The best ways to leverage capitalism to accelerate and build wealth for all people

Throughout our years of work, we at Living Cities have analyzed the mechanisms of capitalism that have gotten us here. We understand the systemic racism that has been at the core of our capitalist system since our country’s founding, and we are looking to create the best ways to leverage parts of capitalism for a modern approach to accelerating and building wealth for all people.

We believe one of the most glaring disparities continues to be the racial wealth gap. By some measures, the wealth of white families is about 10-times that of Black families. In a multiracial country with a new emerging majority, we need to take on the issues of racial wealth gaps head-on to create a thriving, equitable economy. This requires those of us committed to closing racial wealth gaps across the philanthropic and financial sectors to disrupt the long-standing mechanisms for wealth building and identify how we can support innovative, inclusive systems change for a level playing field.

The goal of Catalyst Fund III

It can cost entrepreneurs of color up to $250,000 more to start a business than white entrepreneurs with similar backgrounds. Businesses owned by people of color are denied credit at two- to three-times the rate of firms with comparable gross revenues that are white-owned, even when controlling for wealth, credit history, and location of the business.

Why is this? There are many historical and complex reasons, but data shows a major one is because people make investments in people who look like them, and almost 99% of all U.S. assets under management are managed by white men. Central to our work on Catalyst Fund III will be the work to change the mindset and practices of “capital decision makers” who determine how capital flows in our economy and to whom.

Many capital decision makers do not have experience investing in businesses owned by people of color and can see these as “riskier” investments. Yet, this has been proven untrue time and again. It’s a perception due to unfamiliarity; a product of systemic racism and individual conscious and unconscious bias.

I often use the metaphor of the ocean to explain this. When you are a kid and first go to the ocean, you are likely scared. You go back with more experience, and you aren’t anymore. The ocean didn’t change; you did. How can capital decision makers change their perceptions to see opportunity for investment, not risk?

This looks different for different organizations, but for Living Cities – a 30-year funder collaborative focused on wealth building opportunities for Black, Indigenous, and People of Color (BIPOC) – our role is to create an investment vehicle to confront and address underinvestment and disparity in those communities.

This fund, Catalyst Fund III, will seek to do this by creating a “fund of funds” that invests in fund managers of color, non-BIPOC fund managers working to increase the number of BIPOC fund managers, and/or funds whose investment thesis is to expand access to capital for BIPOC entrepreneurs. The ultimate goals of the fund are to:

• Expand access for emerging fund managers of color to seed capital and technical support.
• Reduce the time it typically takes for fund managers of color to raise initial capital.
• Enable emerging fund managers of color to establish a track record, gain credibility, and be positioned for future rounds of funding.

The Kauffman Foundation committed to a $10 million anchor investment in the fund, which was announced at the annual Milken Institute Global Conference in May 2022. This investment follows Kauffman’s $1.67 million seed grant to Living Cities to better understand the root cause of the country’s racial disparities in income and wealth. We are excited to come to this point in our partnership with Kauffman to close racial wealth gaps in this country.

Our Journey to Catalyst Fund III

Our work on this fund began long before the pandemic and the national reckoning, sparked two years ago now, around how this country invests in and supports Black lives. The work to increase access to funding for BIPOC communities began at the Kauffman ESHIP Summit in 2017, where we met a few key players working to overcome barriers to capital for businesses owned by people of color.

This meeting was the beginning of our “Builders and Benefactors” network, which we gathered for the first time in 2018. This network is made up of innovators of color who are working within the context of high-growth scalable businesses to close racial wealth and income gaps. They are rewriting the rules that exclude people of color from participation and success in the private equity and business venture capital sector.

After this event, we decided to go deeper into the research around ways to support and grow Black-owned businesses in service of closing racial wealth gaps. We worked with this group to illuminate and elucidate the nuanced needs of this community and share these lessons with others working to tackle racial wealth gaps.

The main product we created from this process was our “Radical Collaboration for Black Wealth” report. This report centered on the historical and current state of Black wealth and examines the ways in which philanthropy can disrupt the systems that currently yield poorer results for people of color.

The report found that because 70% of the economic growth in the U.S. is attributable to consumer spending, the growth of the U.S. economy will suffer if U.S. systems continue to maintain the racial wealth gap and exclude the emerging majority from participating at its full potential. To continue our national growth, we believe we must level the playing field for wealth creation to capitalize on valuable expertise, resources, partnerships, experiences, perspectives, large market opportunities and thus the potential for value creation.

When we gathered Builders and Benefactors once again in 2019, and when the pandemic hit, we had a strong sense of where we needed to go and where we needed to be with our next fund. The pandemic stalled some of our efforts because of the inability to convene in person, but also accelerated the trends we were already seeing. We were fortunate to gather the group in person again this past June following two years of virtual engagement.

Building the Ecosystem

We are looking to shift perceptions of this “risky” ocean by working with and investing in fund managers who represent the emerging majority, as well as with any fund manager or intermediary with a focus on supporting BIPOC individuals. Our goal is to identify best practices and examples to help other funds scale their support of businesses.

For example, we worked with the Urban Investment Fund (UIF) in our previous fund, the Blended Catalyst Fund. UIF is a venture capital fund owned and operated by an all-woman team, intentionally focused on providing financial resources to overlooked entrepreneurs. They have raised $170 million with an enterprise value of $476 million. As noted in our annual report, they’ve created more than 380 jobs through their investments.

As we are working to raise Catalyst Fund III, we are intentionally seeking out opportunities to build the equitable ecosystem necessary for the support of BIPOC enterprises and closing wealth gaps. We are tackling one piece of that ecosystem by investing in fund managers, but we believe there is so much more needed beyond this.

If we will be able to truly change the perception of the “ocean” and how capital decision makers consider risk, we will all have our role to play. We all must identify our version of Catalyst Fund III and how to contribute. Living Cities and Kauffman cannot do this alone. Others are coming in, but more need to be a part of this solution. Closing racial wealth gaps is a huge undertaking that will be essential if we want our country to continue to thrive and prosper well into the future.

Demetric Duckett, managing director at Living Cities, is a thought-leader in the domestic impact investing field, accelerating the adoption of innovative financing for the benefit of Black, Indigenous, and People of Color, and low-income people and the communities in which they live.

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