From the September 2003 issue of Entrepreneur

This year appears to be both the best of times and the worst of times for small, urban minority-owned businesses. Venture capitalists and large financial institutions are stepping up investments in minority-owned companies. Yet at the same time, some of the traditional backers of minority entrepreneurs--small local banks--appear to be slashing commitments to companies owned by African Americans, Asian Americans and Hispanics. Minority entrepreneurs have also been feeling the pinch while Congress debates whether to fund certain SBA programs.

Venture capitalists, large financial institutions and other forms of private equity appear to be realizing that minority-owned businesses are becoming a major market. In April, Merrill Lynch announced it would drastically expand its program for providing capital and advice to minority entrepreneurs. Other major investment houses such as Goldman Sachs have also created programs that fund minority businesspeople or establish VCs to target private equity to minorities. Meanwhile, several leading minority-managed VCs have weathered the economic downturn and are considering expanding. "The minority-owned VCs have done OK because they invest less money at one time than traditional VCs, so they're more diversified," says William Bradford, an expert on minority-owned businesses with the University of Washington, Seattle.

Financial institutions and VCs have good reason for focusing on minority-owned businesses. According to a report by research organization the Milken Institute, minority-owned firms are growing more than three times faster than nonminority companies and will eventually comprise the majority of U.S. businesses. What's more, institutions and VCs have watched minority entrepreneurs like Earvin "Magic" Johnson succeed in predominantly African American and Hispanic urban areas. Traditional financiers have realized urban minority entrepreneurs are the future of private equity, says Betsy Zeidman, an equity expert at the Milken Institute in Santa Monica, California. "The bursting of the tech bubble has actually helped minority-owned businesses, because many of them are in basic industries now looked on more favorably as information technology crashes."

As the private sector wagers more on minority-owned business, the historic bedrocks of minority entrepreneurs may be showing signs of recovery. With "S.1375" approved earlier this year, programs for minority business owners, including the HUBZone Program and the New Markets Venture Capital Program will be strengthened. One remaining problem: As smaller banks consolidate, they are pursuing larger clients and increasingly rejecting minority entrepreneurs. According to the Federal Reserve, Hispanic-owned companies get rejected for bank loans nearly twice as often as white-owned companies.

Experts who study minority entrepreneurship believe that, at least in the short term, federal programs remain vital. After all, according to the Department of Commerce, minority-owned companies still receive only 2 percent of all private equity investments. "There has been some improvement in the private sector funding minority businesses, but venture capitalists still mostly give money to people who are already in their social network," says Bradford, "and most minorities aren't yet in those networks."