The Black Tax: The Unseen Hand that Henders Blacks Founders In The Friends and Family Round

Bill HustonAlternative Finance, Community Capital, CrowdfundingLeave a Comment

Black Business

Introduction

Black Professionals work hard and save to pay for their college education, but there is an unseen hand often referred to as the Black Tax. After 400 years in America, Black people find themselves on the losing end of the racial wealth gap. According to a Federal Reserve Report, White people own 86% of the nation’s wealth but they only make up 60% of the population, and Black people make up 13.4 % of the population, but only own 4.2% of the nation’s wealth. According to the Zero Wealth, the median wealth will be zero if we continue on the same road we have been on for the last 400 years. Today,  White wealth is diversified among real estate, equities, and other assets, whereas non-white wealth is mostly in pensions and real estate and this lack of diversity puts this small slice of the wealth pie at even higher risk.

Why is Wealth an Important Measure of Financial Health

Wealth is a crucially important measure of economic health—it allows families to transfer income earned in the past to meet spending demands in the future, such as by building up savings to finance a child’s college education. We will, in this post, examine some of the major periods in US History when wealth drives the Black Tax and lack of access to capital for Black-owned businesses. The Black Tax is one side to the same coin that limits Black founders’ ability to raise funds from friends and family. We will also explore why rewards crowdfunding on Fund Black Founders and the 10K Project are the new alternative for Black founders to tap the friends and family round. 

King Cotton and The Expansion of the Black-White Wealth Gap

The slave economy of the South had international economic reach since the majority of cotton was sold abroad; it connected the United States to the international marketplace. In other words, slave-picked cotton made the United States a global economic power based on this cash crop that drove the Industrial Revolution. In 1793, Eli Whitney revolutionized cotton production when he invented the cotton gin, a device that separated the seeds from raw cotton. According to Steven Deyle in 1860, the value of the slave population was “roughly three times greater than the total amount invested in banks,” and it was “equal to about seven times the total value of all currency in circulation in the country, three times the value of the entire livestock population.

Redlining and The Genesis of the Hood

Post emancipation barriers include legally mandated segregation in schools and housing, discrimination in the labor market, and redlining, which reduced access to capital in Black neighborhoods. We are going to deeply delve into what Redlining is and how the impact of this racially motivated practice continues to impact the Black-White wealth gap. Redlining was the racist 1930s-era housing policy that effectively blocked Black families from obtaining loans and continues to widen the wealth gap. Homeowners in redlined neighborhoods have earned 52% less in home equity than those in greenlined areas over the last 40 years. Black homeowners are nearly five times more likely to own in a formerly redlined neighborhood than in a greenlined neighborhood, resulting in diminished home equity and overall economic inequality for Black families. Redlining resulted in the national homeownership rate being lower for Black families than white families—44.0% versus 73.7%

Understanding the Impact of the “Black Tax” on Black Founders

What is the Black Tax? The term “black tax” is commonly used in South Africa, where it refers to the financial support that Black professionals are expected to give their extended families. In the U.S. it also describes the racial dimensions that perpetuate a cycle of inequality such as lower pay and a lower standard of education, and a lack of access to capital for homeownership and business investment. How does this impact access to capital for Black Founders? In 2016, the Center for Global Policy Solutions reported that due to discriminatory financing practices and a bias towards companies primarily operated by white males, America is losing out on over 1.1 million minority-owned businesses, and as a result, foregoing over 9 million potential jobs and $300 billion in collective national income.

Systemic Barriers To Seed Funding for Black Founders

There is a systemic bias spawned by decades of a lack of diversity in the venture capital space that is almost totally homogenous at the top. Where 40 percent of VCs come from only two schools, Harvard and Stanford, and they are over 80 percent White males this seriously hinders the growth and funding opportunity for Black founder communities. The privileged reality that many of these Harvard and Stanford-educated venture capitalists expect founders to raise funds from a family and friends round when the reality is the African-Americans have an average net worth of $11,000 compared to $144,000 for white Americans. With this lack of access to early capital and generational wealth, most family members and friends can not invest, regardless of how great the idea or desire is.

Rewards Crowdfunding is a Solution to the Friends and Family Round

Normally when you begin to raise capital for a new venture, friends and family funding is often the first place you turn to raise some capital. This is a form of crowdfunding that allows the founder to pitch their business directly to a group of friends and family in a form very similar to rewards or seed crowdfunding. The 10K Project and Fund Black Founders have taken the place of the friends and family round in the Black founder’s capital acquisition journey. The average Black founder is not going to be able to go directly to a friend or family member and ask for $10,000 as an initial investment in the early start-up phase of the investment cycle. Fund Black Founders and the 10K Project play a very pivotal role in the process for Black founders. The visionary founders and CEOs at these two companies have created culturally specific programs suited and constructed for the many issues that face Black founders by creating and nurturing a custom-tailored culturally relevant crowdfunding literacy program to serve this very specific startup community.

Why The Friends and Family Rounds Is Needed For Funders 

Typically, these friends and family investors are individuals willing to invest anywhere between $10,000 and $150,000 of their own personal finances because they feel loyalty and affection for the founders or are motivated by their startup idea. This type of early-stage financing is commonly referred to as a “friends and family” round. The close personal connection of friends or family members to the founder makes them a convenient source of initial funding. Given this intimacy, entrepreneurs may be tempted to accept money from such investors without following the corporate formalities that institutional investors require. Even when monies come from those closest to you, entrepreneurs should always carefully document each investment. This will help to avoid future conflicts while ensuring there is a proper foundation for future investment, and may even help to maintain clarity in case there is a need to go back to the well:

  1. The investor is usually a personal connection of the founder, is not necessarily a high-net-worth individual, and lacks industry knowledge to objectively evaluate the structure of the startup, its technology, or opportunities, but is willing to invest anyway
  2. The average investment is around $23,000
  3. The valuation of the startup is usually between $0.5 and $1 million
  4. Takes a shorter time to close, usually around two months, so it provides a speedier solution to the startup’s immediate financial needs
  5. Often turns into a continuous, long-term financing opportunity because of the pre-existing relationship
  6. Costs less than other rounds because of reduced transaction fees and lower legal fees due to the lack of due diligence and complex documentation

Key Takeaways 

It is important as Black founders and small business owners that we acknowledge and understand the historical realities that created and continue to drive the racial wealth gap. With this knowledge and understanding of the historical context we, as a community can begin to develop culturally specific solutions that address these issues. I believe investment crowdfunding can be a game-changer for the Black community, but we must address the culturally specific context we operate from in the capital aggregation space. Fund Black Founders has created a rewards or seed crowdfunding platform to raise capital from the crow. The 10K Project has developed an educational and investment platform to jumpstart the historically and culturally marginalized business owner to fill the friends and family round for Black founders and small business owners. For more information on how to access capital from the crowd in a manner that addresses these culturally specific issues please visit Crowd-Max.com

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