Leveraging Entrepreneurship to Close Racial Wealth Gaps

Leveraging Entrepreneurship to Close Racial Wealth Gaps

The latest jobs report shows that our national recovery from the COVID pandemic and its economic impact will be slow and painful for millions of Americans, particularly those who did not have the luxury of wealth before the pandemic. It is increasingly clear that the capitalist system created for our society is not working for everyone, leaving some insulated from the wreckage of our economy, while others cannot escape. Without a change to the mechanisms of how our economy functions, there is no hope for a fully equitable recovery.

In our work at both the Kauffman Foundation (Philip) and Living Cities (Demetric), we have seen that entrepreneurship can be a fundamental pathway to economic growth and wealth-building. Yet, entrepreneurship is fundamentally different for those who have access to capital and those who do not. At least 83% of entrepreneurs do not receive either venture capital or a bank loan, leaving them worse off compared to their peers who are able to tap into capital markets. More recently, we have seen how this plays out in programs like the Paycheck Protection Program (PPP), where those who already had relationships with banks were able to tap into the funding while those who did not were left out.

Black entrepreneurs are less likely to be approved for small business loans, and when they are approved, receive lower amounts at higher interest rates.

These challenges are even greater for Black business owners. These individuals are unusually constrained by undercapitalization and lack access to traditional advisor and investor networks. Because Black people, and people of color more broadly, have suffered decades of systematic discrimination, they have less wealth compared to white peers. This disparity leads to a “friends and family” gap in funding. While many white entrepreneurs can rely on their own networks for seed funding and funding to scale, Black entrepreneurs are unable to do so. And therefore, in a vicious cycle, they also have less collateral to use as guarantees for loans.

As a result, Black entrepreneurs 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. 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 not significantly different than those of white-managed firms.

Fewer than 1.3 percent of the $69.1 trillion in global assets under the four major asset classes—mutual funds, hedge funds, real estate and private equity—are managed by white women and people of color, 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; therefore, investors are missing opportunities for higher financial return.

Capital decision-makers need to be knowledgeable about the history and root causes of the country’s racial wealth gaps.

Because Black and brown entrepreneurs continue to be the engine of employment in Black and brown communities, an equitable recovery requires us to rewrite how capital and access to capital work. To do so, capital decision-makers need to be knowledgeable about the history and root causes of the country’s racial wealth gaps. And, we need to explore new ways of investing in fund managers of color.

To begin to solve these challenges, Living Cities and the Kauffman Foundation are collaborating on an impact investing fund dedicated to closing the racial income and wealth gaps. The fund will invest in fund managers of color, and especially Black fund managers, to fill the capital gap and help entrepreneurs of color access more capital and grow their businesses.

The proposed fund will:

  • Provide Black, Indigenous, and People of Color (BIPOC) fund managers access to capital as well as technical supports to promote success.
  • Reduce the time it typically takes for a BIPOC fund manager to raise initial capital.
  • Enable 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 Black fund managers with positive ripple impact to Black founders.

By providing emerging BIPOC fund managers with the tools for success, and supporting them to overcome structural barriers, we are supporting their ability to pay it forward by investing in entrepreneurs of color who will then generate wealth for their communities.

This fund will build off the work for the Kauffman Foundation’s Capital Access Lab, which provides new kinds of capital to underserved entrepreneurs and communities in the US, and Living Cities’ Capital for the New Majority, which blends grant dollars, philanthropic debt and commercial debt to invest in innovative solutions for closing the racial wealth gap. Together, our two organizations will work to identify promising solutions and investment opportunities that help establish what it means to have an equitable recovery.

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