The Effect of Wealth and Race on Start-up Rates

By Maritza Salazar (BCT Partners, LLC), 2007. 35 pages

Newark, NJ 07103 under contract no SBAHQ-05-M-0416

This report was developed under a contract with the Small Business Administration, Office of Advocacy, and contains information

and analysis that was reviewed and edited by officials of the Office of Advocacy. However, the final conclusions of the report do not 

necessarily reflect the views of the Office of Advocacy.

Purpose

The notion that it “takes money to make money” 

is commonplace in public discourse. Indeed, some 

researchers find that the ability to start a business 

would be greatly impaired without some form of 

financial assets or net wealth. Others, however, 

have found that some businesses do not require 

large amounts of start-up capital, and therefore, one’s financial position has little to do with 

whether or not an individual is able to start their 

business.

Understanding the role of wealth in predicting 

the likelihood of becoming self-employed may be 

particularly relevant for nascent minority entrepreneurs.

This research uses the Panel Study of 

Entrepreneurial Dynamics (PSED) to uncover 

whether wealth affects the start-up outcomes of 

minorities and nonminorities differently

Overall Findings

At first glance, net wealth is not found to be related to the likelihood that an entrepreneur will start 

a company. However, a more fine-grained analysis 

shows that net wealth is positively correlated with 

the probability that a nascent entrepreneur will 

start a new company if the nascent entrepreneur 

is in the top 25 percent of the wealth distribution. 

This research also shows that wealth affects the 

outcomes of minority entrepreneurs slightly differently than it influences the outcomes of their 

white counterparts.

Highlights

• The results show that Black and Hispanic 

nascent entrepreneurs face greater odds in opening 

a business than do their nonminority counterparts. 

Race is a significant predictor of opening a business, and the odds of a minority person opening 

a business are found to be 55 percent lower than 

those for a nonminority. 

• Female nascent entrepreneurs in the sample 

were also less likely to start a business than males. 

• Having a parent who was or is an entrepreneur 

has no influence on the likelihood of opening a 

business.

• Those individuals who sought start-up dollars 

from financial institutions were more likely to operate their business successfully than those who did 

not seek financial assistance.

• Nascent entrepreneurs with no experience in the 

industry of their start-ups were less likely to open a 

business than those with experience.

• Other factors for which the researcher tested 

hypotheses were also not as important in influencing the likelihood that a nascent entrepreneur will 

open a business. These include the existence of a 

business plan, locating in a “high technology state” 

(California, Massachusetts, or Texas, as defined by 

the author), the size of the nascent entrepreneur’s 

household, the number of partners in the start-up, or 

the level of educational attainment.

Scope and Methodology

The authors analyzed the impact of wealth on 

business creation using a multi-year sample from 

the PSED where nascent entrepreneurs were interviewed in 1998, 1999, 2000, and 2001. Several 

decisions were made regarding truncating the data 

sample for the analysis. First, any respondent 

who reported that a firm would be sharing over 

50 percent of the start-up was removed from the 

sample to ensure that the entrepreneurial activity 

of individuals (and not firms) is being assessed. In 

addition, based on other studies using the PSED 

July 2007 No. 307
dataset, only respondents between the ages of 25 

and 45 were examined. Respondents not within 

this range were excluded from the sample, as very 

few were involved in entrepreneurial activity.

To study the relationship between the likelihood of opening a new business and underlying 

factors including race, net wealth, and other personal characteristics, the author estimated a logistic regression specification with the binary outcome of whether or not an entrepreneur opened 

a business at any point during the evaluated years 

of the study.

This report was peer-reviewed consistent with 

Advocacy’s data quality guidelines. More information on this process can be obtained by contacting the Director of Economic Research at 

advocacy@sba.gov or (202) 205-6533.

Ordering Information

The full text of this report and summaries of other 

studies performed under contract with the U.S. 

Small Business Administration's Office of Advocacy 

are available on the Internet at www.sba.gov/advo/

research. Copies are available for purchase from:

National Technical Information Service

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Springfield, VA 22161

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