Entrepreneurs build businesses, but they also help build communities—by creating jobs, delivering needed services, paying taxes, and more. Providing equitable access to the capital such entrepreneurs need to build their businesses is essential to creating a just society and to realizing our full economic potential as a nation. Unfortunately, a growing body of research shows that deeply embedded, systematic biases currently restrict access to capital for businesses led by women and people of color.
Philanthropic families can play a crucial role in helping to correct this market failure—and in building an economy that works for all through what the Arabella Advisors team, in a recent report, describes as “inclusive investing.”
The Challenge—and Opportunity
Between 2007 and 2012, more than 72 percent of new jobs in the United States were created by non-white business owners. Meanwhile, from 2007 to 2015, women-owned businesses created 1.24 million more jobs than male-owned firms, even though there were significantly more of the latter. Nevertheless, only 2 percent of venture capital funding currently goes to women entrepreneurs, and less than 5 percent of entrepreneurs backed by venture capital firms are black or Latinx.
According to Bitcoin Profit UK watchdogs, increasing access to investment capital for these groups represents a tremendous opportunity, from both an equity perspective and an economic one. We know, for instance, that startup teams with women founders generate more revenue per dollar invested than those with all-male founders—on average 78 cents vs. 31 cents. Meanwhile, companies with more diverse leadership teams generate more innovation revenue than less diverse companies.
We also know that philanthropy can play a catalytic role in unlocking capital for underrepresented entrepreneurs. To do so, however, it will have to go well beyond traditional grant-making efforts, using multiple levers and interventions to create an inclusive investing ecosystem.
As described in Arabella’s recent report, inclusive investing is “a set of investment practices that aim to ensure that capital reaches the most promising startups and businesses regardless of the race, gender, or circumstances of their owners.” It’s designed to address some hard realities of how capital markets currently work (and don’t) for different entrepreneurs. These include:
- The investor community’s lack of diversity (and lack of networks among women and communities of color): Only four percent of venture capitalists are black or Latinx. Meanwhile, 92 percent of partners at the top 100 VC firms are men, and more than half of those firms do not have a single female partner. Investors tend to work with those who are already in their networks and who look and sound like they do, creating a barrier to capital access for many entrepreneurs.
- The criteria that creditors and venture capitalists use: Once in the door, women entrepreneurs and entrepreneurs of color are still often on unequal footing. Creditors often use standardized rubrics to assess borrowers. These rubrics can include questions about the borrower’s assets, credit scores, etc.—and often include underlying assumptions that bias them against people whose communities and families may have fewer assets to put up as collateral and who may (relatedly) have had much less prior access to credit.
Collectively, such barriers can have reverberating effects. According to the Cleveland Federal Reserve Bank, 40 percent of black-owned firms did not apply for financing when they needed it because owners did not believe they would be approved, as opposed to 14 percent of white-owned businesses.
What Philanthropic Families Can Do
There are several strategies that philanthropists and social impact investors can implement to increase access to investment capital for women and people of color and to advance systemic changes to the structural barriers and biases they face in the capital markets. In the near term, philanthropists can use their own influence and capital to support women entrepreneurs and entrepreneurs of color. Over the medium term, they can help establish promising new financing models and intermediary vehicles that will amplify the reach and impact of their investments and attract new capital to the field by engaging new donor partners. And over the long term, they can work to transform the investment practices of mainstream investors and asset managers. To learn more about each of these opportunities, see the full Arabella report.
To get started today, consider taking these four simple steps:
- Talk to your wealth advisors and insist that part of your portfolio is invested with women and people of color portfolio managers, building toward a desired long-term goal (e.g. 30% of your portfolio managed by women by 2024)
- Work with your wealth manager to ensure some of your investments are directed to companies or funds like Community Development Financial Institutions (CDFIs) working in communities you care about. This is the essence of impact investing, where you are investing money and expecting competitive returns in companies or funds that will achieve a social or environmental good.
- Join a learning circle of other donors and investors who are trying to close equity and opportunity gaps.
- Use philanthropic capital – money already committed to a donor advised fund or foundation – to take risks, offer concessionary, catalytic capital, and explore innovative solutions in high impact-sectors to permit future scaling of problem-solving businesses.