Improving Pathways to Entrepreneurship

To better understand the rapid expansion of new online businesses in the United States in recent years and the characteristics and experiences of online entrepreneurs, RAND partnered with Shopify, a major online business platform that represents approximately 10 percent of e-commerce sales in the United States and is a growing presence around the world,^[1] powering millions of businesses in more than 175 countries. RAND researchers analyzed data about online businesses from Shopify, as well as data from a RAND survey of Shopify business owners, to learn more about business owners' characteristics, their backgrounds, and the key challenges they experience and supports they use while operating their businesses (see the box below).^[2] The researchers found that Shopify is facilitating higher levels of business ownership among female and Black individuals in particular, which are two groups that have historically faced significant challenges engaging in entrepreneurship.^[3]

This research brief summarizes the experiences of entrepreneurs from these two historically underrepresented demographic groups that have begun to make traction in the online business space. It highlights key findings from research about the unique challenges and key supports that underrepresented entrepreneurs report as being particularly important for their businesses. Finally, it discusses the importance of these findings for policymakers and others interested in ensuring greater equity in entrepreneurial opportunity in the United States.

As shown in Figure 1, Black and female entrepreneurs appear to benefit from reduced barriers to entry associated with online business; around 66 percent of the business owners surveyed were women and 15 percent were Black. These proportions are higher than those for female (44 percent) and Black (7 percent) owners of comparable retail and wholesale businesses nationwide.

Online Platforms Offer New Pathways to Entrepreneurship for Black and Female Business Owners, Who Are Distinct from Their Nonminority Counterparts

Female and Black business owners have different profiles from other business owners. As shown in Figure 2, both demographic groups are newer to entrepreneurship than their male and White peers, respectively; 35 percent of men owned a business immediately prior to owning their current businesses, compared with 20 percent of women, and 27 percent of White entrepreneurs owned a business immediately prior, compared with 20 percent of Black entrepreneurs.^[4] Both female and Black business owners were also much less likely than their male or White peers to have consulted a financial or legal adviser when initially setting up their businesses (32 percent of men versus 17 percent of women; 25 percent of White business owners versus 10 percent of Black business owners). They also tended to have less start-up financing than other entrepreneurs; for both female and Black owners, there is roughly a 20–percentage point gap in the share reporting having more than $5,000 in start-up capital relative to their male or White counterparts. Finally, they have fewer personal financial resources to draw on; both groups reported lower personal household income.

These factors likely affect the types of businesses that female and Black entrepreneurs operate, detailed in Table 1. On average, female and Black entrepreneurs in the RAND survey sample own younger and smaller businesses (in terms of annual revenues) than male or White entrepreneurs, respectively. Business owners in both groups are less likely to report currently operating their businesses at a profit (56 percent of men versus 44 percent of women, and 52 percent of White business owners versus 35 percent of Black business owners). Eighty-three percent of Black business owners rely solely on their online businesses, without using physical storefronts, compared with 70 percent of White owners. Black owners are also much more likely than White owners to establish their businesses as LLCs (70 percent versus 52 percent); LLCs are more costly to establish than sole proprietorships but offer legal protection in the case of business losses. Both Black and female owners are less likely than their White and male counterparts to indicate that their businesses are corporations.

Black- and female-owned businesses also experience less revenue growth when other factors are accounted for, as shown in Figure 3, which compares business revenues of survey respondents in the year prior to their completing the survey (2021) relative to the following year (2022). The results show that female-owned business revenues grew by 88 cents during this period for every dollar of growth for male-owned businesses. Black-owned business revenues grew just 67 cents relative to every dollar of growth for White-owned businesses. These differences are apparent even after adjusting for prior-year revenue levels and other factors that might predict growth, such as household income and business age, type, and industry. These results could have multiple contributing factors, including differences in individuals’ goals for their businesses and challenges experienced by the owners over time.

Both Female and Black Entrepreneurs Experience More-Acute Challenges Running Their Businesses Than Their Male or White Peers

Compared with male owners, female owners report significantly greater challenges with running their businesses, as shown in Figure 4. Across several questions asked in the RAND survey (which spanned many aspects of running a business), female owners were more likely than male owners to report “very challenging” circumstances, and the most-sizable differences were for challenges related to attracting new customers (41 percent of women versus 32 percent of men), the unpredictability of business conditions (28 percent of women versus 22 percent of men), securing financing (23 percent of women versus 19 percent of men), and losing access to other potential sources of income because of time spent running the business (21 percent of women versus 15 percent of men).

Even more-pronounced disparities are evident for Black business owners relative to White business owners, as shown in Figure 5. Compared with White owners, Black owners are much more likely to report “very challenging” circumstances for securing financing (44 percent of Black owners versus 15 percent of White owners); attracting customers, domestically or internationally (46 percent of Black owners versus 35 percent of White owners); losing access to other potential sources of income (33 percent of Black owners versus 15 percent of White owners); paying for business inputs (24 percent of Black owners versus 10 percent of White owners); and paying for labor (15 percent of Black owners versus 8 percent of White owners), among other areas.

