By Brian O’Connell
Investing in U.S. businesses is a cornerstone of wealth creation for profit-minded investors, and the earlier one can grab a piece of the investment pie, the better.
So it goes for the burgeoning Black-owned business sector, which has shifted into higher gear in the past several years.
According to the U.S. Census Bureau’s latest Annual Business Survey, released in November 2022, Black-owned businesses accounted for $141.1 billion in annual receipts and $42.2 billion in payroll in 2020. About 27.5% of these businesses were in the health care and social assistance sector. The most recent census data shows the number of U.S.-based Black-owned businesses has risen to more than 3 million, with about a 38% rise in Black entrepreneurship since 2019.
With an aggressive growth rate and sector success stories stacking up, it’s high time investors gave Black-owned enterprises a closer look when adding to portfolio positions.
There are abundant opportunities to choose from, even for investors interested in supporting fledgling startups.
Take New York City-based Uncle Waithley’s Beverage Co., for example, a ginger beer maker that is using a StartEngine crowdfunding campaign to gain leverage for its business in the specialty soda and carbonated beverage category. Industry research shows the niche ginger beer market is expected to grow at a compound annual growth rate, or CAGR, of roughly 7% to more than $8 billion by 2030.
“A lot has happened in the year since we launched our brand at the Whole Foods Market in Harlem in early 2022,” says Uncle Waithley’s founder Karl Franz Williams. “We became the fastest-selling ginger beer at that store, which led to an expansion into 14 more Whole Foods locations by October and plans to be on shelves at all 56 Northeast locations by late February.”
Assessing the potential of growth-oriented small businesses like Uncle Waithley’s is one way to start investing, but it’s far from the only way. Here’s a look at several strategies to engage with Black-owned companies as an investor:
- Invest via venture capital.
- Try angel or early investing.
- Support Black fund managers.
- Invest through CDFIs.
- Explore peer-to-peer lending.
- Stocks of Black-owned businesses.
Invest via Venture Capital
Investing in venture capital is one way to support Black-owned businesses. Instead of investing in a publicly traded stock of a large, vetted firm, venture capital investments finance startups and small businesses that have potential for long-term growth.
Venture capital investing is risky, so these investments often come from firms designed to finance startups, wealthy investors, financial institutions or investment banks. But equity crowdfunding platforms such as StartEngine have also taken off as a way for startups to raise capital to help them get off the ground.
“Black founders raised an estimated $2.254 billion out of the $215.9 billion in venture capital allocated in 2022,” says Octavio Sandoval, director of investments at Illumen Capital in San Francisco. That figure represents about 1% of all venture funding last year, which indicates plenty of room – and plenty of opportunity – for growth.
“Studies continue to show that diverse leadership teams continue to outperform just white-men teams,” Sandoval notes. “Consequently, there is still an enormous opportunity to invest in Black-owned businesses.”
Try Angel or Early Investing
The most critical time in a startup’s journey is in the beginning, or the “friends-and-family round,” and that goes double for new minority-run companies, investment experts say.
According to data from an innovation hub called 1871, a traditional founder will start a business with about $100,000 in capital, “but BIPOC (Black, Indigenous, People of Color) founders have access to only about one-twentieth of that, meaning they have fewer resources to hit the growth metrics they need to raise subsequent rounds,” says Desiree Vargas Wrigley, chief innovation officer at P33, a nonprofit focused on driving growth for Chicago’s tech sector.
“The most impactful way to invest in Black-owned startups is at the friends-and-family stage or pre-seed stage, to give them the best possible chance of creating businesses that scale to the next level,” Wrigley says.
For accredited investors looking to support Black-owned businesses directly, one of the best ways to access deal flow is by learning about pre-seed funds focused on supporting Black founders.
Investment firms such as Fifth Star Funds, Capitalize VC, Harlem Capital, Backstage, Collab Capital, LongJump and Rising Stars all have “incredible” founders in their portfolios who are actively raising capital and who likely need investors’ $25,000 checks, Wrigley says.
Support Black Fund Managers
For investors not ready to directly invest in startups, Wrigley recommends investing with Black fund managers to diversify portfolios, mitigate risk and maximize impact.
“Great fund managers include Charles Hudson at Precursor, Tessa Flippin at (Capitalize VC), Neal Sales-Griffin at Rising Stars, Kathryn Finney at Genius Guild, Kelli Jones at Sixty8 and so many more,” Wrigley says.
Other funds may offer an investment gateway common to minority-run portfolio funds. “Founders First Capital Partners is a great example,” says Carrie Endries, director of impact investments at Reynders, McVeigh Capital Management LLC in Boston. “The firm’s Change Catalyst Fund provides revenue-based financing to support businesses led by diverse founders. The fund performs like a bond as investors receive a quarterly distribution that pays them a reasonable rate over a seven-year term.”
Invest Through CDFIs
Speaking of investment gateways, one way to invest in Black-owned businesses that need working capital to expand is through community development financial institutions, or CDFIs. CDFIs are private financial institutions that provide affordable loans to underserved communities and people who have traditionally lacked access to financing.
“A CDFI such as Capital Impact Partners, for example, prioritizes BIPOC affordable housing developers, seeking to expand participants in that market,” Endries says. “Community loan funds like Boston Impact Initiative promote racial equity through their lending, but also by asking their portfolio companies to diversify their employees and their suppliers, thinking about building wealth in multiple ways in BIPOC communities.”
She adds that “CDFIs and community loan funds are often open to non-accredited investors.”
High-net-worth individuals interested in venture or angel funding for Black-owned businesses should reach out to investment advisors and capital management firms that specialize in impact investing, Endries says. “Advisors can make connections with impact funds focused on providing growth capital to Black-owned businesses,” she adds. “They can also help you target your investments geographically.”
Explore Peer-to-Peer Lending
For investors looking for a creative and lower-cost way to invest in Black-owned companies, peer-to-peer loans can have a lasting impact on business owners. Peer-to-peer loans cut financial institutions out of the process and allow individuals to make loans to borrowers.
“In 2022, 49% of borrowers through Kiva U.S. were Black-owned businesses, including creative firms, health care providers, retail boutiques, cosmetics and beauty lines, and more,” says Kathy Guis, vice president of investments at Kiva, a crowdfunding firm in San Francisco. “These 0%-interest loans are often the first step for small business owners in accessing funding. From our research, we know that we’re their first engagement with formal financial services.”
“What’s more, these loans can help provide a proven track record for startup companies,” Guis adds.
Stocks of Black-Owned Businesses
It’s possible to invest in the stocks of Black-owned businesses, but there’s a caveat and it’s a big one: It’s a challenge right now due to the dearth of minority-owned publicly traded companies.
“Of the 4,300 public companies in the U.S. reported by the American Council for Capital Formation in June 2022, there were seven Black-owned companies,” Sandoval says. “That comes to approximately 0.16% of public companies.”
He adds that “Black-owned businesses need capital to grow and scale their operations. So, investors should invest in Black-owned businesses when they’re private. When Black-owned businesses are adequately capitalized, the chances of achieving an IPO goes up.”
Endries says that researching Black-owned publicly traded companies takes some diligence and creativity.
“It’s difficult to categorize a publicly traded company’s ownership by race because ownership is spread across shareholders,” she says. “A better way is to look for companies with well-represented diverse leadership at the CEO, SVP (senior vice president) and board levels, in particular.”
“Many companies also report on their diversity statistics, and sustainable investment mutual funds often highlight social or racial justice as one lens they use to determine holdings in their fund,” Endries says.
See Original Article at US News