Who's behind all the "access to capital" reform? (Part 2)
Hey folks. This is the 5th edition of The Great Near. My heart is heavy today, celebrating justice served for George Floyd while grieving lives claimed by police in the same breath and a system that makes this verdict the exception to the rule. Words don’t suffice to capture the heartache, but I find some solace in those trying to fix the systems that perpetuate this racialized violence. As Rodney Foxworth so eloquently stated last summer, “Our strength keeps us from breaking under the weight of racism and economic injustice. Instead, we build.” Today’s post, like last week, is about the leaders rebuilding our financial system by reforming access to capital. Part 2 covers trends in fintech, community investment funds, and CDFIs.
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Access to capital and the wealth gap are inextricably linked. Lack of access makes it harder to build wealth, which makes it harder to access capital, and so forth. It’s still hard to wrap my head around the fact that in Boston, the median net worth for non-immigrant African-American households is $8 (yes, eight), compared to $247,500 for white households. We should all be asking, “how did it get this bad?”
I was thinking of a way to illustrate this, but Elaine Rasmussen, CEO of Social Impact Strategies Group, does it better. Last Wednesday, I shared a few of these trends on the Skoll World Forum panel called Reparative Capital for Marginalized Communities. Elaine explained the forces that have perpetuated the racial wealth gap, demonstrating how financial principles like compound interest keep us stuck in a race that few people of color can win.
She started by explaining the concept of present value: the current value of a future sum of money at a given rate of return. Present value explains why I’d rather have $100 today instead of $100 in five years. If I invested that money today at a 3% rate of return, I’d have $116 in five years.
The same forces are at play when we look backward in time to understand how generational wealth is built. In this graphic, Elaine shows how exponential returns translate to social mobility, propelling a family over time up the income ladder. Where one starts — in this case, slavery vs. land ownership — is the most consequential factor in generational wealth creation.
Credit: Elaine Rasmussen, Social Impact Strategies Group
Of course, we aren’t all running the same race. The barriers to wealth creation in Black communities look very different than those in Native America. While people do break this cycle, your chances of going to college or purchasing property are statistically much higher when you start from a place of wealth.
Matthew Desmond, author of “Evicted: Poverty and Profit in the American City,” calls this a form of racist capitalism that “ignores the fact that slavery didn’t just deny black freedom but built white fortunes.” $100 invested at 3% in 1871 would return $8,425 in today’s dollars. In another 350 years, that becomes $262 million. Now think back to the wealth gap in Boston ($8 vs. $247,500) and imagine how hard it will be to close that gap in another hundred years.
It’s fun to make these lists, but as Elaine reminded us in the panel, “there are no silver bullets, so stop looking for them.” This isn’t a reason to lose hope. It is a reminder that we must invest in a creative mix of solutions that will redefine the role of capital and redistribute power in our economy. That’s what this list is for.
10 ideas and individuals turning “capital access” upside down (part 2)
Credit score alternatives—they exist, but we need more
Equity crowdfunding continues to grow
Blockchain and NFTs are here (to stay?)
Community investment funds are starting to get the right attention
The jury is out on CDFIs
6. Credit score alternatives—they exist, but we need more
It astonishes me that we’re still living with a system as antiquated as credit scores, one where paying off debt can actually be a mark against your creditworthiness. Credit scores can be used by your bank, employer, landlord, rental car agency, health care company—basically anyone who wants to determine how trustworthy you are. This gauge is not only broken, it runs on opaque algorithms created by three credit reporting companies frequently sued for breaches and inaccuracies in consumer data.
Sarah Ludwig adds, “Credit reports and scores are not race neutral. Rather, they embed existing racial inequities in our credit system and economy – to the point that a person’s credit information serves as a proxy for race.” The data supports this. Communities of color are more likely to encounter payday lenders, take out subprime auto loans, and hold excessive student loan debt. Unpaid debt, (or rather your credit utilization ratio) knocks down your credit score, which makes it harder to invest in your future with the good kind of debt, like mortgages or business loans. Good credit on the other hand (760+) could save you $32,923 in interest on a 30-year mortgage.
These systems make it painfully difficult to get ahead when we charge exorbitant premiums on being poor. Everyone knows it’s broken—including Congress and Vice President Harris— yet we continue to monitor our cute little credit gauges and pretend this makes sense.