Black Business Owners Report Greater Difficulty Accessing Business Financing

Although both Black and female business owners report significant challenges related to securing financing, this is a substantially greater concern for Black business owners than for any other demographic group surveyed. Figure 6 shows the proportion of Black business owners who identified various dimensions of securing financing as very challenging. In particular, 47 percent of Black business owners described concerns about their personal finances as very challenging for their businesses, relative to just 23 percent of White business owners. Similarly, 40 percent of Black owners described meeting minimum financial requirements as very challenging, relative to just 13 percent of White owners. Black owners also reported identifying banks that they can work with (31 percent) and completing the loan application processes (29 percent) as very challenging far more often than White owners did (10 percent and 9 percent, respectively).

Black business owners were substantially more likely than White business owners to report having had loan applications for their online businesses rejected at any point in the past (36 percent versus 16 percent), as shown in Figure 7. This large difference in the experiences of Black and White business owners is robust to statistical controls to account for other characteristics of their businesses, such as revenues, start-up financing, location, industry, and business structure, as well as controls for owners’ personal characteristics, such as current household income and education of the business owner. These analyses suggest that business or personal characteristics may not be sufficient to explain the higher loan rejection rates that Black business owners report experiencing relative to their White counterparts.

The challenges that Black business owners face with accessing credit culminate in a higher, more time-sensitive demand for business financing relative to White business owners. When asked whether they would prefer to receive a smaller amount of funds for their business now versus a greater amount of funds one year from now, Black owners were much more likely than White owners to indicate a preference for receiving funds right away, even if they would not receive as much. As shown in Figure 8, 58 percent of Black owners indicated that they would rather receive $1,000 today than $2,000 a year from now, compared with just 27 percent of White owners. This finding underscores the greater financing challenges that Black business owners face relative to White business owners.

Female Entrepreneurs Report Challenges Using Tools and Marketing Channels and Navigating Financial and Legal Issues

In addition to being less likely than male owners to have previously owned a business, female owners were more likely to indicate challenges related to certain aspects of reaching customers and managing their businesses. In particular, in the area of attracting customers, a higher percentage of female owners reported finding it very challenging to find, use, and afford the costs of necessary tools or marketing channels, as shown in Figure 9. They were also more likely than male owners to describe greater challenges managing taxes for their businesses (22 percent of women versus 15 percent of men) and finding sufficient financial and legal advice (16 percent of women versus 12 percent of men). Overall, these results suggest that female owners (especially those newer to entrepreneurship) may benefit more from improved access to information, guidance, and support related to operating their businesses.

Black business owners were also far more likely than White business owners to cite key resources and supports as very important for their businesses, as shown in Figure 11. Black owners placed differentially higher importance on access to platforms for reaching customers and managing their businesses, obtaining low-cost financing, personal finances, online resources or training, and government and paid professional resources or training, among other areas. For example, 49 percent of Black business owners said that low-cost loans or credit were very important, relative to just 19 percent of White business owners.

Overall, these data highlight that female and Black business owners seem more acutely aware than male and White business owners of the aforementioned resources and supports that have facilitated their pathways into entrepreneurship. Platforms have been a key support for both groups. Both groups also report relying more heavily on their personal or family financial resources, underscoring the greater risks and challenges associated with their entrepreneurial activity.

Continued innovation to provide first-time entrepreneurs with additional resources has the potential to further reduce barriers to entry for these traditionally underrepresented groups. In particular, our findings suggest that increasing access to skill development, professional services or advice, and business financing may be helpful. For Black entrepreneurs in particular, supports related to navigating lending processes, eliminating inequities in lending, or leveraging data to enhance lenders’ capacity to finance newer and smaller online businesses may be especially important.

Notes

• [1] This number (Shopify’s market share of the U.S. e-commerce market) is based on the company's calculation of its 2022 U.S. gross merchandise value (excluding merchant sales made through offline channels).
• [2] Lisa Abraham, Gabriel W. Hassler, Benjamin K. Master, and Brian Phillips, "The Changing Nature of Entrepreneurship in the United States: Evidence from Shopify," RAND Corporation, WR-A3370-1, 2024.
• [3] Robert W. Fairlie and Alicia M. Robb, "Why Are Black-Owned Businesses Less Successful Than White-Owned Businesses? The Role of Families, Inheritances, and Business Human Capital," Journal of Labor Economics, Vol. 25, No. 2, 2007; Jorge Guzman and Aleksandra Kacperczyk, “Gender Gap in Entrepreneurship,” Research Policy, Vol. 48, No. 7, September 2019.
• [4] Black owner experiences are compared with White owner experiences, since White owners represent the majority of business owners in the sample. The results are similar if Black owners are compared with all non-Black owners.

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Topics

• Business Strategies
• Electronic Commerce
• Entrepreneurship
• Gender Equity
• The Internet
• Racial Equity
• Small Businesses