Closing the Racial Wealth Gap with Crowdfunding

Like many of you, we’ve spent the last few weeks grappling with the roots and current state of social unrest throughout the country. As part of better understanding the underlying tensions of the racial divides in America, we have focused on the ways in which InfraShares can be a mechanism for reducing inequalities by building bridges and distributing resources to minority-led businesses and ventures. Unlike traditional capital markets, entrenched in policies that have continued to segregate and disenfranchise minorities, crowdfunding platforms offer a unique opportunity. These platforms increase transparency and resources for capital givers and capital seekers that can help us understand and breakdown inequalities that exist throughout the financial industry.

We often hear how systemic inequalities play out in the gender pay gap. But, these inequalities are more stark for people of color. Black men earn 73% of what White men earn and Black women fall back to 65%. While the pay gap is a common indicator of equality, the seeds of financial inequality have a deep history that continues to impact employees, employers, and business partners. And, the racial wealth gap exists at an alarming scale. While the average White family has total wealth of $171,000, the average Black family has only $17,600. This is the result of centuries of discriminatory policies, restricting and erasing intergenerational wealth aggregation for Black Americans. Most of this wealth has been amassed through institutions like banks and stock markets. The first has historically discriminated against Black Americans in terms of lending. The second has favored those with wealth. Thus, a vicious circle has persisted. Without access to loans, Black families and entrepreneurs couldn’t build wealth. Without wealth, the stock market remained elusive.

Recently, we’ve seen two trends take off that have helped to democratize wealth building.

Growth of start-ups has opened up new markets of angel investing and venture capital investing. While these entities sit outside of banks and stock markets, their practices are similarly discriminatory. Studies have found that despite the significant success of diverse teams, only 1% of VC funds go towards companies with Black founders. Why is investing so low? Studies show that VC/angel investors favor companies that look like themselves. When 77.9% of angel investors are male and 87.6% are white, there doesn’t leave too much room for increasing investments to minority businesses and ventures.

Crowdfunding is seen as a beacon for minority businesses, providing a platform for them to access nontraditional capital. The segmentation of the crowdfunding market among donation, debt, and equity is meant to provide these businesses with options as products are ideated and brought to market. While there seems to be better resource allocation among diverse businesses, researchers have found that “the crowd is not color blind… bias does exist and that that bias is subconscious”. This research found that Black founders were less likely to succeed because they received fewer and smaller contributions on donation crowdfunding sites. Only 18% of all projects on Indiegogo, one of the earliest donation crowdfunding platforms, are created by ethnic minorities.

Equity crowdfunding tells a similar story so far. These platforms don’t focus nearly as much on minority businesses. Even though minority entrepreneurs attract a high number of investors, they rarely secure their funding goals. In the first year of regulation crowdfunding almost 19% of businesses that filed with the SEC had minority founders. But, only 9% of successful campaigns had minority founders.

Crowdfunding’s promise for growing wealth for minority businesses has yet to be realized. But, the democratization of investing through crowdfunding and other financial technologies (FinTech) is another trend that is aiming to reduce the racial wealth gap. Without exorbitant broker/management fees and smaller investment minimums, investors can more easily access investment markets to build their own wealth. While there are limited studies that show investor demographics on these platforms, Pew has found that the stock market investment demographics look more promising than the make-up of angel investors. Black families comprise 31% of stock market investors, as opposed to the 1.3% of angel investors. And, recent proposed changes to Regulation Crowdfunding increases the limit that unaccredited investors may invest towards a business or venture (from $1.07 million to $5 million). This effectively opens up the opportunities for more individuals to build wealth via crowdfunding platforms, like InfraShares.

While technology and regulatory policies are enabling a more equitable marketplace to reduce the racial wealth gap, it takes individual actors to make concerted efforts to build diverse pipelines and investor bases.

InfraShares is committed to creating a platform that allows for broad-based investment in infrastructure assets. On one side of the marketplace, InfraShares is working diligently to build a pipeline of minority-owned businesses and ventures. On the other side, InfraShares is ensuring each opportunity has low investment thresholds to increase access to investment opportunities previously limited to only the wealthiest investors. With this two-sided approach, InfraShares is playing an important role in democratizing the investment process, especially for those who have historically been marginalized by traditional capital markets.