2020 was an unprecedented year for many people across the United States. Families were separated, millions of people lost their jobs and thousands of companies went out of business. In fact, roughly 200,000 U.S. establishments closed permanently in 2020. By the end of April 2020, the number of active business owners in the United States plummeted by 3.3 million. That’s roughly a 22% drop in business ownership in just four months. To date, the 2020 drop in business owners is the largest on record.
The losses among businesses and business owners have been felt across nearly all industries. Business owners from traditionally underrepresented backgrounds were some of the most affected from February to April 2020. The number of Hispanic business owners fell by 32%, Asian business owners fell by 26% and immigrant business owners fell by 36%. The number of female-owned businesses also dropped by 25%. Black businesses were arguably hit the hardest. Within the first four months of 2020, they experienced a 41% drop in business ownership.
However, according to one study by the National Bureau of Economic Research (NBER), which included participants in eight states — Georgia, Kentucky, New York, Tennessee, Texas, Vermont, Florida and Washington— some cities across the country experienced an increase in registered businesses following the initial decline. Much of the increase had to do with the passage of the major federal relief packages towards the mid part of 2020. While the relief was not meant to directly support new business formation, it did provide entrepreneurs with the capital to create and register for new businesses, and many did. What is most unique about the information gathered from the NBER study and the Startup Cartography Project is that the startup growth was not contained to traditional business hubs. Instead, most areas of growth were centered in cities where there is a high percentage of African Americans, as well as a higher than average median income. For example, In New York City, while Manhattan experienced a decline in registered businesses in 2020 relative to 2019, the Bronx and Brooklyn registered significant improvement, allowing New York City to see an overall increase. Cities with above-average Black populations, such as Houston, Atlanta and Miami, also saw an almost uniformly positive increase in new business registrations by the mid to later part of 2020. According to the study, while racial inequalities continue to persist in entrepreneurship, this uptick in Black-owned business ownership might help turn the overall tides of Black entrepreneurship.
Robert F. Smith Encourages More Growth Through The 2% Solution
While there has been an increase in Black entrepreneurship among higher than average median income Black neighborhoods, not all Black neighborhoods have been so lucky. Many less affluent communities and African Americans in those communities are still suffering from the effects of systematic racism and the racial gap that still has not been closed despite many efforts. Entrepreneur and philanthropist Robert F. Smith advocates for a specific solution that would help close this racial gap: The 2% Solution.
The 2% Solution calls for companies throughout the United States to invest 2% of their profits each year for the next 10 years into communities that have been systematically held back by the racial wealth gap, many of which are Black communities. However, Smith, and others that support the 2% Solution, do not call the solution charity. Rather, these investments would be focused towards building Black healthcare, education, infrastructure and finance in communities, or socio-economic areas, that have long been neglected.
Furthermore, as part of The 2% Solution, Smith calls these companies to particularly focus their efforts on Community Development Financial Institutions (CDFIs).
“The deprivation of capital is one of the areas that creates a major problem to the enablement of the African American community,” said Smith. “The first thing to do is put capital into those branch banks to lend to these small businesses to actually create an opportunity set…drive it into these small businesses, which employs 60%-plus of African Americans.”
In other words, these CDFIs can be the vehicle to help infuse capital into Black businesses and Black communities. Entrepreneurs in Black communities can use loans from those institutions to help start their businesses. Once the startup gets off the ground, the money can go right back into the neighborhood. This is a solution that can help foster growth in businesses well into the future, starting with a 2% investment this year, and for many years to come.
Learn more about The 2% Solution and Robert F. Smith’s involvement in the initiative.