It’s no secret that businesses across many sectors have suffered their worst periods of performance over the last year and are fighting for survival. What may be less obvious to the broader investment community, however, is that BIPOC-owned businesses — those companies owned by people identifying as Black, Indigenous or people of color — have been overwhelmingly affected by the effects of the pandemic. The BIPOC community’s fastest-growing segment, Latinx entrepreneurs, has felt the most devastating impacts.
The economic impact not only affects owners, employees and their communities — it spills over to the entire U.S. economy. Indeed, these entrepreneurs are, in many ways, the bellwether for recovery and future growth.
Therein lies the challenge, but also the opportunity, for this growing segment of entrepreneurs to rise to the occasion — and for banks and venture capital firms to support them at this critical moment.
Why Latinx businesses are vital
As a group, Latinx is a growth engine of the economy. It’s expected to make up nearly 30% of the U.S. population by 2050, compared with 18% today, according to the annual Biz2Credit Latino-Owned Business Study for 2020. Meanwhile, Latinx-owned businesses are significant job creators in American communities, which has a multiplier effect on the overall economy.
A study from the Federal Reserve Bank of Cleveland helps put this effect in perspective. BIPOC-owned employer firms support nearly 9 million jobs across the United States, and their role in the economy continues to grow. Between 2014 and 2016, the number of BIPOC-owned small businesses increased 11% versus 1% for non-BIPOC-owned firms during that time.
Before COVID-19, the fundamentals of these businesses were improving too. The average annual revenue of Latinx-owned businesses jumped 10% compared with 2019, or up to $525,415 in 2020. As revenues climbed, the average credit scores of Latinx-owned businesses also increased, from 588 in 2019 to 618 in 2020, according to the Biz2Credit study.
The effects of COVID on Latinx businesses
Latinx businesses accounted for a significant portion of all new businesses prior to the pandemic and represented a major force in communities with large and growing Latinx populations. For example, before COVID-19, the proportion of new business applications that were submitted by Latinx owners was 24% in California, 20% in Texas and 11% in Florida, according to the Biz2Credit survey.
While Latinx entrepreneurs are involved in a wide range of industries, they are particularly focused on sectors that both depend on and support thriving local economies. These sectors include construction (17%), services (16%), accommodations and food services (15%), retail (9%), and transportation and warehousing (8%).
No doubt, the effects of the pandemic have hit many of these industries particularly hard, and as a result, many Latinx-owned businesses quickly went from profitable to cash flow negative.
This change in cash flow has had a ripple effect. Research from the National Bureau of Economic Research found that between February and April 2020, the number of working, self-employed Black business owners dropped by 41%, while Latinx and Asian self-employment rates fell by 32% and 26%, respectively. By contrast, white self-employed workers saw a 17% drop over the same period.
As economies look to reopen previously shuttered businesses, many are finding doing so requires access to funding. And that can be more difficult for Latinx owners to obtain, according to research from the Kauffman Foundation. Further, the Federal Reserve Bank of Cleveland reports that more than 70% of new Black, Latinx and Asian firms rely solely on personal funds and family savings to start their businesses, while white entrepreneurs are the most likely to secure a traditional business loan to start their companies.
The keys to future recovery: resilience and investment
Now is a pivotal moment for Latinx businesses and the professionals and investors who support them. While the impact of COVID-19 has been devastating, the recovery has the potential to help this segment reach new levels of success.
One Latinx entrepreneur’s story provides a spark of hope for progress among the funding hurdles for BIPOC-owned businesses and COVID-era investing. Belsasar Lepe, Co-founder and CEO of cybersecurity startup Cerby, learned that an economic downturn can be a springboard for building a successful company.
Belsasar founded Cerby in May 2020, when many other founders were running for the exits. He had learned valuable lessons of lean operations, having started his prior company just before the Great Recession of 2008.
Launching a cybersecurity company at a time when many businesses were facing a recession and racing to move to a remote workforce was, in fact, a tailwind for Cerby.
“As a security company that focuses on enabling end-users to work more securely, we have found that our primary buyers have allocated a significant part of their IT and marketing budgets to securing remote work in a way that gives their employees more safe and secure autonomy,” he said. “We founded the company assuming this would be the case, and it has proven to be true thus far.”
There have been some positive changes to the fundraising process for Latinx entrepreneurs, as well. “The profile of an ‘investable’ founder is being expanded to include different schools and additional non-American companies outside of the traditional feeder options,” Belsasar noted. “A key reason for this is the hiring of partners onto VC teams that know the Latinx network, which is frankly a different network from the traditional network that receives funding.”
To be sure, the Latinx community represents one of the nation’s greatest potentials for recovery and economic growth. Supporting these emerging business owners isn’t just the right thing to do — it’s the smart thing to do. While Latinx owners have endured more than their share of financial hardship, they represent one of the fastest-growing segments of new business and job creation. They are the lifeblood of their communities and pillars of the American economy — and its recovery.
First Republic is committed to supporting equitable opportunities for small business owners. Highlights of our efforts between 2011 and 2020 include:
- Funding $9.2 billion in community development loans, 84% located in high-BIPOC neighborhoods
- Funding $5.4 billion in small business loans, 31% located in high-BIPOC neighborhoods
- Early and significant commitments to the California Rebuilding Fund, directing loan capital to help small businesses located in underserved neighborhoods
- Expanded partnerships with over 60 community-based nonprofits to support small business success in underserved neighborhoods
For more information about First Republic’s efforts, visit our Sustainable Culture and Community Engagement Report.
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