Our Small Business Toolkit reveals two crucial insights about San Diego as the metro seeks to hone its focus and build a more inclusive post-pandemic economy:

• Lagging Firm Density: the number of Latino-owned firms in the San Diego Metropolitan Area are lagging. Even though the Metro performs better in the overall index than Orlando (FL), it trails it in terms of the business density of Latino-owned firms (Orlando has 8.1 Latino-owned business per 1,000 Latino residents and the gap with non-Latino-owned firms is smaller). San Diego should look to Orlando for strategies to grow its number of Latino-owned firms.
• Sectoral Emphasis for Growth: Latino-owned firms are overrepresented in Construction, Accommodation and Food Services, and Administrative and Support. Simultaneously, they are underrepresented in the Professional and Technical Services sector[91] (15% vs 20% for non-Latino-owned firms). A strategic long-term approach should target sector diversification in San Diego.

 

El Paso, Texas

El Paso ranks 42nd among the top 100 metros in the Latino-owned Business Index. When compared to other metros with similar demographics, the MSA trails San Antonio (20th) and Albuquerque (24th). Prior to the pandemic, El Paso hosted more than 53,000 Latino-owned firms. In other words, Latino-owned firms accounted for 74% of all firms in the metropolitan area, while 83% of El Paso’s residents identify as Latino. However, disparities start to be revealed when we breakdown employer and non-employer firms. The participation of Latino-Owned employer firms is much less equitable: There are 11,300 firms with paid employees in El Paso, and only 44.4% of them are Hispanic-Owned firms (a total of 5,000 Latino-owned employer firms).

El Paso Latino-Owned Employer Business Baseline pre-COVID

Our Small Business Toolkit reveals three crucial insights about El Paso as the metro seeks to hone its focus and build a more inclusive post-pandemic economy. Taken together, the data shows significant limitations for the ability of Latino-owned firms in the Metro to grow and scale. Addressing this challenge is one of the most important steps to building a more inclusive post-pandemic economy in El Paso.

• Low business density for employer firms: The business density of Latino-Owned employer firms is 4.5 times lower than the business density of Non-Latino-Owned firms. The metro should focus on growing the number of employer firms for an inclusive recovery. One option for doing so, would be to focus on helping the high number of non-employer firms grow into employer firms.
• Focus on growing the Size of Firms: Non-Latino-Owned Firms in the El Paso Metro are more than double the size of Latino-Owned Businesses (this gap is larger than what we observe nation-wide). A closer look at the data shows that among its peers, El Paso ranks around average in annual sales for its Latino-Owned Firms, but far below Knoxville ($2.1M), Raleigh ($1.7M), and Baton Rouge ($1.6M). El Paso’s Latino-owned firms are, on average, smaller than Latino-owned firms nationally. A recovery strategy should focus intensely on reducing barriers to Latino-owned firm growth in El Paso.
• Diverse Sector Makeup of Latino-Firms: El Paso is unique in its sectoral distribution of Latino-Owned firms: Latino-Owned Firms are more distributed across Industries than in many metros in the country. Thus, a strategic approach involves more than sector diversification: scaling existing Latino-owned firms across sectors in El Paso is one of the key pathways forward to a more inclusive economy.

Tucson, Arizona

Overall, Tucson ranks 76th among the top 100 metros in the Latino-owned Business Index. The Tucson MSA trails almost all demographically similar metros. Among the three dimensions included in the index, Tucson MSA is particularly lagging in the number of Latino-owned firms, both in absolute and relative terms.

Before COVID hit, Tucson housed more than 19,800 Latino-owned firms. In other words, Latino-owned firms accounted for 24% of all firms in this Metropolitan Area, while 37% of the MSA’s population identified as Latino. These disparities are even larger when we focus on employer firms. Of the 15,600 employer firms in the Tucson MSA, Latino-owned firms only account for 8.4% (a total of 1,300 Latino-owned employer firms).

Tucson Latino-Owned Employer Business Baseline pre-COVID[10]

An initial look at the Tucson Latino-owned Business baseline shows the stark inequalities that Latino-owned employer firms face. As Tucson develops strategies to build a more inclusive post-pandemic economy, it should focus on strengthening the whole small business ecosystem. The city should especially focus on helping new firms start and grow, especially in higher wage sectors.

