Investing in Entrepreneurs and Leaders of Color
Although small businesses and business creation are key drivers of the American economy, entrepreneurs of color have consistently experienced barriers in access to capital. These barriers are the result of unconscious biases against people of color, historic inequities that have created a vast racial wealth divide over time, and challenges that certain groups face in raising capital through friends and family, given that social and personal networks in America fall along lines of both wealth and race.
How are impact investors working to support entrepreneurs of color? Below, we explore two general tools that can make a difference for investees of color: venture capital, to support innovative, high-grown start-ups; and investments intended to support the daily needs of small businesses across the United States. Within these general categories, impact investors contribute in a variety of ways, such as through direct investment, indirect investments via funds, and more.
Supporting leaders of color can spark broader social change. Leaders of color are also more likely to support investees or communities of color, such as through jobs, indirect investments, and more. Allocating investment capital to diverse leaders — whether they're direct investees or intermediaries like CDFIs with diverse leadership— can ultimately contribute to broader social changes.
Along the spectrum of risk, return, and tenor, the opportunities to make a difference are diverse and highly creative. Foundations also play a critical role in providing patient or low-interest loans that allows intermediaries, including CDFIs, to provide flexible terms to small businesses. For example, foundations like Surdna are looking at innovative investment tools, such as royalty financing and convertible notes, to bridge divides between equity and debt or different types of needs.
Foundations can build the impact investing field and attract other investors. For example, guarantees by Annie E. Casey Foundation and Kresge Foundation were catalytic components supporting Prudential Financial's investments in Invest4All, a fund for communities and entrepreneurs of color in Memphis, Atlanta, and New Orleans. Foundations can also support technical assistance for investees, offer influential connections that support investees for the long-term, and foster education and training to support entrepreneurship among youth, laying the groundwork for future generations.
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A tiny fraction of the total amount of venture capital goes to Black and Latinx founders. To address this, foundations and other investors are seeking to support founders of color in a variety of ways. For example:
- Lumina Impact Ventures, the impact investing division of Lumina Foundation, makes direct investments in ventures working to improve post-high school learning opportunities. Many of their investments support entrepreneurs of color. Examples include Upswing, Credly, and Care Academy.
Ford Foundation, Surdna Foundation, and others are making indirect investments in venture capital firms that have made express commitments to supporting investees that are underserved.
Lending to Entrepreneurs, Small Businesses, and Intermediaries
Debt is an important tool for businesses that are not ready or looking to rapidly scale. Yet small business borrowers, particularly those of color, are often unable to access traditional debt options that can help them manage gaps in cash flow, invest in improvements, grow, and much more. Many foundations are working to expand access to capital by providing patient or low-interest capital to intermediaries that can provide responsible debt to underserved entrepreneurs. Intermediaries with expertise in impact investing include community development financial institutions (CDFIs), such as credit unions and loan funds. Examples of investments of this kind include:
- The Detroit Entrepreneurs of Color Fund, managed by the Detroit Development Fund with investments and grants for technical assistance by W.K. Kellogg Foundation.
- Investments in place-based CDFIs in the American South, by Mary Reynolds Babcock Foundation.
- Invest4All, a fund for communities and entrepreneurs of color in Memphis, Atlanta, and New Orleans, supported with guarantees by Annie E. Casey Foundation and Kresge Foundation and investments by Prudential Financial.
- Investment by and for Native CDFIs, by Northwest Area Foundation
#BankBlack: Supporting the Disappearing Industry of African-American Owned Banks
The number of African American owned banks have declined from 91 to 19 between 1987 and 2018, attributable in part to competition and the commitment that many these banks have to serving low income communities. As the communities they serve experience underinvestment and disinvestment, including from the banking system, African American owned banks have also felt the consequences.
- Prudential Financial places a total of $47.8 million cash deposits and other liquid assets (as of 2019) with minority depositories, and minority and veteran-owned money managers across the United States. Learn more about why in this Stanford Social Innovation Review essay by Lata Reddy of Prudential Financial, part of a series on racial equity and impact investing curated by Mission Investors Exchange.