Crowdfunding Could Be a Key Part of Closing the Wealth Gap Between African Americans and the Larger Community

The disparity between VC funding going to black entrepreneurs vs their white counterparts is striking. Yet the numbers are more favorable for crowdfunded companies.

Sherwood Neiss, Principal of Crowdfund Capital Advisors compiled the stats and notes below on this topic.

VC investment

-       VCs invest in people that look like themselves

-       Women founding teams that were VC funded is at 10.7%, Asian = 25.2% and Black only 1.7%

-       female-only founding teams hit a high-water mark in 2019—of 3.4 percent of VC dollars, before falling to 2.4 percent in 2020. Funding to mixed-gendered founding teams dropped from 13 percent in 2017 to 9 percent in 2020, which still leaves an astounding 87 percent of funding going to all-male founding teams.  (Chicago Booth)

-       To address this (according to Women in VC) over the past 4 years 140 new women-led investment funds launched

o   Focused on seed and early-stage investing

o   1/3rd of them have small funds (<$10M)

o   2/3rd manage $10M-$20M funds

o   2 of them are on their second/third fund with AOM of $21M to $50M

o   64% of startups have a female founder

o   18% have an underrepresented minority (Black, Latinx, or indigenous) founder

-       Black female founders have received just 0.34 percent of the total VC spend so far in 2021 (crunchbase)

-       Startups with at least one Black woman as a founder have raised around $494 million so far in 2021, surpassing the $484 million raised in all of 2018, the previous five-year high

-       Funding to Black founders reached $1.8B in the first half of 2021 (Total Global Venture funding according to crunchbase was $288B so this is .625%)

-       Minorities in general only received 2.6% of venture dollars (forbes)

RegCF

-       Just might be the true democratization of capital we were hoping for …

-       Slice of data … Recent closed offerings – Top 5%

o   Total Raised by top 5% of offerings = $112.9M

o   At least one women-founder

§  $46M of the $112.9M raised = 41% (1 out of every $2.50 dollars raised in this group went to women-founders)

o   At least one minority-founder

§  $23.2M of the $112.9M raised = 20.5% (1 out of every $5 raised went to minority founders)

o   At least either one Women or Minority

§  $62.8M of the $112.9 raised = 55.6% (1 out of every $1.80 raised went to a woman or minority founder)

-       One the the main benefits RegCF brings to issuers is a diverse investor base … not you white male VC only group … thing brings diverse thinking/insights/perspectives that lead to better business outcomes

-       NET-NET – THESE TYPES OF FIGURES DO NOT EXIST ANYWHERE ELSE IN THE CAPITAL MARKETS … PUBLIC OR PRIVATE

-       MORE AWARENESS NEEDS TO BE PAID

-       MORE FOCUS NEEDS TO BE ON MINORITY OPPORTUNITY

-       Current CCA research is pointing to the fact that women/minority founders have greater growth in revenues and earnings than their white counterparts signifying better investments for financial backers

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Black people have faced economic inequality for hundreds of years in the United States. 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. When it comes to investing dollars into companies led by Black entrepreneurs, this fact is documented by a preponderance of data. Also, the reality of the racial wealth gap prevents Black entrepreneurs from access to capital that would allow them to get their ventures off the ground in the first place.

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 investor networks is limited.

As crowdfunding gains acceptance in the Black business community as a community-based solution to the persistent and historical racial wealth gap issue. 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 allows the Black community to invest in these Black founders through inclusive investing that offers a new pathway for both individual and community wealth-building.

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. Acquiring financing is an essential step for the entrepreneurial process; however, financing most often comes from equity rather than bank debt at the early-idea stage. The primary equity sources for most entrepreneurs include friends and family, angels, and venture capital.  

Where will crowdfunding fit in the funding ecosystem for Black entrepreneurs?  The answer comes down to how much money the business seeks and its ability to excite and engage its social network. 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 to create a crowdfunding ecosystem to support Black entrepreneurs and businesses.  A recent  Wall Street Journal article highlighted the American Dream Marketplace and Crowd-Max collaboration with the “CrowdFit” crowdfunding accelerator and incubator to better prepare Black businesses for crowdfunding success. 

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