The Troubling Reality of Capital Limitations Faced by MBEs 1 Congressional Briefing Cannon HOB March 9, 2010 U.S. Department of Commerce Minority Business Development Agency Disparities in Capital Access between Minority and Non-Minority Businesses:

Major Findings Disparities in Capital Access Regardless of Firm Size Disparities in Capital Grow with Time MBEs are Good Investment Opportunities Minority Firms Grew Faster, but Are Smaller Strong Job Creation Disparities in Capital Access between Minority and Non-Minority-Owned Businesses

Barriers to Capital Access Financial Constraints –Lower Asset Levels Lending Discrimination Other Discrimination –Penetrating Networks –Consumer or Other Firms Discrimination Human Capital –Lower Education Level and Language Skill Business Ownership Experience and Family Background Limited Social Networks Industry Sectors and Geographic Locations (New analysis) Disparities in Capital Access between Minority and Non-Minority-Owned Businesses

Current Financial Crisis Lower Housing Equity Values Lower Stock Market Lower Investment Deals and Investment Amounts Higher Business Bankruptcies Numerous Bank Failures Disparities in Capital Access between Minority and Non-Minority-Owned Businesses

Lower Housing Price Index Disparities in Capital Access between Minority and Non-Minority-Owned Businesses

Lower Number and Amount of VC Deals Disparities in Capital Access between Minority and Non-Minority-Owned Businesses

Higher Business Bankruptcies Filings Disparities in Capital Access between Minority and Non-Minority-Owned Businesses

New Analysis Inadequate Capital Access continues to be an important constraint to the growth of minority business. –Lower Loan and Equity Amounts –Higher fear of loan rejection and denial rates –Higher interest rates Differences in Capital Access Regardless of Firm Size Differences in Capital Grow with time. Disparities in Capital Access between Minority and Non-Minority-Owned Businesses

Higher Loan Denial Rates and Rejection Fears Disparities in Capital Access between Minority and Non-Minority-Owned Businesses Source: Survey of Small Business Finances (2003)

Higher Loan Interest Rates Disparities in Capital Access between Minority and Non-Minority-Owned Businesses Source: Survey of Small Business Finances (2003)

Lower Percentage of Firms Receiving Loan and Equity Investments Disparities in Capital Access between Minority and Non-Minority-Owned Businesses Source: Survey of Small Business Finances (2003)

Lower Loan Size and Equity Investments Disparities in Capital Access between Minority and Non-Minority-Owned Businesses Source: Survey of Small Business Finances (2003)

Disparities in Capital Access Grow After First Year in Operations Disparities in Capital Access between Minority and Non-Minority-Owned Businesses Source: Kauffman Firms Survey ( ).

Competitive Returns on Equity Investments Venture Capital Funds Focused on Minority- Owned Firm Investments are Competitive - Venture capital funds focused on investing in minority-owned firms provide returns that are comparable to mainstream venture capital firms. Funds investing in minority businesses may provide attractive returns because the market is underserved. Disparities in Capital Access between Minority and Non-Minority-Owned Businesses Source: Timothy Bates and William D. Bradford, "Venture-Capital Investment in Minority Business," Journal of Money Credit and Banking 40, no. 2-3 (2008):

Overview of the State of MBEs Minority-Owned Firms Outpace Growth of Non-Minority Firms Disparities in Capital Access between Minority and Non-Minority-Owned Businesses Source: U.S. Census Bureau’s 2002 Economic Census

Minority-Owned Firms Lag Behind in Size Compared with Non- Minority Firms Disparities in Capital Access between Minority and Non-Minority-Owned Businesses Source: U.S. Census Bureau’s 2002 Economic Census

MBEs Have Fewer Employees on Average Compared to Non- Minority Firms Disparities in Capital Access between Minority and Non-Minority-Owned Businesses Source: U.S. Census Bureau’s 2002 Economic Census

Average Payroll per Employee for MBEs and Non-MBEs about the Same Group of Firms Average Payroll per Employee, 2002 Native American$26,848 Asian$25,352 Hispanic$23,888 African American$23,277 Non-Minority Firms$29,842 Disparities in Capital Access between Minority and Non-Minority-Owned Businesses Source: U.S. Census Bureau’s 2002 Economic Census

Group of Firms Employment Growth Asian2% African American5% Hispanic11% Minority Firms4% Non-Minority Firms-7% Disparities in Capital Access between Minority and Non-Minority-Owned Businesses Source: U.S. Census Bureau’s 1997 and 2002 Economic Census Employment Grows During 2001 Recession

New Analysis Young MBEs Create Jobs at Similar Rates Compared to Young Non-Minority Firms Disparities in Capital Access between Minority and Non-Minority-Owned Businesses

Major Findings Disparities in Capital Access Regardless of Firm Size Disparities in Capital Grow with Time MBEs are Good Investment Opportunities Minority Firms Grew Faster, but Are Smaller Strong Job Creation Disparities in Capital Access between Minority and Non-Minority-Owned Businesses

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