• Low business density: With a business density of 3.4 Latino-owned employer firms per 1,000 Latino residents Tucson’s business density lags far behind Non-Latino-owned firms (which is almost 6 times larger). This local gap surpasses gaps observed at the national level.
• Small business size: On average Latino-owned firms have half the sales of Non-Latino owned firms. This local gap surpasses gaps observed at the national level.
• Relatively diverse sector makeup: Tucson’s Latino-owned firms are not overrepresented in the Accommodation and Food Services and Health Care and Social Assistance sectors, but they are overrepresented in the Construction sector (17% vs 11% for Non-Latino-owned firms), which may partially explain the lower size of Latino-owned businesses in this metro.

 

Building an Inclusive Small Business Ecosystem

While each metro we profile has unique baselines and strategies, moving forward in each place requires a whole-ecosystem approach. The Venture Capital world often talks about startup ecosystems: overlapping networks of institutions that deliver coordinated, multifaceted support to grow and scale startups. This concept tends to conjure up images of the newest Silicon Valley app and be very race agnostic. However, like our colleagues at Next Street, we believe it should be applied to growing Latino-, Black-, Minority-, and Women-owned businesses.

We call the various institutions that make up ecosystems “intermediaries” because they serve as connections between public sources of funding, entrepreneurs of color, potential private sector customers, investors and partners. Intermediary institutions provide mentoring, help access capital, create marketplaces to connect companies and potential clients, aggregate supply from small companies to match with demand of large institutions, foster communities of practice, and help with critical transition points in the business life cycle. These ecosystems perform similar functions in the predominantly-white Silicon Valley tech world, we believe these functions should be applied to achieving inclusive growth.

We identified seven functions that the government, nonprofit, and private ecosystem organizations should individually or collectively perform to best support small businesses:

• Maintain Market Data through Scorecards: Maintaining real-time information on the number, size and sector of small businesses in general and minority and women-owned business enterprise (MWBE) in particular is vital to set benchmarks and goals. Local ‘scorecards’ with this data will help communities set reasonable targets for recovery from COVID-19 and measure progress against ambitious targets for small business creation. A local scorecard should also capture capital flows into small businesses, the availability of debt financing, and similar measures.
• Build Markets Through Procurement: Routinely collecting data, setting goals and publicly reporting progress on the procurement spend of large “anchor institutions” from MWBE vendors is crucial to growing market demand to support growth in the number and size of MWBE firms. By anchor institutions, we mean public sector entities, educational and medical institutions and major corporations. Ideally, a strong ecosystem should be capable of matching the demand coming from anchor institutions with the supply of MWBE businesses that can meet these needs; in other words, market-matching and market-building.
• Education & mentorship: Identifying, nurturing, and supporting firms as they develop intentional business strategies and gain access to the network of business service providers is vital to foster growth. Providing easy-to-access up to date information on practices such as accounting, borrowing, leasing, legal, tax, hiring, technology, marketing and customer and supplier relationships is a must. A strong ecosystem should also provide access to investor networks to marry technical assistance with capital provision, along with practices to support financial planning and fundraising.
• Access to Capital: Providing access to high-quality, affordable, and responsible capital across a broad continuum that’s aligned with the needs of small businesses at different stages of their lifecycles and in disparate sectors is vital to nurturing growth. The continuum of capital should extend beyond traditional debt products and include grants, equity investments, equity-like products (e.g., revenue-based financing) and tax advantaged capital. Doing this well takes skilled small-business finance professionals who understand how to structure transactions and the full range of capital sources. Good delivery systems also have robust customer-referral mechanisms, to ensure different organizations meet the unique needs of small firms.
• Business Districts: Managing and marketing the business districts and commercial corridors where many small businesses congregate and co-locate is crucial to growing the number and size of businesses. Special intermediaries include merchant associations, business improvement districts, community development corporations, and (where they exist) entrepreneurial incubators and accelerators.
• Streamlined Rules: Streamlining the paperwork required for starting small businesses, for example, is especially vital for reigniting entrepreneurship coming out of the pandemic. Many federal rules, in particular, have evolved over time, making effective and efficient administration incredibly difficult and rewarding economic incumbents with the expertise to navigate them.
• Sector Diversification: Local leaders need to develop strategies to foster strong sector diversity. Having a clear idea of the sectors where Latino- owned businesses are concentrated on a local level is vital information for developing strategies. For example, many Latino-owned businesses on a national level are concentrated in the construction and food service sectors. Understanding this is important for procurement goals, but also in targeting growth-focused resources.

