How Investors Can Better Support Women and People of Color-owned Businesses
A study conducted by a team including Jessica Thomas, director of the Business Sustainability Collaborative, and Jeffrey Pollack, associate professor of entrepreneurship, explains the importance of investors supporting women and persons of color-owned startups.
As of 2019, women in business now make up 40 percent of entrepreneurs in the United States while minority-owned business enterprises have accounted for 50 percent of the two million new businesses over the past 10 years.
Despite these numbers, a history of discriminatory financing practices have plagued businesses and cost the American economy over nine million potential jobs.
Researchers collaborated with LIFT Economy and Community Venture’s Force for Good Fund (FFGF) over a 12-month period to determine how women and people of color-owned businesses have impacted their employees, community and industries. The research team also interviewed the entrepreneurs to find out how investors can best serve their needs and how they would be able to measure investment success.
The FFGF was designed to address systematic barries in seven ways:
Focusing on Women and People of Color
FFGF was designed to address the inequality by focusing majority of investments on women and minority-owned businesses.
“Living Return” vs. “Market-Rate” Return
Living return enables the terms of the loans to be more flexible and is explicit in asking investors to share a large portion of the risks. This is opposite to market-rate return that most investors are used to, which FFGF believes to have generated forms of oppression.
Avoiding the Need for an Exit
FFGF tries to prevent the need for “exiting”, which is either taking the company public or being acquired by another company. It often diminishes the positive impact a business could have on workers and the community.
Entrepreneur Friendly Investments
FFGF investments focus on debt instead of equity which prevents investors of feeling the pressure to scale and exit to make a return on their investment.
Integrated Capital Approach
An integrated capital approach creates investment terms with each investor to match their stage, cash flow, market, anticipated cash flow and sources.
A goal of the FFGF was to rebalance the power struggle between investors and entrepreneurs. They accomplished this through crowdfunding a portion of the total investment.
Providing Capital and Services
FFGF provides the entrepreneurs with customized technical assistance and 12 to 18 months of capital to help with their vision, mission and strategy.
After observing entrepreneur and investor interviews and evaluating FFGF approaches, four themes emerged to shed light on the intricacies of providing underrepresented businesses with capital.
Time is a precious commodity to all businesses, however, traditional time parameters can deter and set companies up for failure. Utilizing patient capital allows investors to understand what a successful timeline looks like for each company based on their business model.
For women and minority-owned businesses, limiting fundraising times gives them more time to focus on their businesses as a whole. Time can also break down barries and build trusts between investors and marginalized communities, who in many cases, have experienced sexual harassment and racism from previous investors.
The researcher’s interviews found three large themes that make up a business’s system: ecosystem, relationships and community. From an ecosystem perspective, the business follows a trickle-down system that invests capital into every person in the supply chain. Good investor relationships take time to cultivate, however, with these types of company demographics the relationship has time to go beyond money to make the company feel as though the investor is growing with them. When companies make an investment into their communities it can lead to larger system-wide impacts by addressing larger issues.
Across all three, there is a connection to how the companies are building broader system impacts and adding long-term value to their business models.
This study brought attention to the investment challenges women and minority-owned businesses face and how the they ultimately limit their financial and social impact. The founders of the FFGF companies have a strong bond with the mission of their company which translates to a strong passion for their work.
As of now, many of these companies offer impact through pathways for diverse individuals and communities to achieve success. Establishing a collaborative business model is one way to get employees to have the incentive to make the business profitable because of their stake in the company.
Business owned by women and people of color need investors who recognize that their ventures have been historically marginalized and understand traditional business models may not work. Forming trust between business owners and investors gives the company piece of mind that investors have the business’ best interest at heart.
The FFGF need champion investors who will be open to new business models, critique them and provide new insights to strengthen their approach, and teach them investment language.
Questions for Investors
The following are a number of questions that investors, family offices, foundations, and other financial institutions should consider when making investments and/or creating a fund:
- Do you really need “market rate” returns, even when the concept of “market rate” is based on historical oppression, exploitation, theft, and enslavement?
- Is it really a positive goal to strive for “high impact” and “high returns”? Or should we be striving for “high impact” and “living returns”?
- Who benefits when you exit an investment? Is it workers, the local community, the environment, or traditionally underrepresented entrepreneurs? Or does the financial upside of exiting disproportionately benefit white wealth holders, thereby increasing the racial wealth gap?
- How can more of the risk and burden of the investment process be shifted onto investors and away from women- and people of color-owned businesses? For example, many organizations could drop the requirement for asset-based or other types of securitized lending.
- Do women and people of color have meaningful representation on your decision-making bodies that decide who gets funded? To counter historical imbalances, we recommend striving for 50% or more women and 50% or more people of color on these decisionmaking bodies.
- Can you co-design customized investment terms that take into account stage, cash flow, market, anticipated future capital needs, and other similar variations?
- Are you planning on providing (and/or contracting with an organization that can provide) technical assistance to your investees over the long term?