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Why Bet­ting on Com­mu­ni­ties of Col­or is Crit­i­cal for Con­tin­ued Growth in the U.S. Economy

Author: Danielle Shoots
Posted Date: November 8, 2022

As demo­graph­ics of the Unit­ed States are shift­ing and the pop­u­la­tion of BIPOC com­mu­ni­ties con­tin­ue to grow, many finan­cial pub­li­ca­tions have writ­ten at great length about the eco­nom­ic and socio-polit­i­cal need for ven­ture cap­i­tal funds to invest in busi­ness­es led by founders of col­or. Yet, not much mean­ing­ful action has been tak­en despite the data.

Par­tic­u­lar­ly, for Black-owned busi­ness­es, the amount invest­ed from 2020 to the first half of 2021 went from .6% to 1.2%. This shift comes as a result of some under­stand­ing and con­sid­er­a­tion that eco­nom­i­cal­ly, invest­ing in BIPOC founders is sim­ply a good busi­ness deci­sion. How­ev­er, much of the action tak­en has come as a direct response to the George Floyd 2020 mur­der. In fact, Soft­Bank Group’s Oppor­tu­ni­ty Fund was launched to sup­port founders from BIPOC com­mu­ni­ties with­in 48 hours of the tragedy.

While a dou­bling of the per­cent­age of ven­ture cap­i­tal invest­ed in Black com­pa­nies would seem like a win, a lot of the promised finan­cial cap­i­tal, in a post George Floyd’s mur­der econ­o­my, has yet to actu­al­ly reach the founders and busi­ness­es it’s intend­ed for. What has become clear is that the gap is far more than finan­cial; it is sys­temic in a lack of under­stand­ing in valu­ing the lived expe­ri­ences of BIPOC founders.

A bro­ken sys­tem that needs to be fixed to main­tain the glob­al eco­nom­ic posi­tion­ing of the U.S.

The tools and vehi­cles of wealth build­ing in the U.S. have long been the indus­tries that have bare­ly moved in the work of diver­si­ty, equi­ty, and inclu­sion. The truth is that most of the peo­ple in this coun­try have been left out of the ven­ture cap­i­tal invest­ment space entirely.

BIPOC com­mu­ni­ties have been entire­ly capa­ble of build­ing wealth and have done so time and time again, usu­al­ly in the face of adver­si­ty. His­tor­i­cal­ly, how­ev­er, they have been exclud­ed from accu­mu­lat­ing gen­er­a­tional wealth; or their access to wealth has been dec­i­mat­ed due to vio­lence, theft, or the great­est cul­prit, ​“eco­nom­ic pol­i­cy.” We have wit­nessed prime exam­ples of this, par­tic­u­lar­ly for the Black com­mu­ni­ty, from Freedman’s Bank of 1865 to Black Wall Street of the ear­ly 1900s.

Fast for­ward to today, the ven­ture cap­i­tal indus­try has already cap­tured the data that clear­ly states BIPOC com­mu­ni­ties are ful­ly capa­ble of build­ing wealth and being suc­cess­ful entre­pre­neurs. They sim­ply just exclude these com­mu­ni­ties or under­fund them because they do not under­stand their cus­tomers (like­ly oth­er peo­ple of col­or) and their prob­lems; nor see the val­ue in invest­ing in these busi­ness­es that solve their customer’s unique problems.

This pos­es a prob­lem for the over­all U.S. econ­o­my because BIPOC peo­ple are a lit­tle over 43% of the U.S. pop­u­la­tion and will grow to more than half of the U.S. demo­graph­ics in the next gen­er­a­tion. If BIPOC-led busi­ness­es con­tin­ue to be under­fund­ed and the prob­lems of near­ly half of the U.S. pop­u­la­tion are being ignored, the U.S. will lose its place as an eco­nom­ic pow­er­house in the glob­al econ­o­my and all Amer­i­cans and their busi­ness­es will be dev­as­tat­ed by anoth­er eco­nom­ic crisis.

