Building an Inclusive Economy by Supporting Entrepreneurs of Color

Gloria Freeman, Meda’s Entrepreneur of the Year, is the founder and chief executive officer of Minneapolis-based Olu’s Home. (Image courtesy of Meda and Olu’s Home, Inc.)

As other contributors to this series have pointed out, the US economy is deeply inequitable. The median household wealth for black and Latinx families is 12 times less than white households. And as the US population grows more diverse, racial economic inequity will impact more and more Americans. By 2050, people of color will represent half of America’s total population. Simultaneously, median household wealth for black and Latinx families is expected to drop nearly to zero, which means half of the population will face significant structural barriers to economic opportunity and mobility—barriers that ultimately prevent them from fully participating in both the economy and democracy. This is profoundly unjust. Considering that consumer spending drives 70 percent of US gross domestic product, it also stands to impede the country’s ability to compete in the global market.

The Surdna Foundation, one of the oldest family foundations in the United States, is committed to addressing these inequities and building a more inclusive economy for future generations. Our mission is to foster communities guided by principles of social justice, and distinguished by healthy environments, inclusive economies, and thriving cultures. We work to fulfill this mission through a variety of approaches.

How Foundations Are Using Impact Investing to Advance Racial Equity

In this series, presented in partnership with Mission Investors Exchange, 10 foundation presidents share their organization’s efforts to embed commitments to racial equity into their institutions and impact investing practices. FOLLOW THIS SERIES

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In terms of impact investing, we announced our commitment in 2017, allocating $100 million—10 percent of our total endowment—for mission-related investments (MRIs), program-related investments (PRIs), and a variety of other strategies intended to both fulfill Surdna’s social justice mission and grow the field of impact investing. Since our initial announcement, we have committed more than $50 million in impact investments, and have reported on our experiences and lessons, with the aim of helping other foundations achieve positive social, environmental, and financial returns.

In 2018, we reasserted our commitment to social justice by refining our focus and centering on racial justice—a shift based on our belief that the most effective way to build a more just society is to address historical and structural racial inequities.

Focusing on Racial Justice

As part of this shift, we are targeting three outcomes through all of the foundation’s efforts, including impact investing, grantmaking, and other initiatives:

• Building wealth among communities of color,

• Building accountability by supporting the capacity of community-based organizations to hold policymakers and institutions accountable to the goal of equitable investments and benefits in communities of color,

• Increasing democratic participation by strengthening the power and expertise of often overlooked communities of color to shape decisions that impact their lives.

This third outcome, democratic participation, is important to Surdna’s impact investing strategy and one of the most effective ways to address racial inequities. Advancing democratic participation recognizes and honors the agency of individuals and communities impacted by injustices. We regard community residents as experts in creating solutions to the systemic issues we aim to solve. That means creating an inclusive economy in which all people can shape the economy and its direction, and all people can benefit from economic growth and prosperity.

Surdna also supports entrepreneurs of color, because such efforts are essential to building an inclusive economy in which people of color can fulfill their potential as leaders, creators, and innovators across sectors. Entrepreneurs drive job and wealth creation, and are the key to creating the next generation of businesses that will power our economy. Yet while the number of minority-owned businesses increases annually, they continue to see a decline in access to capital. This is due to actual risks associated with investing in small and startup businesses that may make investors wary, as well as to perceived risks based on implicit biases and racism that underestimate the viability of minority-owned businesses. We therefore use our grants to build ecosystems in which entrepreneurs of color operate, providing access to capital, and trainings and resources needed to build successful businesses. And we direct our impact investment capital to invest in fund managers who, in turn, invest in minority-owned businesses.

Creating More Flexible Capital

The vast majority of our impact investment occurs through venture or debt investment.  For example, we invested $2 million in two funds managed by Impact America Fund (IAF), a venture capital firm that focuses on early-stage technology companies that seek to improve economic inclusion for underserved consumers. The fund’s founder, Kesha Cash, is one of the few black women in venture capital and understands that traditional venture capital funds often overlook prioritizing and supporting entrepreneurs of color. Investing in a diversity of entrepreneurs is baked into IAF’s strategy.

We have also made a $1.5 million, 10-year debt investment in Meda, a community development finance institution (CDFI) located in the Twin Cities of Minnesota. Meda operates a fund that makes working capital, capital expenditure, and other short-term business development loans to middle-market, minority-owned businesses. One example is Olu’s Home, Inc., founded in 1999 by Gloria Freeman. Olu’s Home is a licensed care organization that provides residential and in-home services to people who are elderly, have developmental disabilities, or experience mental illness. Today, the company operates 12 group homes and employs 125 people, which Freeman partially credits to the support she received from Meda in 2014. Meda provided Freeman with the capital she needed to purchase and renovate a large commercial facility to run her business, which she was unable to secure from traditional lenders as a startup.

Of course, different entrepreneurs need different kinds of capital and resources to build successful businesses. Many new companies lack the cash flow, credit, or ability to take on debt. Many may not be ready for traditional venture funding, and many may not be the typically rapidly scalable companies that are appropriate for traditional venture funding. While some entrepreneurs can raise funds from family and friends in this scenario, given the significant wealth disparities created by historic racism, this is not a feasible option for many entrepreneurs of color.

Surdna is therefore seeking to better understand how fund managers can provide more-flexible capital, including in the form of convertible notes, demand dividend notes, or royalty shares. These instruments provide flexible capital to companies while allowing investors a clear path to exit. These aren’t new instruments, but they’re typically not available to most entrepreneurs. Greater access to capital also gives investors the ability to participate in the success of the company if it scales. This works well for us because our aim is not simply to make this capital available to a few businesses, but to invest in managers that want to build scalable and replicable products and processes—and thereby position businesses owned by people of color for viability and growth.

Embracing Strategic Risks

Our strategy aligns with our social justice mission. It’s also a smart investment: The key to generating strong financial returns is to successfully identify and invest in emerging businesses, new investment strategies, and overlooked opportunities. Given the vast number of previously overlooked entrepreneurs, and the growing demand for diverse enterprises that meet diverse consumers’ needs, there is real opportunity to grow existing businesses and support new ones owned by people of color.

Surdna has set out to use impact investing as a new way of meeting the needs of entrepreneurs of color who are often overlooked by traditional investors due to actual or perceived risk. We expect to meet with both success and failure in the coming years, but believe that ultimately, by embracing risk, we’ll prove the reward in these investments and thus attract more mainstream capital to support entrepreneurs of color. There is audacity in our strategy. But we firmly believe that’s exactly what racial justice requires.

Read more stories by Don Chen & Shuaib Siddiqui.