How to Make Investments in Black-Owned Companies

For profit-driven investors, investing in American companies is a crucial component of wealth growth; therefore, the sooner one can seize this opportunity, the better. The same is true for the sector of expanding Black-owned businesses, which has accelerated over the past few years. Black-owned companies generated $141.1 billion in yearly sales and $42.2 billion in wages in 2020, based on the U.S. Census Bureau’s most recent Annual Business Survey, published in November 2022. These companies accounted for around 27.5% of the healthcare and social support industry. According to the latest current census data, there are over 3 million Black-owned enterprises in the United States, with Black entrepreneurship increasing by around 38% since 2019.

It’s past time investors offered Black-owned businesses a closer examination when adding to their portfolio positions, given the sector’s strong growth rate and the growing number of success stories. Even for investors eager to assist new ventures, there are several options to select from. Consider the ginger beer manufacturer Uncle Waithley’s Beverage Co. in New York City, employing a Start Engine crowdfunding approach to build traction for its venture in the specialized soda and carbonated beverage sector. According to market research, the specialty ginger beer market will reach over $8 billion by 2030, growing at a CAGR of almost 7%.

Uncle Waithley’s inventor Karl Franz Williams says, “a lot has transpired in the past year since we debuted our brand in the Whole Foods Market in Harlem through early 2022.” We were the ginger beer with the highest sales at that particular store, which prompted an extension into 14 more Whole Foods stores by October, and we hope to be available in all 56 Northeast sites by late February. One method to begin investing is to evaluate the possibilities of growth-oriented small firms like Uncle Waithley’s, but there are other options. These are a few ways that investors can interact with Black-owned businesses:

• Spend money on venture capital.
• Consider investing in angels or startups.
• Assistance to black fund managers.
• By investing with CDFIs.
• Learn more about peer-to-peer lending.
• Shares of companies run by Black people.

Spend money on venture capital.

One strategy to assist Black-owned companies is to invest in venture capital. Venture capital investments support startups and small businesses with the potential for long-term development as opposed to investing in publicly listed shares of a big, verified company. As venture capital investment is hazardous, affluent individuals, financial institutions, investment banks, and companies that fund startups frequently make these investments. Yet, equity crowdfunding websites like StartEngine have become more popular as a tool for businesses to gather money to help them launch.

Octavio Sandoval, head of investments at Illumen Capital in San Francisco, estimates that out of the $215.9 billion in venture capital given in 2022, black entrepreneurs raised $2.254 billion. The fact that this statistic accounts for only 1% of any venture capital financing in a given year suggests significant space for expansion. According to Sandoval, “Research continues to demonstrate that different leadership teams tend to outperform merely white-male teams.” Thus, there is still much room for investment in Black-owned companies.

Consider investing in angels or startups.

According to investment experts, the “friends-and-family round” at the beginning of a startup’s development is its most crucial phase. This is especially true for newly founded minority-run businesses. BIPOC (Black, Indigenous, People of Color) founders have direct exposure to only about one-twentieth of that amount, which means they have fewer resources to hit the growth metrics they need to start raising subsequent rounds, according to data from an innovation hub called 1871, says Desiree Vargas Wrigley, chief innovation officer at P33. This Chicago investment company focuses on minority-owned businesses.

To provide Black-owned firms the best opportunity of building companies that expand to the next level, Wrigley thinks that pre-seed or friends-and-family investments are the most effective ways to invest in them. Finding out about pre-seed funds that help Black founders is one of the most excellent methods for accredited investors to access deal flow and support Black-owned firms directly. Wrigley claims that “amazing” entrepreneurs in the portfolios of investment firms, including Fifth Star Funds, Capitalize VC, Harlem Capital, Backstage, Collab Capital, LongJump, and Rising Stars, are all actively soliciting money and probably require the $25,000 cheques from investors.

Assistance to Black Fund Managers

To diversify portfolios, reduce risk, and increase impact, Wrigley advises investing with Black investment firms for investors who aren’t ready to make direct startup investments. 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 a host of others are great fund managers, according to Wrigley.

Other funds may provide a doorway to investments similar to minority-run portfolios fund. Carrie Endries, director of infrastructure projects at Reynders, McVeigh Capital Management LLC in Somerville, Massachusetts, cites Founders First Capital Partners as a superb example. “The organization’s Change Catalyst Fund offers revenue-based funding to assist companies with diverse founders. The fund behaves like a bond since investors get quarterly distributions that pay them over seven years at a fair rate.”

By Investing Through CDFIs

Invest Via CDFIs Speaking about entry points for investment, community development finance institutions, or CDFIs, are one means to fund the expansion of Black-owned companies. Private financial organizations known as CDFIs offer cheap loans to underprivileged communities and persons who have historically had difficulty accessing credit. BIPOC affordable homes developers are given priority by CDFIs like Capital Impact Partners, who strive to increase the number of players in that sector, according to Endries. “Community lending funds, including Boston Impact Initiatives, promote racial justice through their loans, as well as by requesting that their portfolio firms diversify their suppliers and staff, thinking about creating wealth in BIPOC areas in various ways.”

“CDFIs and community lending funds are frequently available to non-accredited investors,” she continues. Endries advises high-net-worth people interested in venturing or angel finance to connect with investment advisers and capital management companies that focus on impact investing. Advisers may link with impact funds that are dedicated to giving Black-owned companies development money, she continues. “They can also assist you in regionally focusing your assets.”

Learn more about peer-to-peer lending.

Peer-to-peer financing can have a long-lasting effect on company owners for investors searching for an innovative and less expensive approach that invests in Black-owned enterprises. Peer-to-peer lending eliminates the need for financial institutions by allowing people to provide credit to borrowers. According to Kathy Guis, vice president of investments at Kiva, a crowdfunding company based in San Francisco, “In 2022, 49% of borrowers through Kiva U.S. were Black-owned enterprises, including creative organizations, health care providers, retail shops, cosmetics and beauty lines, and more.” “These no-interest loans are frequently the initial stage in the funding process for small business entrepreneurs. We know from our study that they have never used formal financial services before.”

Guis continues, “In addition, these loans can assist in giving young businesses a track record of success.

Shares of Black-Owned Companies

The equities of Black-owned companies can be purchased; however, there is a significant caution: Due to the lack of minority-owned publicly listed enterprises, it isn’t easy. According to Sandoval, seven Black-owned businesses were among the 4,300 public corporations in the United States that the American Council for Capital Creation reported in June 2022. “That represents around 0.16% of publicly traded corporations.”

They were adding that “Capital is necessary for black-owned enterprises to expand and develop their operations. Investors ought to support Black-owned companies by making private investments in them. The likelihood of completing an IPO increases when Black-owned enterprises are appropriately funded.”

Endries claims that exploring publicly listed Black-owned businesses requires some work and imagination. The fact that ownership is distributed among shareholders makes it challenging to classify a publicly listed company’s rights by race, according to the expert. Looking for businesses with well-represented diverse leadership, particularly at the CEO, SVP (senior vice president), and board levels, is a preferable strategy.

“Many businesses also publish their diversity data, and sustainability investment mutual funds frequently stress social or racial equality as one of their selection criteria,” adds Endries.