One solution is to develop alternative forms of lending to substitute credit checks and collateral with trust and relationships. Prioritizing an applicant’s character over their financial conditions is known as character-based lending, and it’s already a cornerstone of many microfinance initiatives. It can, and should, be used for small business lending, specifically to meet the financial conditions in many BIPOC communities. Common Future and a few partners from our network may be getting in the game, but I’ll have more to say on that soon.
What else is out there? My friend Samir Goel at Esusu has created a product to help U.S. citizens build credit through rotational savings clubs, where funds are pooled by a group of individuals who take turns withdrawing it. This model is common in other countries, and they’ve added a unique “Esusu score” as an alternative proxy of trust. Experian recently unveiled a product allowing consumers to use phone, utility, and streaming service payments to boost their score on their platform. UltraFICO is another version of this that provides alternative scores to a small group of lenders. Regulation would go a long way to scale these small initiatives.
I’ll leave you with this quote from Sarah Ludwig: “In our culture, indebtedness – and certainly failure to pay one’s debts – is deeply entwined with concepts of morality. The insidious notion that our credit history speaks to our reliability as human beings is largely taken for granted.” It’s time we change this.
7. Equity crowdfunding continues to grow
Ever wonder why you can’t invest in the business down the street? Or how to invest in those crazy startups like rich people who strike it big every other day? Now you can do both.
Compared to traditional crowdfunding platforms like Kickstarter, where you fund an idea in exchange for a future product or service, equity crowdfunding allows you to invest cash and receive a piece of a company. Some platforms even allow you to loan capital and receive it back in a revenue share agreement once the company is profitable (see last week’s post).
This all became possible in the 2012 Jumpstart Our Business Startups (JOBS) Act, which created a legal pathway for businesses to raise investment from all people—not just accredited investors (read: very rich people). This was largely the result of lobbying efforts from platforms like WeFunder that petitioned to change the laws. Companies can now raise up to $5M/year, a cap that was just lifted last month.
A lot of people have called this leveling the playing field. Small businesses can theoretically seek grassroots investment, and you can theoretically invest in this cloud-based on-demand coffee company for luxury apartment buildings. 👀
I’m excited about equity crowdfunding because it opens up possibilities for small businesses and nonaccredited investors like you and me. Despite the possibilities, the major platforms have a notable absence of BIPOC founders, businesses outside of major metro areas, and businesses that serve low-to middle-income consumers. It’s equally disconcerting that 80% of campaign commitments may come from first- or second-degree associations with the company or entrepreneur, meaning it still might be hard to lead a successful raise without wealthy networks.
Many of the popular platforms are experimenting with new financial offerings, from crypto to real estate investments. Imagine if nonprofits or community-based entities could crowdfund local investment to acquire and flip blighted properties? Or if your local coffee shop could invest in new machinery and offer local investors a percentage of future profits? All of this is becoming possible, but it will be crucial to remember who we should be building these tools for.
Financial products are often built by and for the elite, then scaled to communities. What if we flipped this? Equity crowdfunding is still in its early stages. I hope we take the opportunity to build for Main Street, not Wall Street from the beginning.
8. Blockchain and NFTs are here (to stay?)
Are you tired of non-fungible tokens yet? 🙋♀️
(tl;dr: These technologies suck up a lot of attention in fintech, yet the conversation has typically been dominated by a small white elite. What would it look like for nonprofits, economic development agencies, or civic tech experts to adopt these technologies with communities at the forefront?)
I’m a skeptic, or perhaps just a luddite when it comes to AI, blockchain, or NFTs, which Amanda Yeo calls “the very costly, environmentally disastrous, tech bro equivalent of peeing on a hydrant.“ (A+) NFTs have democratized ownership, allowing all of us normies to invest in art, music, and even GIFs. NFTs assign value to digital “IP” that wouldn’t otherwise have it—like Jack Dorsey’s first tweet. If you have no idea what I’m talking about, here’s a fun Planet Money video.
Ownership is a hot topic in the local economy movement, particularly when it comes to employee ownership and worker co-ops as strategies for building wealth. Could NFTs shift patterns of extraction in Black and Brown communities, where culture and local expertise (dance moves, recipes, environmental knowledge) are frequently co-opted by mainstream white culture without due credit? Maybe. Most people believe more ownership is not the answer, especially when community assets are often the product of collective knowledge. Still, there are examples of Indigenous artists joining forces to use NFTs and early discussion of how it might allow other BIPOC creatives to thrive.
Amanda Yeo sums up my feelings: “NFTs are capitalism gone wild. They're the ugly result of the destructive desire to own things that don't need to be owned, purely for the sake of owning them.” The kicker for me? NFTs have a stunning environmental footprint. By some estimates, the average NFT creation generates the equivalent carbon to driving 500 miles in your average gas-powered car. This may not be the just transition we were looking for.
