The financial industry remains dominated by white men today: In the U.S., women make up only 26% of the executive committees in major financial services firms, and only 1% of the c-suite at financial services firms are represented by women of color.
It may come as no surprise, then, that women entrepreneurs of color face major barriers to accessing investment capital. The latest data show less than one percent of all venture capital, for example, goes to women of color.
With the U.S. economy struggling to recover from the COVID-19 pandemic—and small businesses nationwide bearing the brunt—this disparity in access to capital is a recipe for disaster.
As a Black female, I am living proof of the challenges that many Black women, as well as other women of color, face—despite my Ivy League education and credible financial services background. My race has played a factor in my entrepreneurial journey.
I remember starting my own financial technology business in 2010 and how difficult it was to access “family and friends” seed capital, and then later angel investment dollars during our first few years of operation.
Along with another Black female, I founded my former company, known as Smarteys, Inc., to revolutionize how young professionals manage their money. Smarteys’ goal was to provide a platform for young professionals to see their transactions in one place, allocate their paychecks to various uses, and get personalized recommendations on products and services to meet their financial needs.
I eventually raised enough money to hire my first employee, pay my cofounder and myself a minimal salary, and build the technology. However, the fact that I had to adapt a bootstrapped approach slowed down our progress, made it difficult to build a technology product to properly test market fit, and prevented the company from achieving major milestones before it ran out of money.
I ultimately closed the company, and while this decision was the appropriate business decision, it left a lasting impression on me. I came to Next Street to tackle many of the systemic and structural barriers that play a part in the accessibility of capital based on race.
As a person of color, my difficulty in accessing capital is not an anomaly. As recently outlined in a major study, business owners of color overall, both male and female, are plagued by the challenges of finding equity capital to launch a new venture, or of accessing bank credit for expansion. Therefore, small business owners and entrepreneurs have a steeper hill to climb than their white counterparts in both growing and scaling their businesses.
My experience should concern you even if you aren’t a woman of color, because when women of color aren’t given the opportunity to innovate and bring new products and services to market, the whole economy is held back.
As of 2019, women of color account for 50%, or 6.4 million, of the 13 million women-owned businesses; they account for approximately 20% of the 31.7 million proprietor-owned firms in the United States. American Express calculated that four million new jobs and $981 billion in revenue would be added if the average revenue of all women-owned firms owned by persons of color matched that of businesses owned by white women. These achievements would be incredibly impactful on the overall economy.
Access to investment capital can make or break a business before its doors even open. But most importantly, access to equitable investment capital can help create local jobs with livable wages in communities often overlooked by traditional financial institutions.
And when you consider what types of businesses are growing the fastest, it’s those owned by women of color. Specifically, the number of firms owned by women of color grew 43% from 2014 to 2019, according to American Express. Black-women-owned businesses grew the fastest at 50%, followed by Native Hawaiian/Pacific Islander (41%), Latina/Hispanic (40%), Asian American (37%) and Native American/Alaska Native (26%). Women of color employ 2.4 million people and generate $422.5 billion in revenue (23% of total women-owned businesses’ revenue of $1.4 trillion).
Imagine how much further we can take this if we continue investing in women of color with our dollars and actions. In the midst of an unprecedented pandemic and civil unrest that has decimated small businesses, we need governments, corporate institutions, financial institutions, and individuals to think boldly and create avenues for capital and programs that will truly help women of color continue to innovate and contribute to our economic growth in heightened ways.
We don’t have to build from scratch. A recent report I co-authored for Next Street outlines four concrete solutions that we can act on today:
- Create multiple new sources of equity capital focused on financing entrepreneurs of color.
- Encourage shifts toward equity-like capital products, such as revenue-based financing, that are a better fit with moderate-growth businesses.
- Hire, promote, and retain more racially and ethnically diverse people among general partners and key staff at equity funds and other institutional investors.
- Move beyond considering this issue as just a social issue, and understanding that closing the capital gap drives economic growth.
There has never been a more crucial time to expand investments in women of color. As we prepare our nation’s recovery, women of color entrepreneurs will be one of the most important parts of a healthy economy.
Inaction is not a viable option. Let’s do more together.
Charisse Conanan Johnson is manager partner at Next Street, an advisory firm that provides tools and strategies to drive equitable small business growth for a more inclusive U.S. economy.