Pop­u­la­tion growth is going to impact the U.S. economy

As of 2021, almost half of the U.S. pop­u­la­tion are peo­ple of col­or or non-White. Yet, accord­ing to the US Gov­ern­ment Account­abil­i­ty Office report, of the $70 tril­lion dol­lars in U.S. assets under man­age­ment, less than 1% are invest­ed in busi­ness­es led by BIPOC peo­ple. By 2055, the U.S. will be the most eth­ni­cal­ly diverse it has ever been. Yet, fund­ing for the Hispanic/​Latinx com­mu­ni­ty remains stag­nant at 2% and Asian-led busi­ness­es saw a sig­nif­i­cant 20% drop in fund­ing from the sec­ond half of 2022 com­pared to the sec­ond half of 2021.

BIPOC founders are the lead­ing demo­graph­ic for open­ing up busi­ness­es yet the least fund­ed. The ven­ture cap­i­tal indus­try already knows that this dis­crep­an­cy is a plague on the indus­try itself and the entire growth pro­jec­tion of the U.S. econ­o­my. In fact, 83% of firms acknowl­edge that if they pri­or­i­tize invest­ing in busi­ness­es led by founders of col­or, they can max­i­mize returns. How­ev­er, 60% say it is not their fund’s pri­or­i­ty. The rea­son for the dis­con­nect is implic­it bias. Most ven­ture cap­i­tal firms are major­i­ty White and male run, with a small num­ber of diverse perspectives.

Busi­ness­es are formed to solve prob­lems that con­sumers pay to have solved. The U.S. econ­o­my can­not grow if homoge­nous ven­ture cap­i­tal­ists only invest in com­pa­nies that solve a frac­tion of the population’s prob­lems. 88% of the ven­ture cap­i­tal indus­try already rec­og­nizes that this is the case; and acknowl­edges that BIPOC-led founders have a com­pet­i­tive advan­tage by under­stand­ing and cater­ing to near­ly half the population’s pain points.

Under­stand­ing the lived expe­ri­ences of BIPOC com­mu­ni­ties cre­ates high­er invest­ment returns

It is there­fore dif­fi­cult to digest the racial equi­ty gap giv­en most of the indus­try is very much aware of the finan­cial ben­e­fit of invest­ing in BIPOC founders. The fact remains BIPOC founders of col­or meet and exceed expec­ta­tions in the mar­ket. Yet, ven­ture cap­i­tal funds still see their busi­ness­es as extreme­ly risky investments.

This is like­ly still because ven­ture cap­i­tal firms do not take the time to edu­cate them­selves on: the lived expe­ri­ences of com­mu­ni­ties of col­or, what prob­lems they face, and the solu­tions BIPOC-led busi­ness­es are cre­at­ing to resolve them. It has also been dis­cov­ered that despite ven­ture cap­i­tal­ist firms being pri­mar­i­ly focused on the ​“data”, they appear to lack data on the poten­tial returns from these companies.

From a smart invest­ing per­spec­tive, there is a large mar­ket that ven­ture cap­i­tal funds are sim­ply not access­ing. They are leav­ing mon­ey on the table both in under­val­ued com­pa­nies with lever­age and in the con­sumer mar­ket data that shows grow­ing pop­u­la­tion trends are only increas­ing the buy­ing pow­er of BIPOC com­mu­ni­ties. In recent years, Black Amer­i­cans spent over $1.2 tril­lion annu­al­ly and Hispanic/​Latinx con­sumers were expect­ed to have reached $1.7 tril­lion in 2020.

Invest­ments in BIPOC-led com­pa­nies impact job cre­ation which has an over­all pos­i­tive effect on the nation­al GDP

Accord­ing to the Stan­ford Busi­ness & Nation­al Ven­ture Cap­i­tal Asso­ci­a­tion, jobs, high­er wages, and eco­nom­ic growth, all tend to be cre­at­ed from ven­ture cap­i­tal invest­ment. In fact, ven­ture backed com­pa­nies are the high­est job and rev­enue gen­er­a­tors in the U.S. econ­o­my. Yet, in the last 10 years, the num­ber of ven­ture cap­i­tal-backed IPOs have plum­met­ed in the over­all U.S. econ­o­my which has like­ly cost the U.S. 22 mil­lion jobs, overall.

