President Barack Obama recently challenged us to think about why we call Johnny back for a job interview, but not Jamal. Johnny and Jamal are competing for more than jobs, however; they’re also competing for investors. You can probably guess who’s winning.
It’s more difficult for minority-owned (not to mention woman-owned) firms to raise venture capital than non-minority-owned firms. Only 1 percent of venture-backed firms are founded by African-Americans, and only 13 percent of all venture-backed firms are founded by any ethnic minority, according to CB Insights. Minority-owned firms are less likely to receive loans, and they receive lower loan amounts and smaller equity investments, and pay higher interest rates than non-minority-owned firms, according to the Department of Commerce.
The challenge of leveling the investment playing field for minority-owned firms, as many cities and states know, is particularly urgent for creating jobs in our nation’s largest cities. Forty percent of minority-owned firms are located in just 10 of America’s largest metropolitan areas.
Could the Internet and crowdfunding, which have helped level the playing field for so many other aspects of life and the economy, do the same for investment?
Not All Crowdfunding Is Created Equal
Online crowdfunding is skyrocketing, from just $2.7 billion in 2012, forecasted to be $34 billion in 2015. There are different kinds of online crowdfunding, however, and not every kind qualifies as a real source of investment capital.
There’s debt crowdfunding, through peer-to-peer lending sites like Lending Club, the first crowdfunding site to go public. But over the course of nine years fewer than 2 percent of Lending Club loans have been business loans. Other familiar crowdfunding names, such as Kickstarter, GoFundMe or IndieGoGo, raise what’s called donation or reward-based crowdfunding. These sites are great, and there are creative ways that startups as well as established businesses can use this kind of crowdfunding, but aside from a few exceptions, donation crowdfunding is just too small to be a game-changing source of capital. According to Kickstarter’s own data, most of its listed projects raise less than $10,000.
The best chance for crowdfunding to transform investing lies in a lesser-known but rapidly growing slice of the crowdfunding pie known as equity crowdfunding. In equity crowdfunding, just like regular equity investments, entrepreneurs sell shares of their business to private shareholders, shares that can potentially be sold later at a much higher price per share. That’s how you attract real investment capital, and that’s why some already predict that equity crowdfunding will eclipse venture capital funding as the leading source of startup capital by 2020.
An Unexpected Revolution
Now imagine that in 2020, the new leading source of startup capital is one in which there is a level playing field for minority-owned firms. Based on the experience of at least one equity crowdfunding platform, it’s quite possible that will be the case. In an internal sample of 5,000 companies using EquityNet, the world’s largest equity crowdfunding platform, 32 percent were minority-owned, including 9 percent owned by African-Americans. What’s more, minority-owned firms surveyed on EquityNet, which is based in Fayetteville, Arkansas, were achieving the same funding success rate (20 percent) and seeking similar amounts of capital on average (around $1 million) compared to non-minority-owned firms on EquityNet.
EquityNet hasn’t done anything to actively court minority-owned firms. “It just happened,” says EquityNet Founder and CEO Judd Hollas. “We have a very broad marketing portfolio, as inclusive as possible. We don’t single out any [business owner] demographics with our adwords or anything like that. The early adopters of equity crowdfunding have just been those who previously were at somewhat of a disadvantage raising capital.”