The Impact of Hispanic Business: A Deep Dive into Hispanic Entrepreneurship

Highlighting Excellence, Exposing Barriers, and Defining a Plan of Action

The data found on this page comes from the Stanford Latino Entrepreneurship Initiative (SLEI), which is a collaboration between the Latino Business Action Network (LBAN) and Stanford's Graduate School of Business (GSB). Links to this data can be found at the bottom of this page.

The Rising Tide That Lifts All Boats

The Hispanic community stands to benefit from an increase in entrepreneurial success. However, so does the rest of the country. The statistics tell us that Hispanic firms serve a broader constituency than just Hispanics and that an increase in their wealth would impact the entire country. This is because "less than one-quarter of firms are in majority Latino neighborhoods," and "a majority of firms report that over half of their clients or employees are non-Latinos"². This combats a common misconception that Hispanic firms only exist within the boundaries of Hispanic enclaves. Instead, the data proves that Hispanic firms are everywhere, and they serve everyone: a clear indication that supporting Hispanic entrepreneurship is a rising tide that lifts all boats.

Breaking Stereotypes

A new generation of Hispanic entrepreneurs is already on the rise. Successful Hispanic immigrant entrepreneurs are "more likely to be millennials who came as children to the United States." The data shows that 86 percent of large ($1M+) immigrant-owned firms are owned by millennials who immigrated as children³. Some social scientists attribute this to "immigrant optimism", which is a phenomenon that describes how young immigrants have a unique motivation to perform and succeed because "the immigrant often takes on the challenge where others don't because he or she believes that in doing, so life will get better"⁷. This fact proves that often, stereotypes are wrong. Instead of taking jobs, young immigrants are coming to the U.S. and creating jobs that didn't exist before.

The Biggest Challenge for Hispanic Entrepreneurs: Scaling Up

The Facts of the Case

Although Hispanic entrepreneurs are overrepresented among startups, they are severely underrepresented among large employer firms. Businesses owned by Hispanics “make up only 6 percent of all business with employees and less than 5 percent of business with more than $1 million in revenue”⁵. This evidence makes it clear that the biggest challenge for Hispanic entrepreneurs is not starting a business; it’s growing one.

To interrogate this problem further, it’s essential to understand why Hispanic-owned businesses are having trouble growing. After slicing up the data, it’s clear that the biggest hurdle for Hispanic entrepreneurs is crossing the “employment threshold”. Among the universe of Hispanic business-owners, only 16% convert their businesses from a self-employed business to an employer business. Non-Hispanics, however, have a conversion rate of 36%⁵. So why are Hispanic entrepreneurs having trouble crossing the employment threshold?

Diagnosing the Problem

Do Hispanic business owners have different motivations that non-Hispanic business owners? If so, this might explain why Hispanic entrepreneurs are not scaling up and why they’re not hiring employees. Although this may seem like a tempting explanation for these differences, research shows that Hispanics and non-Hispanics alike list the same top three reasons for owning a business: “Greater Income,” “Wanted to be my own boss,” and “Balance work and family”⁵. Also, Hispanics and non-Hispanics list these motivations at almost precisely the same rates – there is virtually no difference in the motives of these two groups⁵.

Do Hispanic business owners choose to start their businesses in industries without growth opportunities? Indeed, Hispanic business owners don’t choose the same industries as non-Hispanic business owners. The top two industries for non-Hispanics are “professional, scientific and technical services” and “retail trade.” Meanwhile, the top two industries for Hispanics are “construction” and “accommodation and food services.” This difference, however, does not explain the scaleup gap. In virtually every industry, non-Hispanic owned businesses are larger than Hispanic-owned businesses⁵. This means that even if Hispanic entrepreneurs switch their industry choices to match the preferences of non-Hispanics perfectly, they would still be smaller. Differences in industry choice do not explain the scaleup gap.

Do Hispanic business owners receive the same financing opportunities as non-Hispanic business owners? No. In fact, “among those that attempted to receive growth funding from a financial institution, 6.2 percent of Latino employer firms did not receive the requested funds, compared to 3.1 percent for non-minority-owned firms”³. Other funding discrepancies exist, too. Hispanic firms have the “lowest number of loans from a financial institution among all demographic groups,” and Hispanic firms rely heavily on hard money, which usually comes with much higher interest rates³. Also, Hispanic firms have “the lowest numbers of business loans from federal, state, and local government, or government-guaranteed business loans from financial institutions”³. With these statistics in mind, it appears that the leading cause of the scaleup problem is a lack of access to funding. So, what can we do about it?

Looking for Answers

To find answers, we can ask Hispanic entrepreneurs what they need to secure funding. Many Hispanic entrepreneurs report a lack of preparedness that may be impeding access to external financing. To be more specific, Hispanic entrepreneurs often lack the documentation required to secure external funding. Among unscaled firms (<$1M), only 23% have tax returns, 16% have a current balance sheet, 13% have a financial plan, and 20% have a business plan³. Besides, many Hispanic entrepreneurs exhibit an uneasiness when it comes to securing external funding because of a previous loan denial, a lack of connections, or a feeling of being unqualified³. This psychological barrier is even worse among Hispanic women, who feel less qualified than men- also when holding firm size constant³. Acknowledging these barriers may be difficult, but it helps to create a roadmap for positive change.