In 2015 the Federal Reserve Bank of Boston released a study that revealed a city divided: median white wealth was $247,000, compared to median black wealth at $8. Not long after, Aaron Tanaka and Libbie Cohn walked into the office of a Boston financial firm to pitch the Ujima Project, which flows capital to people who historically have been locked out of finance. Ujima members democratically distribute funds with terms that prioritize the return needs of lower-income investors and interest rates that incorporate a racial justice lens. Many loan recipients are low-wealth or working-class black, Latino, or immigrant entrepreneurs.
Tiffany Brown, then an investment advisor at the firm, was hooked. She recognized the power of creating a funding pipeline for entrepreneurs of color, and quickly became an Ujima member. The more she learned about the landscape, the bigger the problem appeared. Only 2 percent of U.S. companies were owned by African Americans as of 2014, the Wall Street Journal found in 2016—and black entrepreneurs own only about 3 percent of firms younger than two years old.
To this day, the market is failing to find and fund black enterprises. A lack of diversity within venture capital, where black employees make up 3 percent of the workforce, is one roadblock. The problem is compounded by decades of redlining and other forms of discrimination that have left African Americans with much lower household wealth, and therefore less ability to rely on financial help from friends and family to get their businesses off the ground.
Yet racial justice funds face a challenge breaking into the mainstream. Emerging racial justice funds don’t have historical track records and therefore have a higher perceived risk. That’s because “risk” traditionally is defined as risk to the wealth holder. But what about the costs of lost potential and injustice? We must start considering what’s at risk if we don’t fund black entrepreneurs.
And we must face the fact that it’s not just the mainstream finance sectors that underserve entrepreneurs of color. A lack of racial diversity in impact investing institutions means the people who best understand the problems have little role in contributing solutions that would create a more equitable society across gender, race, and class.
If the financial sector fails to involve diverse stakeholders in decision-making, creates cost barriers for participation in forums focused on shifting capital, or makes people who’ve been shut out work harder than everyone else just for a seat at the table, many communities will continue to struggle and the whole society will lose a large pool of talented problem-solvers. Those of us in social finance, especially, should hold each other accountable to avoid perpetuating the problems we’re trying to solve.
Questioning our biases
When going over her initial list of entrepreneurs who might receive funding through RSF Social Finance’s Women’s Capital Collaborative, Lynne Hoey was startled to recognize her own unconscious bias. It largely included people who were pretty much just like her. Rethinking the basis of her evaluations led to a much more diverse group of borrowers.
Lynne and her colleagues at RSF have also been questioning their loan evaluation model. It was built on the best practices of banking, but it’s increasingly clear that those practices are not colorblind. Credit scores, for example, are problematic in a number of ways, including the fact that communities of color are targeted for predatory mortgages and lending practices that lead to higher default rates and lower credit scores. Recognizing that this dynamic deepens inequity, RSF and others have stopped using credit scores as the basis for decision-making.
Unconscious bias extends to where and how holders of capital find people to invest in. Silicon Valley’s preference for young white men from prestige universities has been thoroughly explored, but even funders who decry this bias often end up with similar results. The philanthropic and social finance sectors provide an instructive example. A ticket to Social Capital Market’s racial equity track costs $1,500, and Gratitude Railroad’s racial equity track costs $5,000—black entrepreneurs often need scholarships to attend. People who can’t afford to be part of the conversation will miss the opportunities.
Socially responsible investment firms must recognize the value of a cross-class, multiracial team and take responsibility for hiring and promoting a diverse team. We’ve often heard that there “just isn’t a pipeline” as an excuse for little diversity among staff and those receiving funding. But Tiffany observes that the real issue is that it’s just so much easier to hire the white intern, who came in as a favor to an old college buddy, or someone from your alma mater. Then there’s the pervasive practice of hiring based on “culture fit,” which in a white, male-dominated environment would yield a white male.
In the not-so-distant future, a lack of diverse representation will be seen as a risk for financial institutions. People of color are projected to be a majority in the U.S. by 2042. Finance firms with a multiracial staff identifying viable investment options that reflect a diverse perspective will have the upper hand—but this demands that the staff have a seat at the executive table and are not solely in administrative roles.
Inclusive solutions drive innovation
Holding the keys to capital creates a power dynamic that isn’t often discussed in the finance world. Funders may think that if black entrepreneurs aren’t coming to them for money, they don’t need it. That’s far from the truth, and there’s a growing ecosystem of institutions that are aligning their business practices to achieve racial equity.
Tiffany and Kate Poole recently cofounded Chordata Capital, which helps people who have inherited wealth design and implement portfolios with an explicit commitment to racial and economic justice. The firm develops portfolios that are rooted in repair. For people with a history of slavery in their family, this could mean investments in credit unions or reparations loan funds in the South. Tiffany and Kate seek alternatives outside the public equities market for high impact, and believe it is their responsibility to build relationships and connections with these investments.
Another start-up enterprise, The Runway Project, is working to fill the “friends and family” capital gap for African American entrepreneurs. Founded by Jessica Norwood and backed in part by the Women’s Capital Collaborative, The Runway Project provides low-interest, no-collateral loans and other support to black entrepreneurs in Oakland, California, and plans to expand nationwide.
These solutions are just the tip of the iceberg of what’s possible. We invite other finance professionals to join us in asking questions that aren’t top of mind for investment firms—even in social finance. It’s the only way to create a new financial system that benefits all communities.
A version of this article first appeared on ImpactAlpha
