To succeed as an entrepreneur, do you need rich parents?

There is a firm belief that those who start highly successful businesses do so only with their intelligence, creativity, and the kind of innate entrepreneurial spirit that makes them destined to become billionaires.

One claim making the rounds on Twitter made it so If you drop the air One in a “third world country with $5 in his pocket”, he has turned into a millionaire within a few years due to the “traits, skills, and characteristics” that seem to be inherent in all ultra-high-net-worth individuals.

But research shows how much a person’s family background plays in achieving success. And a paper from economists Ross Levin and Yona Rubinstein found that entrepreneurs “tend to be male, white, better educated, and more likely to come from higher-income families.”

The tale of Microsoft’s rise to dominance begins with Bill Gates and Paul Allen humbly operating out of a garage – now a familiar trope in Silicon Valley. Oana Tokoyan, an economics lecturer at the University of California, San Diego, said that while Gates was not obscenely wealthy, per se, he grew up comfortably upper-middle class.

She said his family connections were crucial to Microsoft’s success.

According to CNBC, IBM, which was looking for a software maker to develop an operating system for its personal computer, tapped Microsoft for the project. Microsoft was on IBM’s radar because IBM chairman John Opel knew Gates’ mother, Mary Gates, through a nonprofit organization on which they were both on the board.

Even without such a direct connection that Gates had with IBM, Tokoyan said, family wealth is important in obtaining credit, because obtaining loans is conditional on obtaining collateral.

Tokoyan noted that trying to make it as an entrepreneur is inherently risky, and without family wealth, there is no safety net to fall back on.

Statistics reveal how risky it can be to start a business: About a third of all new businesses fail by their second year, and the other half by their fifth year, said John Deere, founder and president of the Center for American Entrepreneurship.

In some cases, Derry noted, the capital requirements for starting a new business are lower than they were five to 10 years ago — for example, it can be cheaper to market your product thanks to social media, while some companies work remotely rather than pay. for office space. But he explained that there is still a gap between the time you start a business and the time you actually start turning a profit.

“Most new companies lose money for several years,” he said. “If you have generational wealth, you don’t need to work another job to get money to pay the bills.”

But if successful, Derry said, it could be very profitable. “So there’s a very important relationship that goes both ways,” he said. “Generational wealth, entrepreneurship support, entrepreneurship that generates generational wealth.”

Tokoyan said that white men in general have more wealth to begin with, which means that women and people of color in particular are at a disadvantage.

While 17% of black women are trying to start or run a new business, only 3% are running “mature businesses,” according to a Harvard Business Review article. And 29% of black female entrepreneurs live in households with incomes of more than $75,000 compared to 52% of white men, according to data from Global Entrepreneurship Monitor.

“There are barriers throughout the entrepreneurship ecosystem that are especially holding back women and people of color,” said Gabe Horowitz, senior vice president of economics at Third Way.

Last year, Third Way launched a partnership with the National Urban League called the Coalition for Entrepreneurial Equality, which Horowitz said aims to change federal policy to help more women and people of color start and scale businesses. Next year, the AEE will try to figure out what “various policy tools” it needs to pull to improve justice. For example, Horowitz said more government contracts could be awarded to disadvantaged companies.

Horowitz said the data shows white entrepreneurs start with about $107,000 in working capital, while black entrepreneurs start with just $35,000.

“The costs of getting off the ground are steeper for both women and people of color,” Horowitz said.

Horowitz said companies sometimes struggle with financing because they don’t have relationships with lenders. He noted that companies with relationships with lenders were able to get help faster than the Paycheck Protection Program, which was intended as relief for companies during the start of the pandemic. And sometimes, there are few, if any, lenders in predominantly black or Latino areas.

“You don’t necessarily need the family wealth to start a business. There are many entrepreneurs who can go out and start a business and scale the business without having to,” Horowitz said. Your work gives you a huge advantage over others.”

Derry believes that expanding the American Entrepreneurship Act could be one way to diversify the field. This ruling will increase the cap on venture capital funds from $10 million to $50 million, allowing fund managers to invest in more entrepreneurs, and increasing the number of people allowed to invest in the fund.

There are also broad economic forces that have made it difficult for entrepreneurs to achieve success over the years.

“The competition in the market became more and more difficult for the little guy, because there was consolidation going on,” Tokoyan said. “Therefore, there are fewer and fewer opportunities for small businesses to compete successfully.”

Tokoyan said that 10 to 15 years ago, her students were more likely to say they were interested in starting a new business than they are now. Even if they have the resources, they still have student loans to consider. Some of them, she said, are now looking to investment banking, for example, because that is where they feel they will be most rewarded.

“We as a community believe in the freedom to pursue the American Dream,” Tokoyan said. “The extent to which young people’s life chances depend on their family’s resources is utterly un-American.”

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