By Jerry I Porras/ Victor Arias
With better access to loans, investment, and contracts, this rapidly growing sector could benefit even more Americans.
Cesar Madrueno came to the U.S. in 1980 at age 18 with little English and a strong drive to succeed. Fueled by grit and entrepreneurial aspirations, he developed a passion and expertise for the manufacturing of electrical harnesses — equipment that is essential to the auto industry as well as agriculture, semiconductor, and a range of other industries.
Today he is the founder, president, and CEO of Golden State Assembly Inc. Madrueno’s goal is to be an industry leader in his field and he is well on his way; in 2020, Golden State Assembly generated over $125 million in revenues and employed over 250 people. Last year, the company was acquired by an investment group with Madrueno staying on as CEO.
Madrueno is one of five million U.S. Latino business owners who have built companies that are solving customer problems, creating jobs, and generating wealth in both Latino and non-Latino communities. They represent an often overlooked, but rapidly growing part of the U.S. economy.
Over the last decade and a half, Latinos have created companies faster than all other demographic groups in the U.S. These companies are younger and consequently smaller than the average business. However, when compared to white-owned businesses, they grow revenues and create jobs at faster rates for all Americans, not just Latinos. And those jobs come with better benefits and growth opportunities for employees. Our country stands to gain considerably from the growth of these businesses founded by inventive and resilient entrepreneurs who are determined to succeed.
Latino entrepreneurs have made enormous gains, yet structural barriers continue to prevent them from reaching their full potential. The most recent research from the Stanford Latino Entrepreneurship Initiative (SLEI) based on a national survey of over 10,000 U.S. business owners shows that two of the most alarming impediments to the growth of Latino-owned businesses are accessing capital and securing corporate and government contracts.
We found that Latinos encounter significant challenges in obtaining both debt and equity financing. On the debt side, Latinos do not receive loans at the same frequency or of similar amounts as white-owned businesses, even when they are equally, or even better, qualified across a broad array of business metrics.
It would be easy to call for government regulation to assure leveling of the playing field. However, we believe that the banking industry can step up and regulate itself as a way of mitigating more involvement by government agencies. Commercial lenders must agree to become more transparent in publicly reporting the aggregated outcomes of their loan decision-making processes and submit themselves to regular, industry-led audits of their final loan decisions. Given the magnitude of the funding opportunity offered by this high-growth sector, publicly leveling the playing field for Latino entrepreneurs would be highly beneficial, not only for them, but also for all financial services organizations and the American economy overall.
On the equity side, although more than 10% of all Latino-owned employer businesses are in the tech field, less than 1% of all VC funding in 2021 went to Latinos. Transparency of VC investment decisions should also be required.
Recent SLEI research has also shown that Latino-owned companies receive smaller contracts from both corporations and governments than white-owned companies, while taking substantially longer to close on the awarding of those contracts. All contracting agencies, both public and private, should be required to publicly disclose their performance on these two dimensions and justify any resulting differences. Accountability is fundamental to ensuring equitable access to the growing number of corporate and governmental contracts.
Here’s the bottom line: Latino-owned businesses, on average, generate annual revenues substantially lower than white-owned businesses. Herein lies an opportunity. The latest data available show that if the 4.3 million Latino-owned businesses in existence that year had the same average annual revenue as their non-Latino counterparts, they would have contributed at least an additional $2.1 trillion into our economy.
To put this in a wider perspective, in 2020, U.S. Latinos generated approximately $2.8 trillion in GDP (13% of 2020 U.S. GDP). If U.S. Latinos were a country, it would be the fifth largest GDP in the world, growing faster than the U.S. economy.
Closing the Latino business revenue opportunity gap will take time and hard work. Since founding the Latino Business Action Networkopen in new window over a decade ago, we have worked to accelerate the growth of Latino-owned businesses through education, research, and the creation of an ecosystem that fosters growth and connections. But it’s time to work together to remove barriers and empower Latino entrepreneurs to reach their fullest potential. Latino business owners have demonstrated their commitment to succeed. Supporting their continued growth will be a worthwhile investment in our country’s economy.
See Original Article at Graduate School of Stanford Business
