For the economy to restart, everyone must have the opportunity to participate

When I was growing up, I would go everywhere with my father from running errands to stopping at the store to seeing his friends around Central and South Central, Los Angeles. No matter where we visited, though, it seemed like we would always stop by the banks located in the neighborhoods. And I remember asking him, “Why do we go to so many banks?” 

My father was an aspiring entrepreneur. It wasn’t until I was a young adult that I discovered the hardship he faced to secure a bank loan for the business he wanted to start. It took my father four long years to secure a small bank loan.

And why was that? It was because of the zip code we lived in and his skin color as a Black man. He wasn’t seen as worthy of being invested in and trusted to pay back a loan.

That was decades ago, but things haven’t changed much for too many people. While I have carried my father’s entrepreneurial spirit into my role as the entrepreneurship lead at the Kauffman Foundation, the harsh reality is people of color, women, and even rural entrepreneurs access capital to start businesses at a starkly lower rate than their white male counterparts.

Today, in the backdrop of a global pandemic and racial unrest, we are living at an inflection point of change with a new resounding question emanating from communities around the country as it relates to the future of America.

How are we going to rebuild better?

Kauffman Foundation research found 83% of entrepreneurs have no access to bank loans or venture capital at the time of startup. Prior to COVID-19, new Black-owned businesses started with almost three times less in terms of overall capital compared to new white-owned businesses. Men were 60% more likely to secure funding than women when pitching the same business.

We’ve seen a concentration of funding that favors businesses and entrepreneurs in larger cities. In the first quarter of 2018, nearly 80% of approximately $21.1 billion in venture capital funding was disbursed across only five regions: the New York City metro area, Silicon Valley, San Francisco, Los Angeles, and New England.

The statistics are jarring – and they were only reinforced by the Small Business Administration’s Paycheck Protection Program. The recipient list of relief payments showed the money flowed where it has traditionally flowed. As small business owners fought to keep their business afloat during the pandemic, banks continued to prioritize businesses they previously had relationships with and larger corporations with larger loan applications creating an inherent bias to access and in turn opportunity. This is the residual effect of the same redlining that many Black people have experienced in the housing market – and the same redlining I witnessed my father experience when he was trying to secure that small business loan decades ago.

The intent to help small businesses was both necessary and noble but the practice of allocation was misdirected. In the Kansas City Missouri – Kansas metro area, the overwhelming majority of the loans in volume and size went to areas west of Troost Avenue, our historic racial dividing line. Small businesses were struggling to secure loans fractions of the amount what some of the larger corporations received. That racial dividing line exists in the vast majority of our cities. 

That’s why the Kauffman Foundation created the Capital Access Lab – to address this problem head on by providing catalytic funding to innovative investment managers who are pioneering different methods of capital to entrepreneurs historically left behind. 

The systemic barriers facing communities of color are front and center in the news and as states undergo plans to recover, we need systemic change to counteract systemic inequalities. Through the initial rollout of the Capital Access Lab, the Kauffman Foundation invested in five funds including 1863 Ventures, Anzu Partners, Capacity Capital, Collab Capital, and Indie.vc to help reach and provide capital to underserved entrepreneurs and communities. During the last year, the Capital Access Lab has built an active and diverse pipeline of more than 100 potential funds across 32 states; 55% led by women and 41% led by people of color to reflect the networks and communities we live in.

In order for the economy to restart, we need new alternative models that are inclusive and equitable where everyone has the opportunity to participate. For everyone to truly move forward, we must rebuild better and include every sector of our society by closing the capital gap and mobilizing aspiring entrepreneurs and small businesses.

Uncommon Voices columns bring new perspectives and opinions on topics related to the Kauffman Foundation’s work. If you have an idea for a column, please read the guidelines for contributors.