How Investors Can Better Support Women and People of Color-owned Businesses

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 has 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 barriers in seven ways:

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

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 its 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 barriers and build trusts between investors and marginalized communities, who in many cases, have experienced sexual harassment and racism from previous investors.

Systems

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.

Impact

This study brought attention to the investment challenges women and minority-owned businesses face and how 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 an 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.

Champion

A 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 peace of mind that investors have the business’ best interest at heart.

The FFGF needs 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 decision-making 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?

This report is a part of the new series of studies funded by the Ford Foundation and led by Poole College of Management faculty. Learn more about the series through the Business Sustainability Collaborative.

Article  originally published by Poole Communications: Read Here