In performing these functions, ecosystem institutions should mobilize local, state and federal resources as available and create channels to help entrepreneurs navigate public programs. New initiatives are cropping up to do just this.

In the supplier diversity space alone, the Economy League of Greater Philadelphia is bringing together, with funding from the federal Economic Development Administration, area hospitals, universities and leading corporations to use purchasing by large institutional buyers to grow Black- and Brown-owned small businesses via the Philadelphia Anchors for Growth and Equity (PAGE) Initiative. On the public side, LA Metro has developed a highly innovative two-tiered certification program to help firms in the construction industry benefit from federal infrastructure spending. The Aspen Institute Latinos and Society is gearing up to pilot Aspen E-Labs, an eight-month mentoring and national resource network program for high growth Latino-owned companies seeking to become “contract-ready.”

These are only a few of the multitude of examples which are emerging as best-in-class practices that can be replicated and scaled, the subject of a subsequent newsletter.

The bottom line is this: the COVID-19 pandemic has devastated businesses in the U.S., exacerbating what were already substantial ethnic and racial gaps in the number, size and growth potential of employer firms. A clear understanding of the pre-COVID baseline for Latino-owned firms is a needed step to ensure that our actions post pandemic grow not only the number of firms but their participation in high wage, growth sectors of our economy. As the baseline varies, so do the priorities in the small business ecosystem: while supplier diversity may offer opportunities for scaling Latino-owned businesses, education and mentorship may be more appropriate emphases in metros with a significantly low number of Latino-owned businesses. We hope that the Small Business Equity Toolkit provides a first step in giving metros a better idea of where they stand, goals they can set, and strategies they can pursue to grow Latino-owned businesses in the post-pandemic recovery.

Bruce Katz is the Founding Director of the Nowak Metro Finance Lab at Drexel University. Domenika Lynch is the Executive Director of the Latinos and Society Program at The Aspen Institute. Victoria Orozco and Colin Higgins are Senior Research Fellows at the Nowak Metro Finance Lab.

[1] Hispanics includes people with ancestry from Spain and Latin American Spanish-speaking countries, while Latino includes people with ancestry from Latin American countries regardless of language spoken, and excludes people from Spain or Portugal. In this article, we will use the terms Latino and Hispanic interchangeably and we will present only aggregate statistics for these two groups.

[2] https://www.mckinsey.com/industries/public-and-social-sector/our-insights/us-hispanic-and-latino-lives-and-livelihoods-in-the-recovery-from-covid-19

[3] 2018 Annual Business Survey (2018 ABS) and 2017 Nonemployer Statistics by Demographics (2017 2NES-D).

[4] 2018 Annual Business Survey (2018 ABS), 2017 Nonemployer Statistics by Demographics (2017 NES-D), and 2012 Survey of Business Owners (2012 SBO).

[5] 2018 Annual Business Survey (2018 ABS) and 2017 American Community Survey (2017 ACS).

[6] As Lowest-Paying Industries we are considering: (i) the Health Care and Social Assistance sector, (ii) the Accommodation and Food Services sector, and (iii) the Administrative and Support sector. Given that some firms do not specify the sector in the database, this percentage is the lower bound of the real percentage of firms in Lowest-Paying sectors.

[7] 2018 Annual Business Survey (2018 ABS) and 2017 American Community Survey (2017 ACS).

[8] This figure includes both employer and nonemployer firms.

[9] We use this sector as a proxy for highest-paying industries.

[10] As Lowest-Paying Industries we are considering only: (i) the Health Care and Social Assistance sector, and (ii) the Accommodation and Food Services sector. Data for El Paso MSA and San Diego MSA also include the Administrative and Support sector as part of these Lowest-Paying industries. However, there is no data for Latino-owned firms in the Tucson MSA operating in this sector.