Entrepreneurship, by its very nature, is inclusive and diverse. And advances in technology have made it easier for anyone, anywhere to start their own business—so long as they bring passion and grit.
But that doesn't mean opportunity is equally distributed. What if the systems in place are stacked against you? To this day, systemic bias has a profound impact on how money behaves in people’s lives, affecting access to business resources, psychological security, and so much more.
We wanted to understand how these systems—particularly within traditional financing—were impacting underrepresented founders and their ability to thrive as entrepreneurs.
We surveyed 300 U.S. ecommerce small business owners and asked them a series of questions about their experiences with funding, their first year investments, and their overall business performance.
The data was sobering: women had a harder time getting funding from traditional sources like banks and their businesses earned less revenue on average. What’s more, Black, Indigenous, and People of Color (BIPOC) founders reported investing significantly more money in their business to earn the same amount of money as their white counterparts.
Below, we'll explore these findings and their broader implications.
Unequal terms: how funding disfavors women founders
It's no secret that big banks don't like small business loans. Only 28% of small businesses that apply for a loan through a legacy bank actually receive the funds they need, and rarely receive the full amount requested. While this may be well-known, our research found that gender plays a significant role in a bank lender’s decision.
Men are more likely to secure funding from banks
Where women were more likely to seek financial support from friends and family in their first year of business, our data found that men were more likely to secure financing from traditional sources. In particular, men were twice as likely to receive funding from banks. They were also more likely to invest revenue from a previous business.
What our research shows:
Top 5 funding sources for women-owned businesses:
- 71% used personal savings
- 24% reinvested revenue from sales
- 20% received financial support from family and friends
- 16% received a personal line of credit
- 12% received a business loan
Top 5 funding sources for men-owned businesses:
- 67% used personal savings
- 34% reinvested revenue from sales
- 30% received a personal loan
- 26% received a business line of credit
- 25% reinvested revenue from a previous business
Why it matters:
Unfortunately, this is consistent with research on gender bias in funding: small business loan and credit applications by women are rejected more frequently. In 2018, the average loan size for women-owned businesses was 31% less than that of businesses owned by men. And even though 40% of privately held companies are founded by women, only 2.8% of venture capital funding is received by women.
Men also benefited from having revenue available from their previous businesses to invest in new endeavors. “It just shows you that not everyone’s starting from the same place,” says Christie Pitts, a partner at Backstage Capital. “The fact that men have revenue from previous businesses to invest suggests they’re starting from a place of revenue generation. It’s a lot easier to create that again when you already have it.”
It just shows you that not everyone's starting from the same place. The fact that men have revenue from previous businesses to invest suggests they’re starting from a place of revenue generation. It’s a lot easier to create that again when you already have it.
How access to capital impacts revenue generation
We dug deeper to fully understand the relationship between access to capital—both personal capital and external funding—and business profitability. Our researchers found that men not only had more access to external funding, but they also had a higher income when they launched their business, and therefore had more personal capital to invest in their business from the outset.
So, when women founders were asked how much money they spent in their first year of business, it was unsurprising that they reported spending far less than men did. Unfortunately, our findings also confirmed that women-owned businesses made a lot less in their first year than men-owned businesses, as a result.
What our research shows:
- Women-owned businesses reported spending $29,000 and earning between $3,000 and $30,000 in their first year.
- Men-owned businesses reported spending $47,000 and earning between $30,000 and $100,000 in their first year.
Access to capital allows men to invest ~2x as much in their business and make ~3-10x more than businesses owned by women in their first year alone.
Why it matters:
Increased access to both personal and external capital directly impacts how much you can invest in your business—and how quickly you can grow it. The pre-existing gender wealth gap, compounded with men’s access to additional funding, means women don’t have an equal chance to compete in the market.
But there’s a psychological aspect to having access to capital, too. Wealth doesn’t just beget more wealth—it also ensures that when you fall, you land softly. There’s a profound sense of psychological safety in that, which allows men to take more risks in their business; to go “all in.”
“If I’m a man and I know that if my business doesn’t work out I can still return to a high wage, I may have a greater appetite for spending more on seeing my idea come to life. Whereas if I’m saddled by debt, or I’m a caregiver and have others that are dependent on me in order to survive, I’m going to be more hesitant into putting my life savings into something that might be risky. Women don’t have the same fallback options,” says Christie.
The color of money: how race affects financing
Racial bias makes accessing capital nearly prohibitive for BIPOC businesses—and it disproportionately impacts women of color. In a 2020 study, Crunchbase found that Black and Latinx founders represented just 2.6% of the total $87.3 billion in venture capital funding. The stats were even grimmer for Black women founders, who accounted for only 0.64% of all venture capital funding. Despite representing the fastest-growing demographic of new businesses.
Even before institutional funding, BIPOC communities don’t have the same access to personal capital or funding through their social networks. Where white founders report leaning on friends and family for extra cash to start their business, this isn’t as common for BIPOC founders. This is especially true for Black founders: while white families in the U.S. have an average net worth of $171,000, Black families have an average net worth of just $17,600.
And for BIPOC founders who succeed in starting their own business, their hard work in proving their excellence may be costing them more than it should.
