Publications

- September 1, 2020: Vol. 7, Number 8

The color of money: Closing the racial wealth gap with crowdfunding

by Kate Gasparro

Like many of you, we have spent the past few weeks grappling with the roots and current state of social unrest throughout the country. As part of better understanding the underlying tensions of the racial divisions in America, we have focused on the ways that our organization can reduce inequalities by building bridges and distributing resources to minority-led businesses and ventures. Unlike traditional capital markets, entrenched in policies that have continued to segregate and disenfranchise minorities, crowdfunding platforms offer a unique opportunity. These platforms increase transparency and resources for capital givers and capital seekers that can help us understand and breakdown inequalities that exist throughout the financial industry.

We often hear how systemic inequalities play out in the gender pay gap. But these inequalities are starker for people of color. Black men earn 73 percent of what white men earn and black women fall back to 65 percent. While the pay gap is a common indicator of equality, the seeds of financial inequality have a deep history that continues to impact employees, employers and business partners. And, the racial wealth gap exists at an alarming scale. While the average white family has total wealth of $171,000, the average black family has only $17,600. This is the result of centuries of discriminatory policies, restricting and erasing intergenerational wealth aggregation for black Americans. Wealth accumulation occurs through institutions such as banks and stock markets. The first has historically discriminated against black Americans in terms of lending. The second has favored those with wealth. Thus, a vicious circle has persisted. Without access to loans, black families and entrepreneurs could not build wealth. Without wealth, the stock market remained elusive.

Recently, we’ve seen two trends take off that have helped democratize wealth building. Growth of startups has opened up new markets of angel investing and venture capital investing. While these entities sit outside of banks and stock markets, their practices are similarly discriminatory. Studies have found that despite the significant success of diverse teams, only 1 percent of VC funds go toward black founders. Why is investing so low? Studies show that VC/angel investors favor companies that look like themselves. When 77.9 percent of angel investors are males and 87.6 percent are white, that doesn’t leave much room for increasing investments to minority ventures.

Crowdfunding is seen as a beacon for minority businesses, providing a platform for them to access nontraditional capital. The segmentation of the crowdfunding market among donation, debt and equity opportunities is meant to provide these businesses with options as products are ideated and brought to market. While there seems to be better resource allocation among diverse businesses, researchers have found that “the crowd is not colorblind … bias does not exist, and that bias is subconscious.” This research found that black founders were less likely to succeed because they received fewer and smaller contributions on donation crowdfunding sites. Only 18 percent of all projects on Indiegogo, one of the earliest donation crowdfunding platforms, are created by ethnic minorities.

Equity crowdfunding tells a similar story so far. These platforms don’t focus nearly as much on minority businesses. Even though minority entrepreneurs attract a high number of investors, they rarely secure their funding goals. In the first year of regulation crowdfunding, almost 19 percent of businesses that filed with the SEC had minority founders, but only 9 percent of successful campaigns had minority founders.

Crowdfunding’s promise for growing wealth for minority businesses has yet to be realized. But the democratization of investing through crowdfunding and other financial technologies is another trend that is aiming to reduce the racial wealth gap. Without exorbitant broker/management fees and smaller investment minimums, investors can more easily access investment markets to build their own wealth. While there are limited studies that show investor demographics on these platforms, Pew Research has found that stock market investment demographics look more promising than the makeup of angel investors. Black families comprise 31 percent of stock market investors, as opposed to the 1.3 percent of angel investors. And recent proposed changes to regulation crowdfunding increases the limit that unaccredited investors may invest toward a business or venture, from $1.07 million to $5 million. This effectively opens opportunities for more individuals to build wealth via crowdfunding platforms.

While technology and regulatory policies are enabling a more equitable marketplace to reduce the racial wealth gap, it takes individual actors to make concerted efforts to build diverse pipelines and investor bases.

What is required is a commitment to creating crowdfunding platforms that allow for investment in broad-based assets, while working diligently to build a pipeline of minority-owned businesses and ventures. It’s also important to ensure each opportunity has low investment thresholds to increase access to deals previously limited to the wealthiest investors. With this approach, crowdfunding platforms can play an important role in democratizing the investment process, especially for those who have historically been marginalized by traditional capital markets.

 

Kate Gasparro studies crowdfunding and innovative finance and is an adviser to InfraShares, an infrastructure crowdfunding platform.

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