Democratic presidential candidate Sen. Elizabeth Warren released a new plan on Friday to “level the playing field for entrepreneurs of color” by providing business grants to minorities in order to close the startup capital gap — the difference in capital available to white entrepreneurs versus entrepreneurs of color.
Warren argues that “every American should have a fair shot at starting a small business,” but says the playing field is currently drastically uneven, with entrepreneurs of color starting businesses with far less money than their white counterparts. Warren writes that disparity severely affects minority-owned businesses’ ability to attract investors, apply for credit, and their bottom lines.
“Disparity in startup capital is the single biggest reason that promising Black-owned businesses on average are less profitable and bring on fewer employees than white-owned businesses,” Warren said.
In order to level the playing field for entrepreneurs, Warren has a plan to distribute $7 billion to minority businesspeople.
How the plan will work
Warren proposes distributing $7 billion in grants through a new “Small Business Equity Fund.” She stresses the money will be in the form of grants, “not loans or loan guarantees,” in order to ensure entrepreneurs can focus on growing their businesses rather than on repaying debt.
The fund would be managed by Warren’s comprehensive new Department of Economic Development, which Matthew Yglesias explained in a piece on Warren’s “economic patriotism:”
Although the Small Business Equity Fund would be overseen at the federal level, Warren sees state and local stakeholders as being key to distributing funds; she says her program will be modeled on the State Small Business Credit Initiative, a federal program that gave states a great degree of largess in how they chose to distribute $1.5 billion. This freedom was given as officials felt local leaders have a better grasp of the needs of entrepreneurs in their states than federal officials would. Under Warren’s plan, local governments would be required to work with minority investment managers to decide how the funds would be spent.
The federal government would also create guidelines for who would be eligible for the grants: they would be limited to entrepreneurs who are eligible for the Small Business Administration’s existing 8(a) program. To be eligible for that program, a business must be at least 51 percent owned and controlled by a socially and economically disadvantaged individual who has less than $100,000 in household wealth. This figure encompass a large percentage of minority families; according to the Federal Reserve, the median net worth of a black family is $17,600, while the median net worth of a Latinx family is $20,700.
Warren would also work at the federal level to increase the Minority Business Development Agency’s budget — she pledges to triple its funding in her presidential budget.
As with many of her other plans, the cost of this proposal would be entirely covered by Warren’s wealth tax, a 2 percent tax on every dollar of wealth an American owns above $50 million, and a 3 percent tax on every dollar of wealth above $1 billion. According to the candidate, the $7 billion investment would help create 100,000 new minority-owned businesses and as a result, provide 1.1 million jobs.
The startup capital gap, and why it matters
Warren’s proposal states the startup capital gap is the single biggest reason minority-owned businesses are less profitable on average than white-owned businesses. And that capital gap is vast.
The typical black entrepreneur, the candidate notes, starts a business with one third of the startup capital of the typical white entrepreneur. Part of this is due to difficulties receiving loans; another part of it is that minority families often have less wealth to invest in a family member’s startup than white families do. As a Stanford Business School report found, “Latino business owners tend to depend on personal savings and seed funding from friends and family to start their businesses,” and are “much more likely [than white entrepreneurs] to use personal guarantees than business assets to secure financing.”
Having less money at the beginning of a business makes it more difficult to attract money later on, as it limits the amount an entrepreneur can invest in things like prototyping, real estate, inventory, and marketing, all things that, when done successfully, attract new investors and credit.
While the wealth threshold to quality for Warren’s program may seem relatively low, $100,000 is far more than most minority families have on hand, according to Warren, who cites research that found $100,000 is roughly five times the median net worth of Latinx and Black families and more than ten times the median net worth of Native American families.
Warren’s plan invokes the language of reparations, something she has vocally endorsed on the campaign trail, particularly when it suggests that the government has an obligation to address the racial wealth gap, “because the government helped create that wealth gap with decades of sanctioned discrimination.” It is important to note, however, this policy is for all minorities rather than just for black Americans.
How Warren’s plan compares to other candidates’ plans
Warren released her plan ahead of the Black Economic Alliance’s presidential forum in South Carolina, which she will be attending alongside a number of other Democratic presidential candidates, including Cory Booker, Beto O’Rourke, and Pete Buttigieg.
Beto O’Rourke released his own small business plan on Saturday, focusing on women, communities of color, as well as small businesses more generally. His plan hopes to create 200,000 new small businesses to Warren’s 100,000, and pledges a $10 billion small business credit initiative for “economically distressed areas,” to Warren’s $7 billion Small Business Equity Fund. Notably, O’Rouke’s plan doesn’t give funding directly to small business owners in the form of grants. Instead it funds a range of programs designed to increase loan accessibility and reduce discrimination. Like Warren, he has pledged to triple investment in the Minority Business Development Agency in order to provide resources and mentorship to minority small business owners.
Booker is attending several South Carolina events around this weekend’s forum, and is expected to use his stops to discuss the racial wealth gap and growing small businesses owned by African Americans, although he has not released a specific policy proposal.
Others Democrats have proposed more small business-friendly policies. Both Beto O’Rourke and Tulsi Gabbard have suggested cutting or offering deductions on small business taxes, but proposals such as these fail to account for the wealth gap that prevents entrepreneurs of color from opening a business in the first place.
This plan fits in well with Warren’s myriad other plans
Warren has the most plans of any 2020 candidate, but almost all of her plans have the same overarching purpose: erasing the wealth gap. Warren’s overall platform is focused on what she calls “economic patriotism,” and this new plans fits right into that larger vision.
As Vox’s Ezra Klein explained:
Her newest proposal is grounded in these same themes: It disparages an “uneven playing field” and Warren argues that it will “move us closer to an America where everyone has a fair shot to succeed.”
Economic issues remain a top concern for Democratic voters, and by adding her entrepreneurial investment plan to her portfolio of “economic patriotism” initiatives, Warren continues to suggest that addressing that concern is one of her top priorities.