Philanthropy is not doing enough to advance inclusive investment practices that ensure equitable access to capital for people of color and women, a report from Arabella Advisors and the New Venture Fund argues.
According to the report, An Economy for All: How Philanthropy Can Unlock Capital for Women Entrepreneurs and Entrepreneurs of Color Through Inclusive Investing (36 pages, PDF), systemic biases deeply embedded in investment practices are restricting access to capital for people of color and women, who represent 38 percent and 50.8 percent of the U.S. population, respectively, but only 17.5 percent and 19.4 percent of business owners. In 2017, only 5 percent of entrepreneurs backed by venture capital were African American or Latinx, and just 2 percent of venture capital funding went to women entrepreneurs.
Funded by JPMorgan Chase, the study found that systemic and implicit biases not only perpetuate inequities for underrepresented entrepreneurs and their communities but also create inefficiencies in the allocation of capital and undermine potential investment returns. Between 2007 and 2012, minority-owned businesses created 72.3 percent of all new jobs in the United States, while women-owned businesses created 1.24 million more jobs between 2007 and 2015 than did male-owned businesses. The report also cites a study which found that over ten years of investments (2005-2014), companies with a female founder performed 63 percent better than those with all-male founding teams.
Philanthropy has a catalytic role to play in advancing inclusive investment practices but is currently "punching below its weight," the report argues. It calls on foundations to help dismantle barriers such as the lack of diversity in the investor community, outdated and discriminatory criteria used by creditors and venture capitalists, and the lack of scaling capacity among intermediaries, including community development financial institutions (CDFIs), accelerators and incubators, and social impact funds. It also outlines things foundations can do to put their endowments to work, including expanded grantmaking and more inclusive investments, creating new intermediary structures and financing vehicles and engaging peers in attracting more philanthropic capital, and working to improve practices among mainstream investors and asset managers.
"Foundation leaders and boards will readily see the risks inherent in taking such a multi-lever approach," the authors write. "They also need to see the extraordinary risks inherent in inaction — in leaving groups of people who have the potential to build the future of our communities, cities, states, and nation systemically excluded from the capital they need to put their entrepreneurial drive fully to work. We are living in a moment when philanthropy has the potential and power to catalyze transformative changes and improve our society. It must be bold enough to seize that moment."