The murder of George Floyd, and too many others, sparked a nationwide conversation about race and the need to create a society built on equality and justice. We need reform across all facets of society from education to our justice systems, but a major source of strife throughout American history has been the disenfranchisement of Black Americans from equal participation in the established financial systems.
Analyzing disparities in income between Blacks and whites fails to show the whole picture. Wealth is a more comprehensive measure, as it can be passed on and includes such assets and financial instruments as stocks, bonds, and equity in private companies. As reported in a New York Times article in the 1619 Project, “Though black people make up nearly 13% of the United States population, they hold less than 3% of the nation’s total wealth.” This means that “median family wealth for white people is $171,000, compared with just $17,600 for black people.”
This is unacceptable, and reparations should have been paid, as General William Sherman commanded shortly after the end of the Civil War. It was President Andrew Johnson who rescinded the order after Lincoln’s assassination and returned the land plots that were set aside for freed slaves to plantation owners.
We must right this wrong, but beyond reparations and policy changes, embracing the opportunities presented by the crowdfunded investment ecosystem is something Black Americans, and all Americans, can do immediately to begin restructuring the wealth demographics of our country. Though far from an all-encompassing avenue to right the financial wrongs of our past, as the founder and chief strategy adviser of Title3Funds, I strongly believe in the opportunities created by this relatively new investment asset class.
Benefits of equity crowdfunding for Black-owned businesses
Historically, only a limited pool of people was able to benefit from equity investments in private companies—an asset class with one of the greatest potentials for growth, even over stocks, bonds, and other financial instruments. This pool of people consisted of accredited investors, individuals with high net worth who also happened to be mostly white and male. When the JOBS Act went into effect in 2016, all of that changed. For the first time, everyday people could invest in private companies and benefit from the success of those businesses’ growth. By participating in this growing asset class, Black Americans gain more avenues of wealth creation for themselves while supporting businesses they believe in.
Black entrepreneurs face many more challenges obtaining access to capital compared to their white counterparts. In 2018, just 1% of VC funding went to black founders and only 3% of investment partners were African American. This is due to a history of disenfranchisement by banks and lenders, but also because of the laws governing VC funds. For the most part, VC funds can include no more than 99 investors, which means to raise a $100 million-dollar fund, firms need to collect an average of $1 million per investor. There is a small circle of people with that level of wealth, the majority of whom are white, male, and who tend to support the entrepreneurs they know from attending elite colleges or working at tech giants like Facebook or Google. Elizabeth Yin at the Hustle Fund explains in her blog post, “[this] is why you don’t see new money or new ideas go into investing. Literally, change is prevented by the laws that are in place.”
How to get started investing in companies you believe in
When deciding where to put your money, the same basic tenets apply regardless of the type of investment opportunity.
- Never invest more than you can afford to lose.
- Diversify your investments by spreading the risk among different businesses and industries.
- Investment guru Peter Lynch’s maxim “invest in what you know” is worth heeding. If you are already buying the product or service, that’s a good sign that your investment may be worthwhile.
- Look for companies that are solving real-world problems. Some of the greatest opportunities may exist in companies that offer cheaper and more efficient ways of doing things—novel technology solutions and products that can improve our lives in health, medicine, communications, and sustainability, for example.
- If you are unclear about any aspect of the company’s business model, ask questions. What is the five-year road map? How will the company make money? What is the market capitalization and valuation? How crowded is the space with competitors? What is the experience of the team? Do they have important strategic relationships? Is the business scalable and what is the size of its serviceable market? Do they have patent protection if applicable?
When people choose which companies to support, the world will change
When everyday people choose which companies to support with their investments, they tend to choose businesses that align with their values. The influence of millennials on the economy will become increasingly prominent as this generation reaches their prime spending years.
According to one report, “Eighty-three percent of Millennials find it important for the companies they buy from to align with their values.” Millennials and Gen Z are also some of the greatest contributors to the rapid growth of the online investment ecosystem, using platforms like Robinhood to purchase stocks. Imagine the level of change young people could enact if they begin supporting early-stage businesses and startups that reflect the values of social justice, equality, and diversity through crowdfunded investments.
Perhaps more importantly, when these values-oriented companies achieve success five to seven years down the line, all those who invested will reap the rewards of their early support. Accredited investors have been taking advantage of favorable investment opportunities in private companies for a long time. Thanks to the JOBS Act of 2016, crowdfunded investments now represent a crucial path toward transforming the distribution of wealth in this nation for Black Americans and anyone who has been disenfranchised from legacy financial systems.
Ron Hirsch is the founder and chief strategy adviser of Title3Funds.