A Different Kind of Funding Bias

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A Different Kind of Funding Bias

Latino-owned businesses struggle with discrimination when it comes to securing financing. A Stanford GSB initiative is trying to help.
Maria Ureña, King Automotive Services in Moreno Valley, California, says her company has struggled to find funding to grow. | Alyson Aliano
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In the struggle to secure financing and credit for their companies, Latino business owners face the same staggering challenges encountered by every entrepreneur.

And then some.

Most Latino CEOs have a story — or several — of roadblocks that smack of bias rather than bad luck. The incidents can be subtle. A bank inexplicably denies a small loan to a known client. A mortgage broker becomes less receptive after discovering a loan applicant’s race. A potential investor assumes a Latino CEO is the company intern.

The Stanford Latino Entrepreneurship Initiative (SLEI), housed at Stanford Graduate School of Business, is working to uncover such practices by collecting extensive and detailed data on the Latino business experience. Its 2018 State of Latino Entrepreneurship research report takes the closest look yet at national trends underlying Latino business growth. Access to financing — or the lack of it — is of prime concern, says Jerry I. Porras, the Lane Professor of Organizational Behavior and Change, Emeritus, who spearheaded the initiative.

“It’s easy to slip into the notion that everyone is a racist, and that’s wrong,” Porras says. “But there’s a lot of unconscious racial bias — not intended, if you will, but a product of our socialization. Over time, if you’re able to recognize how this bias is creeping into our culture, you can consciously make the decision to eliminate it.”

The new report is extensive, compiling data from SLEI’s survey of 5,000 entrepreneurs, its research panel of over 1,100 participants, and other national sources, including the U.S. Census Bureau. The numbers tell a story of thwarted potential: While Latinos launch more businesses than any other group, their companies often start small and stay small, making up 12% of all U.S. firms, but only 6% of all employer businesses and only 3% of employer businesses with over $1 million in annual revenue. If the current number of Latino-owned businesses grew to match the size of their non-Latino counterparts, it would add 5.3 million new jobs and $1.5 trillion to the U.S. economy.

Among the report’s findings:

  • Latino business owners apply for financing at comparable rates to white business owners but are more likely to experience a funding shortfall. The majority of Latino-owned businesses did not apply for financing in the past 12 months, but among those who did, over 25% did not obtain any amount of the financing requested.
  • Successful Latino-owned businesses are more likely to be tech companies with diversified funding streams, but Latino tech companies report access to capital as a major factor impacting their profitability.
  • About half of employer Latino firms are owned by immigrants.
  • Government contracts provide a path to scalability for Latino-owned businesses, but among employer firms, Latinos have government clients at a lower volume when compared with white business owners.

Among the most significant findings: When applying for financing, 28% of Latino business owners receive full funding, compared with 48% of white business owners.

“That statistic stuck in my head,” Porras says. “That’s a huge gap. The question is why? There are a lot of successful Latino businesses out there, many of them good investments, but how do the funders get convinced of that and see the same level of risk you take when you fund a white owner? That’s a real challenge.”

The insights being generated by SLEI’s data are designed to inform research, policymakers, and capital providers. Through its new and growing research panel, SLEI aims to become a national connection portal and source of mentorship for business leaders looking to secure financing and scale their companies.

If you’re able to recognize how this bias is creeping into our culture, you can consciously make the decision to eliminate it.
Jerry I. Porras

“Our research panel is unique,” says SLEI’s lead research analyst Marlene Orozco. “There’s no other panel of Latino entrepreneurs like it. We’re going to be building a forum of owners who can engage with each other all across the country — businesses of all sizes, in all industries — with the goal of growing a sense of community and learning from each other.”

In collaboration with the Latino Business Action Network, SLEI offers a six-week online course, called the Stanford Latino Entrepreneurship Initiative - Education Scaling program (SLEI-Ed), for promising Latino business leaders interested in growing their companies. Two cohorts of 70 to 80 CEOs from around the U.S. attend the program annually. In addition to attending weekly webinars, the students spend three days at Stanford GSB, have access to personal mentors, and are introduced to SLEI’s growing network of capital providers.

We asked four participants of the SLEI-Ed program to discuss the challenges they’ve faced in raising the capital necessary to grow their companies. Their stories follow.

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