside a rapid, but slower, increase in Native Americans’ and people of color’s population share in the state.2 As the share of Minnesotans ages 20 to 64 who are Native American or people of color increased by 4.8 percentage points, their representation among the state’s business owners increased by 4.9 percentage points from a low initial level of 6.3 percent. (See the table.)

The data also show a significant gap remaining in the overall share of businesses owned by racial and ethnic groups relative to their share of the population. In 2017, Native Americans and people of color made up nearly 19 percent of Minnesota’s population ages 20 to 64 but, as noted above, had majority ownership of a comparatively low 11.1 percent of businesses in the state.

Disparate receipts, employee numbers, and sectors

Sales receipts are lower at Native American- and person-of-color-owned firms in Minnesota than they are at White-owned firms. Racial and ethnic disparities exist in two characteristics related to firms’ ability to generate revenues: their employment of people beyond the owner, and their industry.

Employer vs. non-employer firms

Firms that hire people tend to have higher sales receipts, and White-owned businesses are more likely to hire employees than many person-of-color-owned firms, particularly Black- or Latino/a-owned firms. While about one in five Asian-, Native American-, or White-owned firms has employees, just one in 10 Latino/a-owned firms has employees—and just one in 25 Black-owned firms. (See Figure 2.)

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This difference alone does not account for the differences in sales receipts. Overall and average sales are higher at White-owned businesses, both for firms that are employers and those that are non-employers. White-owned employer firms have sales around 2.5 times those of businesses owned by Native Americans or people of color. (See Figure 3.)

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Among non-employer firms, sales receipts are less varied, but Black-owned, non-employer firms have average sales that are $12,000, or around 30 percent, lower per year than those of White-owned, non-employer firms. Similarly, the average payroll per firm for employer businesses owned by people of color or Native Americans ($324,000) is significantly lower than the average payroll expenditure per firm for White-owned businesses ($479,000).

Sectoral differences

Native American- and person-of-color-owned businesses in Minnesota are concentrated in different industries than White-owned firms—an important factor, because economic sectors offer different opportunities for growth and revenue generation. In general, the sectors Native American entrepreneurs and entrepreneurs of color in Minnesota enter tend to have lower gross receipts and employ fewer people.

Native American- and person-of-color-owned firms in Minnesota are concentrated in sectors such as Transportation and Warehousing; Retail Trade; and Health Care and Social Assistance.3 (See Figure 4.) Other Services, the industry where Native American- and person-of-color ownership is highest, averaged $122,000 in receipts per firm in 2017, compared to an average of $1.58 million in receipts per firm across all industries. White-owned firms tend to be concentrated in Construction; Finance and Insurance; and the Professional, Scientific, and Technical Services; which all have substantially higher average receipts.

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One avenue to enter business ownership in a particular field might be employment in that sector. Native Americans and Minnesotans of color are underrepresented among nearly all sectors’ business owners relative to their share of the respective sectors’ employees. Native American- and person-of-color-owned businesses are particularly underrepresented relative to their employee share in Manufacturing, Real Estate Rental and Leasing, Information, and Administrative and Support Services. (The latter two industries are not shown in Figure 4 because they do not meet the figure’s 3 percent ownership threshold.) Of those, Manufacturing and Information have average receipts that are higher than the average across industries. On the other hand, people of color are overrepresented among owners relative to employees in two industries that had lower-than-average receipts in 2017: Transportation and Warehousing ($517,000) and Other Services ($122,000, as noted earlier).

The reasons for a lack of businesses owned by Native Americans or people of color in higher-earning, higher-employment sectors vary. Longstanding systemic barriers play a role in the labor market and education systems, potentially impacting Native Americans’ and people of color’s chances to attain credentials or certifications that are advantageous in some fields. White individuals are also more likely to grow up in a household that owns a business, potentially gaining valuable experience for their own startup as well as intergenerational wealth.

A lack of access to social networks is one systemic barrier that can play an important role in preventing entrepreneurs who are Native American or people of color from achieving success or expansion.

A lack of access to social networks is one systemic barrier that can play an important role in preventing entrepreneurs who are Native American or people of color from achieving success or expansion. A case study in Chicago that focused on the professional services industries, where Black entrepreneurs tend to be well-positioned for success relative to other business owners in the sector, found that Black-owned professional services firms were severely disadvantaged by their lack of relationships with procurement offices at larger potential clients. The firms’ Black owners faced these barriers despite being highly educated and experienced relative to other firm owners in their field.

Related research reveals how, in some industries, deals are often done in informal settings. For example, White construction contractors who know each other socially through a club or sports league might agree to work together to beat bids submitted by other contractors. Without a connection to such social networks, Native American entrepreneurs and entrepreneurs of color may face an uphill battle in winning contracts.

Entrepreneurship can help reduce wealth disparities

In Minnesota, the median household wealth for White households is $211,000. In contrast, the median household wealth for Latino/a families is $18,000—and for Black households, it is $0. Some research on the experiences of entrepreneurs of color—specifically, Black entrepreneurs—finds that Black and White entrepreneurs have similar upward wealth mobility, and that Black entrepreneurship can help reduce overall racial wealth disparities. However, if Black-owned businesses are more likely to fail than White-owned businesses, this might not be the case. A recent paper argues that for entrepreneurship to reduce the wealth gap, it’s necessary to first raise the success rate of Black-owned businesses. The ability to generate strong revenue and cash reserves is key to this success; national data suggest that businesses owned by people of color survive at similar rates to White-owned businesses when they have similar revenues and cash reserves.

