Research suggests that family wealth plays a significant role in the success of business ventures. A paper from economists Ross Levine and Yona Rubinstein found that entrepreneurs tend to come from high-income, two-parent families. Family connections can also be important in accessing credit and networking opportunities. Additionally, having a safety net of family wealth can provide a cushion for entrepreneurs during the risky early stages of starting a business. However, it is also noted that starting a business can be rewarding and can also create more wealth for future generations. The report also highlights that the lack of family wealth can be a barrier for minority groups and women in starting a business.
It is often believed that successful entrepreneurs are self-made, with only their intelligence, creativity and innate entrepreneurial spirit to thank for their success. However, research suggests that family wealth plays a significant role in the success of business ventures. A paper from economists Ross Levine and Yona Rubinstein found that entrepreneurs tend to come from high-income, two-parent families.
One example of this is the story of Microsoft's rise to power, which began with Bill Gates and Paul Allen working out of a garage. Although Gates wasn't necessarily rich, he came from an upper-middle-class background and his family connections were crucial to Microsoft's success. The company IBM, which was looking for a software producer to develop an operating system for its computer, chose Microsoft for the project, in part because IBM director John Opel knew Gates' mother, Mary Gates, through a non-profit organization they both served on.
In addition to networking opportunities, family wealth is also important in accessing credit, as access to loans is dependent on having collateral. Starting a business is inherently risky, and without the safety net of family wealth, there is no fallback option. Data shows how risky starting a business can be: about 33% of all new businesses fail by their second year, and 50% by their fifth year, according to John Dearie, founder and CEO of the Center for American Entrepreneurship.
However, Dearie also points out that the capital requirements of starting a new business are sometimes less than they were five to ten years ago. For example, the cost of marketing a product can be cheaper thanks to the internet, and some businesses can operate remotely, eliminating the need for office space. Still, there is a lag between when a business is started and when it starts to earn a profit.
"Most new businesses lose money for years," he said. "If you have generational wealth, you don't need to be working another job to get compensated to cover the bills." But he also notes that if you do succeed, it can be very rewarding. "So there's a vital relationship going in both directions," he said. "Generational wealth, supporting entrepreneurship, entrepreneurship creating generational wealth."
It's worth noting that white men generally have more wealth to start with, and this puts women and minority groups at a disadvantage. According to a Harvard Business Review article, while 17% of people of color are trying to start or run a new business, only 3% of them run "mature" businesses. And 29% of minority entrepreneurs live in families with incomes over $75,000, compared to 52% of white men, according to data from the Global Entrepreneurship Monitor.
"There are barriers throughout the entrepreneurial environment that are specifically holding back women and minorities," said Gabe Horwitz, Senior VP of the Economic Program at Third Way. Last year, Third Way partnered with the National Urban League to launch the Partnership for Entrepreneurship, which aims to increase access to capital and resources for minority entrepreneurs.
In conclusion, while having a good idea and a strong work ethic is important, family wealth can play a significant role in the success of a business venture. It can provide access to credit, networking opportunities, and a safety net during the risky early stages of starting a business. However, it is also acknowledged that starting a business can be rewarding and can create more wealth for future generations. The lack of family wealth can be a barrier for minority groups and women in starting a business.
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