Early Lessons Learned on Removing Barriers to Capital for the New Majority

Early Lessons Learned on Removing Barriers to Capital for the New Majority

In a few decades, Black, Latinx and other communities of color will make up the majority of the U.S. population. Yet the vast racial wealth gap—starkest between white and Black households—and barriers to accessing capital, launching and growing businesses, and building wealth will persist as these groups of people grow into the “New Majority.” These inequities are not only unjust; they are also an urgent economic imperative.

Entrepreneurship is one key pathway to economic growth and wealth-building. However, Black and brown business owners are usually constrained by undercapitalization and lack access to traditional advisor and investor networks. As a result, Black, Indigenous and People of Color (BIPOC) are less likely to be approved for small business loans, and when they are approved, receive lower amounts at higher interest rates compared to their white counterparts. The picture on the equity side of the equation is not any brighter. While at least 77 percent of venture capital is invested in white men, only 1 percent of venture-backed founders are Black. However, data has shown that, for most asset classes, firms managed by people of color exhibit returns that are comparable as those of white-managed firms.

Fewer than 1.3 percent of the $69.1 trillion in global assets under management are managed by white women and BIPOC, and only 1 percent of total assets are managed by Black people. That lack of diversity in venture capital and private equity results in a lack of diversity in the founders funded.

Only 1 percent of total assets are managed by Black people

Shifting these trends will require a fundamental shift of the systems that create these outcomes for the coming New Majority. Systems change requires the undoing and restructuring of policies, practices, and power structures that have long existed and maintained harmful inequities. These inequities have kept people in positions of limited resources, wealth, and agency. 

Current systems leave people of color out of the entrepreneurial and investing space, and as a result, money and talent is left on the table. To address this, it is not enough to simply identify restrictions to access and participation. We have to go beyond that. Rather than working on temporary fixes that overlook the complexity of historic and nuanced inequity, we need to change the rules and requirements of the systems themselves.

Living Cities has long used capital as a driving mechanism of change. When capital is deployed with a systems change strategy, it is possible to rewrite the rules that have perpetuated inequity. Living Cities spent time working with capital with the intention of uplifting low income people in cities. For over a decade, Living Cities has made impact investments through our two funds: the $38 million Catalyst Fund, which closed in 2008 and is fully repaid, and the $37 million Blended Catalyst Fund, which blends grant dollars, philanthropic and commercial debt and is fully deployed.

Yet, after all of this deployment, we looked at the data, and saw that despite all our hard work, the work of other allies in the field,  and the progress we achieved, there were still challenges that remained. 

So in 2018, we refocused the impact strategy for the Blended Catalyst Fund exclusively on testing innovative solutions to close racial income and wealth gaps. In addition, we have built a community of practice of principally Black fund managers and investors. This network, called Builders & Benefactors, helps us build evidence about challenges fund managers of color face in accessing investment and advisor networks, and helps us explore innovative capital structures to address racial barriers.

…we looked at the data, and saw that despite all our hard work, the work of other allies in the field,  and the progress we achieved, there were still challenges that remained. 

Now, with the support of the Ewing Marion Kauffman Foundation, we are determining the optimal design of a new Living Cities fund dedicated to closing racial income and wealth gaps, given our history, lessons from our work, and the needs of the field. We take seriously our unique position as a researcher in the field, and are committed to sharing what we learn along the way about innovative approaches to rewrite how capital systems work. We have identified racism as one of the root causes of inequitable systems, and now we are creating a refined strategy to close racial wealth and income gaps.

The proposed fund will: 

  • Provide emerging BIPOC fund managers access to seed capital as well as technical support to promote success.
  • Reduce the time it typically takes for a BIPOC fund manager to raise initial capital.
  • Enable the emerging BIPOC fund managers to establish a track record, gain credibility and be positioned for future rounds of funding.  This will in turn, create a virtuous cycle of funding for BIPOC fund managers with positive ripple impact to BIPOC founders.

 By providing emerging BIPOC fund managers with the tools for success, and supporting them to overcome structural barriers, we are helping their ability to pay it forward by investing in BIPOC entrepreneurs who will then generate wealth for their communities. These interventions will also help change the inequitable systems in place that prevent BIPOC individuals from fully engaging with our economy, creating a cascading effect that can spur further investment in communities of color. 

Because of our intentional shift with our Blended Catalyst Fund in 2018 to test opportunities for closing racial income and wealth gaps, we have an understanding of what helps to remove barriers to capital for people of color. We are still working on structuring and researching our new fund, but we also know that many others are thinking about how we can use the tools of capitalism to undo the legacy of racism in places. 

We do not claim to have all the answers, but we do have lessons we’ve learned so far and stories we can tell from the investments we’ve made to date. Over the next several weeks, as a part of our Capital for the New Majority series, we are going to be sharing these lessons and the stories of our investees and the work they’ve done. Follow along to see where we have been and where we are going.

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