A few years ago 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 of $8.
Not long after, Aaron Tanaka and Libbie Cohn walked into the office of a Boston financial firm to pitch the Ujima Project as a solution. The organization would make capital available to people who historically have been locked out of finance to build their businesses.
To do so, Ujima would allow its members, neighborhood residents, to vote on which small businesses get financed. It would raise money from retail, as well as accredited, investors and offer tiered interest rates to meet the needs of investors. Many of the loan recipients would be low-wealth or working-class Black, Latino, or immigrant entrepreneurs. Ujima will make its first investment round in 2019, aiming to invest $5 million by 2020.
Tiffany Brown, then an investment advisor at the Boston financial firm, was convinced by Tanaka and Cohn’s pitch. She recognized the power of creating a funding pipeline for entrepreneurs of color and quickly became an Ujima member, as did clients of the investment firm. The more she learned about the landscape, the bigger the problem appeared. Only two percent of U.S. companies were owned by African Americans as of 2014—and Black entrepreneurs own only about three percent of firms younger than two years old.
The market is failing to find and fund Black enterprises. A lack of diversity within venture capital, where Black employees make up three 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.
Financial organizations around the country are democratizing investment decision-making, rethinking credit underwriting and directing capital to fill long-standing gaps as they drop legacy investing practices that have excluded people of color. The Boston Impact Initiative works to create economic justice in an urban environment. In the South, Hope Credit Union provides low-wealth communities with financial resources. First Nations Oweesta provides asset-building assistance to the Native community.
Checking our biases
When Lynne Hoey of RSF Social Finance was reviewing the initial list of entrepreneurs who might receive funding through RSF’s Women’s Capital Collaborative, she recognized her own unconscious bias. The list 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 began questioning their loan evaluation model, which they realized was causing them to overlook otherwise worthy lending opportunities. The model was built on 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.
RSF no longer uses credit scores as the basis for decision-making, as they do not accurately reflect the ability of a client to repay loans. Instead, RSF meets with a company’s stakeholders, including customers, suppliers, employees and shareholders. Lynne says community support is a better indicator of the success of the business, as is commitment to mission and commitment to capital partners that are aligned with their values.
Unconscious bias extends to where and how holders of capital find people to invest in, including in the philanthropic and social finance sectors. A ticket to Social Capital Market’s racial equity track, for example, costs $1,500. 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. So will those who attend, since Black innovators that understand unique, high-impact and high-growth markets are not present.
Racial equity lens
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. Chordata was born from diversity: Kate is a white, Jewish, lesbian inheritor and Tiffany is a mixed Black woman from a working-class background. Both come from the nonprofit sector and apply their training in intersectionality and equity to their work as investment advisors.
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 Black 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.