It costs more to run a business if you’re Black, Indigenous, or a Person of Color
BIPOC founders reported spending twice as much money in their first year compared to white founders—even when controlling for revenue. Put another way, BIPOC founders have to invest twice the amount of money to earn the same amount of money as white business owners. This pattern also holds true when controlling for the number of employees, which our research indicates is the primary driver of business costs in the first year of business.
Put another way: BIPOC business owners have to invest 2x the amount of money to earn the same amount of money as white business owners.
What our research shows:
- White business owners reported spending an average of $33,000 in their first year (when controlling for revenue).
- BIPOC business owners reported spending an average of $65,000 in their first year (when controlling for revenue).
Why it matters:
Legacy banks have a long history of disadvantaging people of color with lower-quality credit products, at higher interest rates. That means the cost of borrowing is often higher for people of color.
In the U.S., this traces back to redlining and race-based underwriting practices aimed to edge Black families out of homeownership and effectively preventing them from building wealth. And though fifty years have passed since the Fair Housing Act, these injustices have shaped the demographic and wealth patterns of American communities today—and still persist in some form.
Lack of equitable opportunity for BIPOC communities to build intergenerational wealth has given white business owners another leg up: more social capital. In having stronger (and wealthier) networks to draw on when they start a new business, they have more access to resources, tools, and professional advice—at a discounted rate.
“Social capital improves economic efficiency. If you don’t have access to business resources, or just haven’t heard about them because no one in your network has talked about it, you’re probably paying full price for everything,” Christie explains.
None of this is made easier by the fact that financial literacy is often passed down with wealth, leaving racialized communities less-equipped to talk comfortably about their finances, or feel confident managing them. Both of which are key to running a successful business.
Shopify Compass: Financial Literacy Series
This educational series shines a light on wealth lessons, through intimate stories from Black financial experts and business leaders, that can help anyone level up their personal finances.Watch the tutorials
Alternative lending and community initiatives are a bright spot
Our data suggests that bias in funding may be forcing women and people of color—and to a greater extent, those at the intersection of both communities—to either self-select into industries that are less capital intensive or to operate at a smaller scale.
How do we put economic freedom into the hands of underrepresented founders? How do we solve for the social, financial, and technological friction that prohibits individuals from carving their own path? This is the time to reckon with these questions.
Correcting the imbalance in access to capital only solves for one of the barriers to economic freedom, but it’s a meaningful step in the right direction. Below are some organizations that are dedicated to investing in and propping up underrepresented groups:
- Backstage Capital is a venture capital firm that invests in companies led by underrepresented founders, including women, people of color, and LGBTQ+ founders. They've also launched four accelerator programs in Detroit, Los Angeles, Philadelphia, and London.
- Launched in 2015 in Canada, the US, Australia, New Zealand and the UK, SheEO is a women-led community of mentors and investors supporting women and non-binary founders.
- The Fireweed Fellowship is the first national accelerator program for Indigenous entrepreneurship in Canada. The program offers peer support, education, one-on-one coaching, mentorship, pro-bono professional services, as well as investment-readiness prep.
- For Shopify store owners, Shopify Capital is a funding option that determines eligibility based on store sales. Funding is proactively offered to store owners, alleviating common anxieties around lengthy application processes and uncomfortable in-person conversations that can expose founders to bias (unconscious or otherwise).
- Operation HOPE is a nonprofit organization working to expand economic opportunities and disrupt the racial poverty cycle. Shopify has partnered with Operation HOPE to remove traditional hurdles to Black entrepreneurship by providing Black founders with the tools, resources, and capital they need to succeed. We’ve pledged to provide up to $130 million in in-kind resources to help create 1 million Black-owned businesses by 2030.
Making entrepreneurship an opportunity for everyone
No one should be forced out of entrepreneurship. Entrepreneurship represents economic freedom. The freedom to pursue a bold idea; the freedom to make your own decisions; the freedom to do things your way.
At Shopify, we can’t have any meaningful conversations about making commerce better for everyone without first acknowledging that opportunities are not evenly distributed, and that for women and people of color, economic freedom has salient barriers.
And these barriers are holding us back as a collective. Creating more opportunities for underrepresented founders can unlock boundless potential that everyone can benefit from. It means more jobs created, more ideas to entertain, and more innovations to enjoy. And it comes with a significant economic upside, too. The gender and racial gap in funding alone is costing us roughly $4.4 trillion in missed revenue, by some estimates.
To make good on our mission, we need to ensure that everything we build at Shopify works towards making entrepreneurship accessible to everyone. So, to all the founders who are fighting for economic freedom; to the founders who face bias when trying to secure capital; to the founders who lack the financial fluency or a community to lean on: we’re here for you.
Start your dream business today—we'll help you every step of the way.
This data is based on survey data collected in October 2020 from 300 small business owners in the US. All values are rounded averages. All data is unaudited and subject to adjustment. All financial figures are in USD unless otherwise indicated. Although our data only reflects the implications of binary gender bias and racial bias in business, we know that transgender and non-binary founders are also affected by bias in institutional funding, as are people with disabilities, and people with intersectional identities.
Research by Lauren Cauchy
Illustration by Isabella Fassler
Data visualization by Kristyna Gottvald