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

There is a lingering belief that those who have launched highly successful businesses have done so with nothing but their intelligence, ingenuity, and some sort of innate entrepreneurial spirit that makes them destined to become billionaires.

A claim doing the rounds on Twitter claimed that if you dumped one in a “third world country with $5 in his pocket”, he would become a millionaire within a few years due to the “traits, skills and characteristics” that are apparently inherent in all very wealthy individuals.

But research shows how much a role’s family background contributes to success. An article by economists Ross Levine and Yona Rubinstein found that entrepreneurs “tend to be male, white, more educated and more likely to come from high-income, two-parent families.”

The story of Microsoft’s rise to power begins with Bill Gates and Paul Allen working humbly in a garage – now a familiar trope in Silicon Valley. However, while Gates wasn’t super wealthy per se, he grew up comfortably in the upper middle class, said Oana Tocoian, an economics professor at the University of California, San Diego.

And her family connections were crucial to Microsoft’s success, she said.

IBM, which was looking for a software company to develop an operating system for its personal computer, tapped Microsoft for the project, according to CNBC. Microsoft was on IBM’s radar because IBM Chairman John Opel knew Gates’ mother, Mary Gates, through a nonprofit of which the two were board members. .

Even without as direct a connection as Gates has to IBM, family wealth is important for accessing credit because access to loans is conditional on having collateral, Tocoian said.

Trying to succeed as an entrepreneur is also inherently risky, and without family wealth there is no safety net to fall back on, Tocoian noted.

Statistics reveal how risky starting a business is: About a third of all new businesses fail in their second year and half in their fifth year, said John Dearie, founder and president of the Center for American Entrepreneurship.

Dearie noted that the capital requirements to start a new business are in some cases lower than they were five to ten years ago – for example, the cost of marketing your product may be cheaper through social media , while some companies work remotely instead of paying for office space. But, he explained, there’s always a time lag between when you start a business and when you actually start making a profit.

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

But Dearie said if you’re successful it can be very lucrative. “So there is a very important two-way relationship,” he said. “Generational wealth, supporting entrepreneurship, entrepreneurship generating generational wealth.”

Tocoian said white men generally have more wealth to start with, which means 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 women entrepreneurs live in households 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 ecosystem that specifically hold back women and people of color,” said Gabe Horwitz, Third Way’s senior vice president of economics program.

Last year, Third Way launched a partnership with the National Urban League called Alliance for Entrepreneurial Equity, which Horwitz says aims to change federal policy to help more women and people of color start and grow businesses. . Over the coming year, the EEA will try to determine “the different policy levers” it needs to improve equity. For example, Horwitz said more government contracts could go to disadvantaged companies.

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

“Just starting costs are higher for women and people of color,” Horwitz said.

Horwitz said companies sometimes struggle to get financing because they don’t have relationships with lenders. He pointed out that businesses that had relationships with lenders could get faster help from the Paycheck Protection Program, which was intended to provide relief to businesses early in the pandemic. And sometimes there are few, if any, lenders in predominantly black or Latino regions.

“You don’t necessarily need family assets to start a business. There are a lot of entrepreneurs who can go out, start a business and scale a business without having that,” Horwitz said. “However, and this is a big deal, having this at the start of your business gives you a head start over others.”

Dearie thinks the Expanding American Entrepreneurship Act could be a way to diversify the field. The provision would 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 a fund.

There are also vast economic forces that have made it even harder for entrepreneurs to succeed over the years.

“The competition in the market has gotten tougher for the little guy as there has been continuous consolidation,” Tocoian said. “And so there are fewer and fewer openings for small businesses to compete successfully.”

Tocoian said 10 to 15 years ago, his students were more likely to say they were interested in starting a new business than they are now. Even if they have resources, they still have student loans to consider. Some of them are now turning to investment banking, for example, because that’s where they think they’ll be rewarded the most, she said.

“As a society, we believe in the freedom to pursue the American Dream,” Tocoian said. “The extent to which young people’s opportunities in life depend on their family resources is deeply un-American.”