Blockchain, by comparison, is the technology that powers NFTs. Matt Reynolds describes it as “storing and processing sensitive information – like financial transactions or voting records – on lots of different computers, rather than sticking it in all in one place.”
Why does this matter for access to capital? Think of blockchain, NFTs, and equity crowdfunding as tools that enable us to own things we couldn’t own before. Blockchain makes it possible to tokenize real estate, meaning someone with limited capital might be able to purchase a slice of an expensive property and sell it more easily in the future. This could also allow tenants to purchase ownership on a fractional basis over time. Blockchain can also make it easier, in theory, for businesses to raise capital without complicated paperwork, brokerage fees, and other overhead costs through something called initial coin offerings—basically crowdfunding via blockchain.
Theory aside, fewer than half of ICOs survived four months after the offering (as of 2018) and real estate tokenization is still far from feasible for the communities who would reap the most benefit. Beyond this Medium article explaining how a hypothetical sandwich shop could use blockchain to raise capital, I can’t find a single case of a Main Street business using it successfully (I’m ready to be proven wrong).
Personally, that’s about all the energy I have this lifetime for blockchain, but I hope someone else will pick up the baton.
9. Community investment funds are starting to get the right attention
I’m taking a hard left here, but stay with me. When we talk about access to capital, owning our neighborhoods, and building real power in communities, few strategies address this nexus as much as community investment funds.
It took me a long time to wrap my head around these funds because they come in many shapes and sizes. The business models share similar names (community development loan funds, community development financial institutions, charitable loan funds, equity investment funds, etc.) and frankly, it is challenging to know where to start if you’re figuring out how to invest locally.
I’m going to write up a resource guide soon. In the meantime, here is a simple framework that many of these funds share: capital is sourced from people in the community (ideally grassroots or unaccredited investors), invested into local people, projects, and businesses with a significant interest in driving social change (ideally businesses run by people with the fewest resources and power), and deployed by individuals in the community (ideally those whom the fund is targeting).
Credit here goes to NC3’s Community Investment Funds handbook, a fantastic resource to learn about these funds. As they explain, growing public interest in impact investing and distrust of Wall Street has led to a small, but meaningful boom in new funds over the past few years. Boston Impact Initiative (BII), a leading nonprofit loan fund, has developed a Fund-Building Cohort to empower prospective fund managers (primarily people of color) to launch or grow community-based funds. Here are a few examples and opportunities to move your money today❗
Boston Ujima Fund is one of the best-known examples. It’s a charitable loan fund that uses a democratic, community-driven process for lending to entrepreneurs of color in Boston’s underserved neighborhoods. They’re currently raising $5M, and anyone can invest at a minimum of $50 for a target return of 1.5-3%. (Boston is an awesome hub for community capital and Ujima was incubated by BII)
Mountain BizWorks is a CDFI that invests in, and provides assistance to small businesses in Western North Carolina, primarily those that cannot access traditional financing, as well as low-income, minority, women, and immigrant entrepreneurs, and businesses that operate within the local food system. They have made $74M in loans over the past 30 years and offer opportunities to invest as low as $1,000 with a fixed-rate annual return of 3%.
East Bay Permanent Real Estate Cooperative (EBPREC) is the first permanent real estate cooperative to qualify for a national Direct Public Offering under Reg. A+ through the SEC. Translation: they can raise funds from the public to invest in permanently affordable, community-controlled homes in the Bay Area. Ownership shares start at $1,000 with a 5-year minimum term and an opportunity to raise dividends. (Currently available to investors in select states.)
RSF Social Finance is a public benefit financial services organization that offers loans, grants, and other investments. They have led the field for nearly 40 years, investing nationally in businesses that create social or ecological impact. It’s super easy to invest with RSF, and they offer minimum investments of $1,000 at interest rates comparable to a certificate of deposit. While every investment comes with risk, they’ve repaid 100% of investors’ principle and interest since 1984.
If you skim EBPREC’s investor terms or RUNWAY’s funder manifesto, you’ll notice their relationships with investors aren’t only transactional; they center trust, participation, and shifting power. This is what it looks like to redefine our relationship with money.
These funds might not be in the suite of investment options you’ve considered, but their impact potential goes far beyond the socially responsible ETFs promising to clean the planet and solve gender inequality. Moving forward, it will be important to update regulations to make it easier to create and operate these funds, similar to reforms in the JOBS Act. You can follow NC3 as they advocate for these changes.