Surveys point to disparities in access to credit

Entrepreneurs generally need access to a variety of credit sources to cover startup, operating, and expansion costs. However, surveys continue to indicate that the nation’s financial system does not meet the needs of business owners of color. For example, in the Federal Reserve’s most recent survey of small business owners, White respondents were more likely to receive a loan—and, when they got a loan, to receive more money—than Native American respondents and respondents of color. In the past, these survey data have shown that the results hold true when researchers control for firm characteristics such as revenue or number of employees.

Disparities related to bank relationships and access to credit have serious implications for the success of Native American entrepreneurs and entrepreneurs of color.

Disparities related to bank relationships and access to credit have serious implications for the success of Native American entrepreneurs and entrepreneurs of color. Research suggests differences in capital access at least partially explain why Black-owned startups start smaller and stay smaller over the first eight years of their existence relative to White-owned firms. Absent a banking relationship, borrowers of color and Native American borrowers may turn to higher-cost online lenders. They may also have a harder time accessing federal programs. During the pandemic recession, banks facilitated applications for federal Paycheck Protection Program (PPP) loans. These forgivable loans sustained many businesses. Surveyed business owners of color were less likely to apply for a PPP loan and more likely to report that they missed a deadline for, or were totally unaware of, the program—partly a consequence of weaker relationships with lenders. Because communities of color have disproportionately suffered the health and economic impacts of COVID-19, many business owners of color saw the pandemic harm their businesses even as they missed out on important federal resources.

More data needed

While existing data allow us to broadly identify racial and ethnic differences in certain business characteristics, these data lack the sample size and detail needed to answer key questions about variability in Minnesota’s entrepreneurial environment across different racial and ethnic communities. Larger and more consistent data-collection efforts would give policymakers improved insights into the status of businesses owned by Native Americans and people of color and the particular barriers that affect them. Better data would help illuminate—and potentially address—the reasons why Native entrepreneurs and entrepreneurs of color choose the sectors they do, why they tend to employ fewer people, and why they often report weaker relationships with the financial industry.

Datasets that follow businesses over time would build the state’s collective understanding of the entrepreneurial experience at both an aggregate and individual level. Every entrepreneur’s story is unique; so are every entrepreneur’s chances of success. As Minnesota’s population continues to diversify racially and ethnically, policymakers and lenders must recognize how race and ethnicity are still shaping those chances.

The authors thank Tyler Boesch for assistance creating figures and Peter Bartz-Gallagher, Anisa Hajimumin, Magda Olson, Maureen Ramirez, and Neal Young for sharing data and insights.


Endnotes

1 Compared to overall population data, the numbers on business ownership by race and ethnicity in Minnesota come with important limitations. For example, a large drop in business ownership among Native Americans could be partially connected to a change in data-collection methods. The 2007 and 2012 data come from a U.S. Census Bureau survey of all business owners. The 2017 data combine information on employer firms from a U.S. Census Bureau survey and information on non-employer businesses tabulated by the U.S. Census Bureau from administrative data. It’s possible that administrative records and survey responses surrounding race, ethnicity, and other information differ in ways that make the 2012 to 2017 comparison less reliable than the 2007 to 2012 comparison.

2 The increase in the people-of-color population is due in part to a recent boom in immigration to Minnesota, particularly from Mexico, Somalia, India, and the Hmong diaspora. Minnesota ranks near the middle of the pack when it comes to immigrants’ share of a state’s population, but immigrants’ population share has been increasing faster in Minnesota than in the United States as a whole since 1990.

3 Independent contractors who work as drivers for platform companies are included as owners of businesses in Transportation and Warehousing. Under current law, these workers are considered business owners and not employees. In U.S. Census Bureau data on non-employer firms, people-of-color owners are particularly overrepresented in this sector, which may reflect higher levels of participation in the platform economy.

Ben Horowitz
Project Director, Community Development and Engagement
Ben Horowitz writes about policies and programs impacting affordable housing, early childhood development, and investments in low- and moderate-income communities.
Michou Kokodoko
Project Director, Community Development and Engagement

Michou Kokodoko is a project director in the Minneapolis Fed’s Community Development and Engagement department. He leads the Bank’s efforts to promote effective community-bank partnerships by increasing awareness of community development trends and investment opportunities, especially those related to the Community Reinvestment Act.

Katherine Lim
Economist, Community Development and Engagement

Katherine Lim is an economist in Community Development and Engagement, where she conducts policy-relevant research to benefit low- and moderate-income workers. Her prior work includes research on self-employment and women’s labor force participation.

Alene Tchourumoff
Senior Vice President, Community Development and Engagement
Alene Tchourumoff, senior vice president of Community Development and Engagement and the Center for Indian Country Development, leads the Bank’s efforts to promote economic opportunity and access to credit for low- and moderate-income people throughout the Ninth District and for residents of Indian Country.