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FUND FACTS

What Biden needs to get right about closing the venture capital racial gap

Arlan Hamilton, founder and managing partner of Backstage Capital, speaks at an industry event in Helsinki
Reuters/Lehtikuva/Heikki Saukkomaa
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  • Lila MacLellan
By Lila MacLellan

Quartz at Work reporter

Published Last updated on

As the first US president since the Civil Rights era to make racial justice a prime concern, Joe Biden has identified racial equity as a top priority of his White House agenda.

Rather than put the quest into a silo, he has instead laid out plans to evaluate every federal policy and project through a racial equity lens. He has connected the equity mission to efforts to raise the minimum wage, boost retirement security for people of color, introduce student loan forgiveness, and implement federal procurement rules that would mandate more spending on minority-owned businesses. By executive order, he directed the Justice Department to stop using private prisons, and directed the Department of Housing and Urban Development to “redress racially discriminatory federal housing policies.”

As a result, the Biden administration appears positioned to make legitimate progress toward closing racial gaps over the next four years.

But can it make headway in as racially lopsided an area as funding for small businesses and startups?

During the campaign, Biden unveiled the specifics of his vision for closing the racial gap in small-business ownership and entrepreneurship. His formula included several ambitious measures, some that would improve access to low-interest loans for entrepreneurs of color and strengthen Community Development Financial Institutions (CDFIs), and others meant to open the global marketplace to minority-owned businesses. The centerpiece of his initiative was the small business opportunity plan, described as an “historic effort to empower small business creation and expansion in economically disadvantaged areas—and particularly for Black, Latino, AAPI [Asian American and Pacific Islander], and Native American-owned businesses.” Biden pledged to allocate $30 billion to a new fund that would spur $150 billion in venture capital and low-interest business loans through private-public partnerships.

He earmarked an additional $50 billion for entrepreneurs of color, which would flow through state and local organizations, and he vowed to resolve issues with the existing opportunity-zones program, which allows investors to delay paying capital gains tax on the sales of personal assets if they put the proceeds to work in designated low-income communities. Under former US president Donald Trump, opportunity zones became domestic tax havens for wealthy investors who built projects that largely served middle-class Americans in areas that were already up-and-coming and therefore attracting investment.

Now, entrepreneurs, venture capitalists, and researchers who have been thinking about the funding and entrepreneurship racial gap in the US for decades—and specifically the lagging growth of Black-owned businesses—are eager to see exactly how historic Biden’s effort will be. Here are some of the big questions they have about his plans.

Will he put minority founders at the helm?

Arlan Hamilton, founder of venture capital firm Backstage Capital, tells Quartz via email that “as someone who has invested millions in more than 150 startup companies led by Black and Brown founders in the past five years (80% of which despite being under the rule of such a divisive president),” she is particularly optimistic about the $150 billion in venture funds that Biden hopes to unlock.

“The most important thing [Biden] can do with this initiative, in particular, is to have seasoned Black investors and entrepreneurs not only consulted, but at the helm of this capital deployment each step of the way,” she argues. “The worst thing that could happen is that there is all of this potential catalyzing capital that is spent without the most impact and innovation possible.”

She continues: “I have seen too many times, for instance, [the] majority of funding for opportunity zones being helmed by white men and homogeneous committees. Having Black professionals line up to ask for a perceived handout is insulting and will end up being counterproductive.”

Tiffiany Howard, an associate professor of political science at the University of Nevada, Las Vegas, and a recent Congressional Black Caucus Foundation senior research fellow, echoes Hamilton’s call to focus on leaders of color. “Some of my own research looked at expanding CDFIs so that more CDFIs that have board members of color and women that are more diverse, that have greater connections with the community, that those are supported,” she says.

What role will major banks play?

To Howard, the administration’s ambitious plan is encouraging, though it has not yet addressed how it will help remove obstacles that have stymied Black businesses for a century. Where Black businesses once flourished (before the introduction of Jim Crow laws), today, fewer than 10% of small businesses are Black-owned, according to pre-pandemic estimates, because of historic and persistent policies and racial discrimination. The economic fallout from the pandemic has driven an estimated 41% of Black businesses out of business, Howard notes, citing a recent study from the National Bureau of Economic Research.

She also points to research (pdf) showing that while white adults in the US have 13 times the wealth of Black adults on average, white business owners have only three times the wealth of Black business owners.

“Entrepreneurship is one of the most direct paths towards closing the racial wealth gap and to building personal wealth,” Howard says.

She will be watching to see how Biden’s aspirations to turbocharge minority-led entrepreneurship will integrate mainstream banks, something she sees as essential. “It wasn’t clear what role formal financing institutions like Wells Fargo, Bank of America, that they would play in this entire process,” she says. Their involvement is important, she says, “because we know from the [first round of PPP] loans, and from understanding the lending process, that African-American entrepreneurs face a lot of challenges with securing startup loans and growth, capital, things like that, and it starts with banks.”

Will there be adequate training and support?

Biden’s campaign platform included a promise to “[e]liminate barriers to technical assistance and advisory services by investing in a national network of cost-free business incubators and innovation hubs and intensive business seminars.”

Marlon Evans, CEO of Nex Cubed, a startup accelerator and investor, tells Quartz that he believes Biden should put heavy emphasis on this part of the plan, which he sees as “equally if not more important,” than access to cash.

“Many great ideas die on the vine due to lack of technical and advisory support,” so rather than spending lavishly on capital infusions, he suggests establishing “entrepreneurship training programs delivered by universities, startup accelerators, chambers of commerce, small business associations,” and more.

“Funding alone is not the answer. To create generational wealth in the black community through entrepreneurship, we must build local capacity,” Evans says.

Will there be accountability?

The details of Biden’s racial equity goals are drawing both cautious optimism and criticism from the left. Some advocates for racial justice are disappointed that Biden has not addressed calls for reparation payments or the legalization of marijuana, considering that Black Americans are 3.6 times more likely than white Americans to be arrested for marijuana possession, even though both groups consume marijuana and roughly the same rate.

Conservative critics, meanwhile, already see Biden’s intention to correct racial gaps as divisive and hypocritical, they say, for a politician championing unity.

Biden’s team has framed spending on racial equity as both a moral necessity and a strategy meant to reap rewards for all Americans. Princeton economist Cecilia Rouse, Biden’s nominee to chair the Council of Economic Advisers, told the New York Times, “We maximize growth, we maximize productivity in this country when we maximize all our productive assets.”

“Embedded in that is a recognition that we have a lot of talented people whose skills, whose knowledge, whose innovations and creativity are not being brought to bear to help their country,” she said.

Backstage Capital’s Hamilton was less circumspect in her note to Quartz. “When the country invests in Black and Brown entrepreneurs, it’s also investing in infrastructure, climate change, and healthcare,” she wrote. “We are the backbone of this country.”

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