10. The jury is out on CDFIs
You may have heard about community development financial institutions (CDFIs) in the news about federal relief spending. Many BIPOC small business advocates were rightly advocating to prioritize CDFIs after being largely shut out of the Paycheck Protection Program. These efforts paid off and $12 billion in new resources flowed to CDFIs and MDIs last year.
Opportunity Finance Network defines them as “private financial institutions that deliver responsible, affordable finance to help people and communities underserved by mainstream finance join the economic mainstream. CDFIs can be loan funds, banks, bank holding companies, credit unions, or venture capital firms.” You may already bank with a CDFI and just not know it.
CDFIs are the darling of the U.S. government when it comes to their efforts to reach underserved entrepreneurs. This isn’t unjustified as CDFIs have been a huge success. They have created or maintained 1.75 million jobs and funded over $400,000 businesses since their inception. But the field is split on whether or not to put all of our eggs in the CDFI basket. My colleague Lauren Paul, Common Future’s Director of Policy and Partnerships, offers some perspective:
“Though it’s been exciting to see the increased attention CDFIs have received in recent months, I worry that the CDFI sector is written off by those who are primarily concerned with scale, given the localized nature of the approach. This is why many people prioritize fintech as the #1 solution. While some have tried to infuse this thinking within the CDFI sector, these conversations continue to miss one another. There are so many valid, though uncoordinated, schools of thought: those who love CDFIs, those who don’t think CDFIs are nearly progressive enough, and those who care deeply about inclusion, but don’t necessarily think programs to invest in small business should grow given competing priorities. The Biden-Harris administration cares about financial inclusion and small business—we need to get organized. We’re losing allies because we’re not coalescing around a basic theory of change, and this is why less equitable solutions take the spotlight.”
CDFIs have been able to access critical capital through government funding programs like Community Advantage. This program is only temporary, so regulatory changes will be needed to make it permanent and open it up to more lenders. The Community Reinvestment Act (CRA), the cornerstone legislation that opened up community funding, also faces major changes, but it’s still unclear where the cards will fall.
In a post-COVID world, how can we get even more creative? While CDFIs have served neighborhoods that traditional banks won’t touch, they are still small in number. If we propped up the funds, microlenders, and entrepreneurial support organizations highlighted throughout this list, we might start to have the kind of diversity in financial services that will serve all communities, not just a select few.
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I can’t believe I’m at the end of this list without naming 50+ other individuals and organizations who are disrupting capital access, including Rodney Foxworth (Common Future), Heather Fleming (Change Labs), Alfa Demmellash (Rising Tide Capital), Brendan Martin (The Working World), Connie Evans (Association for Enterprise Opportunity), Astrid Scholz (XXcelerate Fund), James Johnson-Piett (Urbane Development), Tim Lampkin (Higher Purpose Co.), and so many more.
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What’s Up This Week? 👀 ✨
Caught my attention
Did you know that the SBA’s definition of underserved markets does not include women and people of color? Or that the CBO estimates natural rates of employment for different demographics groups? (The unemployment rate that would prevail in a neutral labor market.) Essentially, it’s the government saying 🤷♀️ to systemic racism.
A deep dive
Check out the SSIR essay Impact Investors Need to Share Power, Not Just Capital written by Denise Hearn and Alyssa Ely. It goes hand-in-hand with this series, as they argue “overcoming systemic injustices will take more than moving money.” The authors note that “how” investments are made is equally, if not more, important than “how much.” This piece is full of resources for investors trying to shift the power dynamics in decision-making.
Someone you should know about
You should know about Heather Fleming! Heather is the Executive Director of Change Labs, a Native-led and Native-controlled nonprofit organization based on the Navajo and Hopi nations. Given the immense barriers that Native small businesses face, Change Labs offers a successful business incubator, character-based loans, and other wrap-around support. Despite the disproportionate challenges, their impact is impressive (I almost guarantee you haven’t seen such rigorous evaluation). Heather spoke on last week’s Skoll panel, and one of her points really stuck with me:
"It's impossible to truly make capital inclusive until we recognize all the different rules each of us are playing by. Technology has yet to reach the Navajo nation and many Native communities. It’s estimated that $216M is lost annually in sales tax revenue to border towns, due to the fact that it's impossible to have local businesses in our communities. I’m looking forward to the day that we can leverage technology to see how investment in Native entrepreneurs can keep revenue in our communities."
until next time,
-Caitlin