Investment Crowdfunding is Vital to Closing the Racial Wealth Gap

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Black-owned business
Introduction 

The Small Business Administration has decreased its loans given to Black-owned businesses by 84% since peaking before the Great Recession, according to research by the Cleveland Business Journal. Across the country, cleveland.com’s sister company, The Business Journals, analyzed lending and demographic data and found small businesses in majority-Black census tracts have less access to bank loans than locations in majority-white lots. 

Banks Are Not Lending to Black-Owned Businesses

In 2019, Black businesses received 3% of the Small Business Administration’s $23.2 billion in loans. The country’s four largest banks Chase, Bank of America, CitiBank, and Wells Fargo, combined 334 loans to Black-owned businesses in 2019, a 91% decrease compared to 2007. Bank of America awarded the most with 263, and CitiBank made the fewest with two. The banks combined 5,443 7(a) loans to all businesses for the SBA’s fiscal year 2019. 

The COVID-19 Impact

The pandemic has amplified the discrepancies. A National Bureau of Economic Research report in June found that the number of Black-owned businesses dropped 41% by April. Black-owned companies also didn’t receive as much Paycheck Protection Program (PPP) money. According to the New York Times, 75% of the loans were given to businesses in mostly white census tracts during the program’s first phase.

Venture Capital and Black Businesses 

2020 has been a year of unprecedented social and economic upheaval. Pre-COVID19, Black and Brown women founders were already at a disadvantage, receiving less than 1% of venture capital funding despite being the fastest-growing group of entrepreneurs nationwide. In 2010, Black tech entrepreneurs received just 1% of technology-based equity investments. The pandemic and ensuing financial crisis have made their economic security even more precarious. According to a recent report by the National Bureau of Economic Research, 41 percent of Black-owned businesses have been forced to shutter due to COVID-19 than 17 percent of white-owned companies.

So, where is Black America?

President Obama has recognized the private equity investment community as the leading opportunity for job creation and wealth generation in America and the solution for the U.S. becoming more competitive in the global marketplace. Today, Black America is missing out on a vital element required for job creation and wealth generation: an innovative infrastructure that focuses on high-growth entrepreneurship fueled by a pipeline of STEM ingenuity and risk capital. Such an infrastructure would be the foundation of capital investments necessary to fund an ecosystem of high-growth entrepreneurship. 

Investment Crowdfunding and Black Businesses

The roots of financial inequality have a deep history that impacts the racial wealth gap at a disturbing and alarming scale. While the average white family has a total wealth of $171,000, the average black family has only $17,600. The racial wealth gap results from centuries of discriminatory policies, restricting and erasing intergenerational wealth aggregation for black Americans. Wealth accumulation occurs through institutions such as banks and Venture Capital. The first has historically discriminated against black Americans in terms of lending. The second has favored those with wealth. Thus, a vicious circle has persisted. Without access to loans, black families and entrepreneurs could not build wealth.

Angels and VCs

Recently, we’ve seen two trends take off that have helped democratize wealth building. The growth of startups has opened up new markets of angel investing and venture capital investing. While these entities sit outside of banks and stock markets, their practices are similarly discriminatory. Studies have found that despite the significant success of diverse teams, only 1 percent of VC funds go toward black founders. Since neither one of the new funding mechanisms seem to level access to the capital playing field, Investment crowdfunding has become a beacon of hope for Black entrepreneurs and real estate developers.

The Regulation Crowdfunding Solution

The financial challenges facing black entrepreneurs are immense and complex. The majority lack the relationships that would get them to angel investors, venture capitalists, or a friendly bank loan officer. Investment crowdfunding platforms offer a unique opportunity to increase transparency and resources for capital investors and capital seekers to understand and break down inequalities throughout the financial industry. But Regulation Crowdfunding platforms hold the potential to break down barriers to funding black-founded startups, democratizing access to capital, supporting black livelihoods, decreasing economic inequalities, and supporting communities. Investment crowdfunding brings two other benefits to the Black community in community-led economic development and wealth building through inclusive investing. 

Key Takeaways

Regulation Crowdfunding shows a proportionate representation of Black-led businesses as of 2019, 13% of the population was Black. Black founders have run 11% of Honeycomb Credit’s campaigns,  and Seedinvest has seen 12% of Black founders’ campaigns. Black founders also see relatively success rates with their fundraises. According to Ben Blieden, co-founder/CFO of MainVest, 60% of companies with at least one African American founder have had successful raises on its platform, compared to the platform’s average of 63%. The success rate for black founders was 50% on Seedinvest, compared to a 69% average success rate on the platform overall. Buy The Block, the Black-owned Regulation Crowdfunding real estate platform was named a top 10 platform rated on capital raised in 2020.

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