There is a persistent belief that those who have started very successful businesses have done so solely on their ingenuity, ingenuity, and some kind of innate entrepreneurial spirit that makes them billionaires.
A claim circulating on Twitter claimed that if you airdropped one in a “third world country with $5 in his pocket,” would become a millionaire in a few years due to “traits, abilities, and characteristics” that are apparently inherent in all ultra-high net worth individuals.
But research shows how much the family background of a role helps to find success. An article by economists Ross Levine and Yona Rubinstein found that entrepreneurs “They tend to be male, white, better educated, and more likely to come from high-income two-parent families.”
The story of Microsoft’s rise to dominance begins with Bill Gates and Paul Allen humbly working out of a garage – now a familiar trope in Silicon Valley. Yet while Gates wasn’t super-rich per se, he grew up comfortably in the upper-middle class, said Oana Tocoian, an economics professor at the University of California, San Diego.
And his family connections were crucial to Microsoft’s success, he said.
The IBM company, which was looking for a software manufacturer to develop an operating system for its personal computer, turned to Microsoft for the project, according to CNBC. Microsoft was on IBM’s radar because IBM Chairman John Opel met Gates’s mother, Mary Gates, through a nonprofit organization of which they were both on the board.
Even without as direct a connection as Gates had to IBM, family wealth is important for access to credit, since access to loans is conditional on having collateral, Tocoian said.
Trying to make it as an entrepreneur is also inherently risky, and without family wealth, there’s no safety net to fall back on, Tocoian said.
The statistics reveal how risky starting a business is: About a third of all new businesses fail in the second year, and half in the fifth year, said John Dearie, founder and president of the Center for American Entrepreneurship.
Dearie noted that capital requirements to start a new business are, in some cases, less than they were five or 10 years ago; For example, the cost of marketing your product can be cheaper thanks to social media, while some businesses work remotely instead of paying. for office space. But, he explained, there’s still a lag between when you start a business and when you actually start making a profit.
“Most start-ups lose money over several years,” he said. “If you have generational wealth, you don’t need to be working another job to get paid to pay the bills.”
But Dearie said if you’re successful, it can be very lucrative. “So there is a very important relationship in both directions,” she said. “Generational wealth, supporting entrepreneurship, entrepreneurship generating generational wealth.”
Tocoian said that white men generally do too. have more wealth to begin with, which means that women and people of color in particular are at a disadvantage.
While 17% of black women are trying to start or run a new business, only 3% of them run “mature businesses,” according to a Harvard Business Review article. Y 29% of black women entrepreneurs live in households with incomes greater than $75,000 compared to 52% of white men, according to data from the Global Entrepreneurship Monitor.
“There are barriers throughout the business ecosystem that specifically hold back women and people of color,” said Gabe Horwitz, senior vice president of Third Way’s Economic Program.
Last year, Third Way launched a partnership with the National Urban League called the Alliance for Entrepreneurial Equity, which Horwitz says is intended to change federal policy to help more women and people of color start and scale businesses. In the coming year, PREPA will try to figure out “the different policy levers” it needs to improve equity. For example, Horwitz said more government contracts could be awarded to disadvantaged companies.
Horwitz said the data shows that white entrepreneurs start with about $107,000 in working capital, while black entrepreneurs start with only $35,000.
“The costs of just getting off the ground are higher for both women and people of color,” Horwitz said.
Horwitz said sometimes companies struggle with financing because they don’t have relationships with lenders. He noted that businesses that had relationships with lenders were able to get help more quickly from the Paycheck Protection Program, which was intended to provide relief to companies during the start of the pandemic. And sometimes, there are few, if any, lenders in predominantly Black or Latino areas.
“You don’t necessarily need family wealth to start a business. There are plenty of entrepreneurs who can go out and start a business and scale a business without having that,” Horwitz said. “However, and this is a big however, having that at the start of your business gives you a huge advantage compared to others.”
Dearie believes the Expanding American Entrepreneurship Act could be a way to diversify the field. The provision would increase the cap on venture capital funds from $10 million to $50 million, allowing fund managers invest in more entrepreneursand increase the number of people authorized to invest in a fund.
There are also broad economic forces that have made it even more difficult for entrepreneurs to succeed over the years.
“Competition in the market has become more difficult for the small ones because there has been continuous consolidation,” Tocoian said. “Therefore, there are fewer and fewer openings for small businesses to compete successfully.”
Tocoian said that 10 to 15 years ago, his students were more likely to say they were interested in starting a new business than they are now. Even if they have resources, they still have to consider student loans. Some of them now look to investment banking, for example, because that’s where they feel they’ll be most rewarded, he said.
“We as a society believe in the freedom to pursue the American dream,” Tocoian said. “The extent to which young people’s life opportunities depend on their family’s resources is profoundly un-American.”
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