America’s Latino population is one of the country’s fastest-growing minority demographics: Latinos are expected to make up 29% of the country by 2050, an increase from 17% today. Nearly 20% of children under 5 are Latino.
Yet, Latino-owned businesses are falling behind their non-Latino counterparts. New Stanford Graduate School of Business research shows that while Latinos are starting businesses more frequently than the overall population, these businesses are smaller and making less money than their non-Latino counterparts. In fact, Latino businesses could have generated an additional $1.4 trillion in 2012 if they had been of equal average size to non-Latino businesses.
“The future economic health of the country depends on this part of the population carrying its share of the load,” says Jerry Porras, the Lane Professor of Organizational Behavior and Change, Emeritus, and one of the researchers on the study. “The Latino business community is not at the point where it can sustain that level of contribution.”
Porras, with Douglas Rivers, a senior fellow at the Hoover Institution and professor of political science at Stanford, surveyed 1,800 Latino-owned businesses on their size, revenues, financing, and other characteristics. The researchers, who are continuing their work, have compiled a dataset of 1.3 million Latino-owned businesses.
The research was done under the auspices of the Stanford Latino Entrepreneurship Initiative, a collaboration between Stanford GSB and the Latino Business Action Network, a nonprofit formed by Porras and a group of Stanford alumni to work on improving the lives of Latinos, lately by helping Latino-owned businesses scale up.
Porras and Rivers found that while the rate of Latinos starting businesses is growing faster than any other demographic, the average Latino business’ sales were flat from 1997 to 2012. In comparison, non-Latino business sales increased 34% over the same time frame.
Currently, less than 2% of Latino-owned businesses have revenues of over $1 million per year, according to the survey. That compares to 4.9% among all businesses.
While many minority communities are at an economic disadvantage in the United States, the extent of the disparity surprised researchers.
“We don’t lack entrepreneurs,” Porras says. “What we lack are entrepreneurs who scale.” To that end, the Latino Entrepreneurship Initiative has developed a program to mentor entrepreneurs.
The full survey results were released at a Stanford State of U.S. Latino Entrepreneurship event on Nov. 11. The research draws the first portrait of Latino-owned businesses in the United States. These businesses are:
Some 91% of Latino businesses are family owned, compared with 85% of non-Latino businesses. About 12% of Latino-owned businesses were owned by husband and wife.
The three biggest sources of financing for these companies were personal savings, credit cards, and friends. For non-Latino-owned businesses, the sources were personal savings, commercial loans, and personal bank loans. Less than 1% of the startups funded by venture capitalists were founded by a Latino, says Porras.
The average Latino-owned firm had 8.6 employees, compared with 12 at non-Latino-owned firms. The average Latino business has sales of $150,000 a year, compared with $573,000 at the average non-Latino-owned business.
The researchers found that two reasons often cited for the small size of Latino-owned firms are without merit. Trying to tease out why the disparity exists, the researchers looked at the industries in which Latinos tend to start businesses, such as construction, health care, and retail, to examine whether conditions in those industries tend to force or favor smaller companies. The researchers also looked at whether Latino-owned businesses tend to serve only Latinos, which could limit their growth potential. They found evidence of neither, Porras says.
Now, the researchers are examining the role outside money or ownership might play in Latino-owned businesses’ size and stagnant sales. Banks and other lending or equity partners could be less willing to work with Latinos, Porras says, or Latinos might be reluctant to give up ownership.
The researchers say what motivated them to do the survey and research was a sense that strengthening the Latino business community meant helping the Latino community overall and, equally important, the nation’s economy as a whole.
“There is wealth lacking in the Latino community. When you don’t have wealth, you tend to have poor schools, crime, and poor housing,” Porras says. “We really believe the economics is where this needs to be attacked. How can we help Latino-owned businesses grow?”