Black people have faced economic inequality for hundreds of years in this country. Still, the recent Black Lives Matter protests have made this generation-spanning problem into a hot-button issue of our present time. The data is clear and consistent the United States remains an inequitable society. The preponderance of data identifies this fact when connecting and investing dollars into companies led by Black entrepreneurs. Still, the reality of the racial wealth gap also prevents Black entrepreneurs from access to capital that would allow them to get their ventures off the ground in the first place.
The Racial Wealth Gap
The historical reality of the racial wealth gap, the inherent disparity in median wealth between people of different races, most Black entrepreneurs don’t have access to a network that can provide them with a type of investment known as a “Friends and Family” round. As a result, they’re rarely able to make that crucial first step toward jump-starting a business. This reality factors into their lack of access to outside capital because banks are unreliable without significant collateral, and proximity to accredited investors is limited. In addition, the venture capital community has not prioritized or sourced from underrepresented groups to place investments.
Crowdfunding in the Black Business Community
But as crowdfunding wins acceptance in the Black business community, there may be a community-based solution to the persistent and historical racial wealth gap issue. This blog post describes the reasons for crowdfunding’s surging popularity and the impact it could have on Black entrepreneurs’ ability to attract investors and help these founders get the early-stage funding they need to get the train out of the station. Crowdfunding also provides the opportunity for the Black community to invest in these Black founders through inclusive investing that offers a new pathway for both individual and community wealth-building
What is Crowdfunding
Crowdfunding is the legal process of raising resources primarily through an Internet platform in the form of investment exchange for future products, lending, or equity is projected to have a profound influence on entrepreneurship. Investment crowdfunding will likely fund a sizeable number of startups and Black-owned businesses, resulting in a new pipeline of crowdfunded ventures. The investment crowdfunding model permits both accredited and non-accredited investors to acquire a share in privately-held enterprises in exchange for a proportion of the entrepreneurs’ ownership stake. Until President Obama signed the bipartisan legislation was legalized, legalized investors will soon be able to buy small parts of a venture’s equity stake, giving the entrepreneur an alternative way of raising capital. The emergence of this new financing mechanism raises an important question: What impact will crowdfunding have on the Black entrepreneurial journey?
The Growth of Investment Crowdfunding
In the broadest sense, crowdfunding is the use of the Internet to raise capital by way of small investments from a large number of investors. Since the launch of crowdfunding, billions have flowed into new ventures, representing what many have noted to be a “global phenomenon,” a “boom,” and a “revolution.” Though it remains difficult to predict the long-term implications of crowdfunding accurately, it is likely to become a permanent fixture in the entrepreneurial landscape. Regulation Crowdfunding (Reg CF) has topped $1 billion – five years after the securities exemption became actionable for issuers in need of growth capital. According to Crowdfund Capital Advisors (CCA), 1.2+ million investors have backed over 4500 companies to achieve this milestone.
The Introduction to Black Crowdfunding
The Black Business community and the Black professional community will need to recognize that crowdfunding, as it grows, will play an increasingly critical role in the Black entrepreneurial ecosystem. These projections are consistent with what many believe will be a fundamental shift in the options available to Black entrepreneurs for raising capital. Acquiring financing is a critical step in the entrepreneurial process, and it is a well-established fact that entrepreneurs turn to several sources to raise capital. However, at the early-idea stage, that financing most often comes in equity rather than bank debt. Banks loan money based primarily on collateral and company cash flows, like accounts receivable and assets that new entrepreneurial firms rarely have. Still, the primary equity sources for most entrepreneurs include friends and family, angels, and venture capital.
Where does crowdfunding fit in the funding ecosystem for Black entrepreneurs? The answer comes down to how much money the firm is seeking. While it is difficult to project the impact of investment crowdfunding for Black entrepreneurs, it is likely to disrupt the existing funding ecosystem. It will be vital for Black crowdfunding professionals in a collaborative effort to create a crowdfunding ecosystem to support the Black entrepreneurs and businesses. A movement is already in place with collaborative efforts between The American Dream Marketplace, The 10K Project, Elizabeth L. Carter ESQ. Law Firm and Crowd-Max. If you are interested in learning more about how investment crowdfunding can be the vehicle for raising capital for Black-owned businesses and entrepreneurs, please visit Crowdfunding For Black Businesses.