This phe­nom­e­non may be explained by the fact that ven­ture cap­i­tal firms con­tin­ue to not invest in busi­ness­es cre­at­ed by BIPOC com­mu­ni­ties and cur­rent­ly, Black Amer­i­can women, are the lead­ing demo­graph­ic in busi­ness cre­ation. Despite this fact, 61% of Black women are self-fund­ing their busi­ness­es and are con­sid­ered solo-entre­pre­neurs. The lack of fund­ing avail­able for Black women and oth­er founders of col­or makes it hard for these groups to cre­ate jobs with­in their com­mu­ni­ties, as founders of col­or tend to hire from within.

The lack of access to fund­ing is the high­est dri­ver in busi­ness fail­ure, and there­fore the high­est dri­ver in job loss. Con­sid­er the effects of the pan­dem­ic and the con­sis­tent lack of fund­ing which both cre­at­ed dis­pro­por­tion­ate job loss in com­mu­ni­ties of col­or. Both phe­nom­e­na will only lead to over­all U.S. eco­nom­ic chal­lenges, such as: a high­er like­li­hood for anoth­er reces­sion, a declin­ing GDP, and a poten­tial threat of los­ing our dom­i­nance in the glob­al economy.

Tight­en­ing the racial wealth gap ben­e­fits all

Tight­en­ing the wealth gap between com­mu­ni­ties of col­or and White cit­i­zens has an over­all pos­i­tive impact on the U.S. econ­o­my. The data shows that White fam­i­lies typ­i­cal­ly have eight times more access to wealth com­pared to Black fam­i­lies, and five times com­par­a­tive to Hispanic/​Latinx fam­i­lies. Fac­tors like the Great Reces­sion and Covid have both neg­a­tive­ly impact­ed BIPOC fam­i­lies and only expand­ed the racial wealth gap.

This gap has got­ten increas­ing­ly worse over time and the main fac­tor in this phe­nom­e­non is the fact that White fam­i­lies tend to have inher­it­ed and had access to build­ing wealth his­tor­i­cal­ly, where­as fam­i­lies of col­or have not. There­fore, entre­pre­neur­ship can help reduce the wealth gap today; yet BIPOC founders dis­pro­por­tion­ate­ly do not have access to funding.

There isn’t a lack of entre­pre­neurs of col­or, nor a lack of moti­va­tion, or a lack of skillset by these groups to run a busi­ness. There­fore, with­out ini­tial access to fund­ing or access to generational

wealth, there are few­er oppor­tu­ni­ties for wealth cre­ation for these groups. Increas­ing the racial wealth gap dis­ad­van­tages every­one. The less buy­ing pow­er com­mu­ni­ties of col­or have, the less like­ly they can buy homes, con­tribute to the broad­er econ­o­my, invest in retire­ment funds, or even the stock market.

The invest­ment case is sim­ple: it just makes good busi­ness sense

It can’t be stressed enough that invest­ing in BIPOC com­mu­ni­ties doesn’t just accel­er­ate the eco­nom­ic growth of those com­mu­ni­ties, but the nation’s as a whole. We must rev­o­lu­tion­ize the invest­ment pipeline to include these com­mu­ni­ties. There is an incred­i­ble oppor­tu­ni­ty for ven­ture cap­i­tal funds to sup­port busi­ness­es where the founders have unique lived expe­ri­ences that they are cre­at­ing solu­tions for in their tar­get market.

When we think about com­pa­nies in the past twen­ty years that received hyper returns and have bil­lion-dol­lar val­u­a­tions, such as Google, Airbnb, Face­book, etc., they tapped into a mar­ket where they were able to sell the prob­lem and solu­tion to their cus­tomers. Peo­ple of col­or can lever­age their own expe­ri­ences to do the same.

For the first time, we are see­ing bil­lion-dol­lar val­u­a­tions, pri­mar­i­ly on Black-led com­pa­nies. When ven­ture cap­i­tal firms con­tin­ue to invest in com­mu­ni­ties of col­or, every­one wins because wealth is com­pound­ed. Increas­ing invest­ment is not just a moral or even a char­i­ta­ble issue, it is a fis­cal­ly respon­si­ble one. McK­in­sey found that eth­ni­cal­ly and cul­tur­al­ly diverse com­pa­nies are 36% more prof­itable and that BIPOC-led focused funds saw high­er yields com­pared to their com­peti­tors. The bot­tom line is invest­ing in busi­ness­es led by founders of col­or is sim­ply a good investment.