Financial Solutions That Build Better Paths for Black Entrepreneurs
Part of our role is acting as change-driven social impact investors. Sometimes, that means identifying opportunities to provide growth capital to deserving business owners, a task that is increasingly important in a landscape riddled with systemic inequities that are unique to minority entrepreneurs. We believe in building a more equitable future in which every entrepreneur, regardless of race or background, can thrive. While our firm prioritizes this work all year round, the occasion of Black History Month allows us to amplify this opportunity.
To that end, diversity, equity, and inclusion is an issue that goes well beyond how established institutions embrace diverse backgrounds and cultures. It hits every chord in our society and is most pronounced in the wealth gap between white and Black Americans.
Business ownership is a path to wealth creation that has been dominated by the white majority, an example of glaring inequity for Black entrepreneurs. Despite their intrinsic value to our economy and society at large, their businesses frequently struggle to make inroads in a culture dominated by aging norms and a lack of representation.
There are ways to close the gap over time by providing Black entrepreneurs with tools to expand access to capital and their runway to success.
The challenge at hand
When taking a high-level view of the current entrepreneurial environment, the same story we’ve seen for decades continues to play out. Black business owners are consistently challenged by a lack of funding and credit facilities when launching a company.
At every fundraising stage, Black entrepreneurs lag far behind their white counterparts in access to capital. A 2017 study from the Stanford Institute for Economic Policy Research found that white entrepreneurs enjoy an average of $107K worth of startup capital, while Black businesses receive an average of $35K to start their businesses.[1] And according to a 2022 study from Crunchbase, a miniscule 1% of venture capital funding goes to Black founders.[2]
Even obtaining that 1% figure is a miracle when you consider that Black entrepreneurs on the whole face a much more stringent loan application process, all while having to manage with a higher cost of capital.
With institutional flaws at every entrepreneurial checkpoint for Black business owners, what solutions have the potential to make the greatest impact?
The solutions within reach
Easing the barriers to entry found throughout the fundraising and access-to-capital pipelines is imperative to counteract the trends we see today. This can be done through creative financing approaches that prioritize and support Black entrepreneurs from the outset.
This important work is being done by the innovative team at Founders First Capital Partners, a national lender built specifically to enable Black and other minority businesses to reach their potential. Founders First is led by serial entrepreneur, cofounder, and CEO Kim Folsom, who herself witnessed the deeply ingrained issues unique to Black founders as she established her career.
Founders First is a well-designed program that opens doors for a new generation of owners from communities that have long been relegated to the financial sidelines. With innovative problem-solvers like Founders First emerging onto the scene, the promise of a more inclusive economy begins to come into focus.
At the center of the solution is revenue-based financing, which involves a unique balance of bank debt and venture capital. This arrangement enables investors to provide funds in exchange for a share of the revenues until the original loan sum and a predetermined repayment limit are met. As a result, budding BIPOC, veteran, LBGTQ+, and women-owned businesses retain their equity while investors receive a dependable return.
Further, facilitating a means for Black businesses to grow at scale while retaining their equity provides a tangible pathway to generational wealth building. Coupled with an advisory team whose members themselves have conquered these obstacles firsthand, Black and other underrepresented businesses can flourish on a more level playing field.
As deployed by Founders First, revenue-based financing also helps keep capital flowing around where the company is built. As founders succeed and build wealth, their companies grow, hire local talent, support employees, and become growth engines for additional employment and spending in underserved communities. Conversely, when investment money comes from outside venture partners, capital is extracted from the community rather than staying with the founders.
Financial innovation that moves the needle
Supporting Black-owned businesses not only helps close the enormous gaps in entrepreneurship but also helps the overall economy. These historic and enduring practices have excluded a swath of the population, preventing diverse businesses owners from contributing to overall growth for decades.
Founders First is a thoughtfully planned, proven program that opens doors for a new generation of owners. With innovative solutions gaining traction, a more inclusive economy and business sphere emerges.
This Black History Month, we’re reflecting on and confronting the landscape of business inequities laid before us. Taking action to upend the status quo is imperative, and it will help clear roadblocks that continue to stunt our collective promise.
DISCLOSURES: The views expressed above are subject to change and represent the current, good‐faith views of Reynders, McVeigh Capital Management, LLC (“we”) at the time of publication. References to specific impact investments are not intended to be, and should not be interpreted as, solicitations, recommendations, or investment advice. The commentary provided herein is educational in nature.
Please note, Founders First only represents one out of a larger pool impact investments that we recommend to our advisory clients, and we receive a management fee on the client assets invested in Founders First. You should not assume that an investment in Founders First or any impact investment, sector, and/or manner discussed was or will be profitable. Past performance is not an indication of future results. Investment decisions should always be made based on an investor’s specific needs, objectives, goals, time horizon, and risk tolerance.
Certain impact investments are private, non‐public offerings that are only available to accredited investors (individuals or business entities that are allowed to trade securities that may not be registered with financial authorities due to their income, net worth, asset size, governance status, or professional experience). Founders First is open to accredited investors only and we may impose an account minimum on participation in these investments. Impact investments that are private, non‐public offerings may experience greater volatility than traditional investments in publicly traded securities. Advisory clients should carefully review the pertinent documents for each impact investment for a more detailed discussion of the associated risks. Given the high‐risk nature of impact investments, advisory clients should contact their portfolio manager to discuss risks and suitability prior to investing.
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[1] Fairlie, Robert, Alicia Robb, and David Robinson. “Black and White: Access to Capital among Minority-Owned Startups.” Stanford Institute for Economic Policy Research, December 16, 2016. https://doi.org/10.3386/w28154.
[2] Metinko, Chris. “Special Series: VC Dollars to Black Startup Founders Fell More than 50% in 2022.” Crunchbase News, February 24, 2023. https://news.crunchbase.com/diversity/venture-funding-black-startups-2022/.