It’s critical to protect equity investments in minority businesses from activist organizations

There’s a new, troubling trend for entrepreneurs of color.

Investment firms and funding organizations are being struck with complaints, and in some cases, federal lawsuits, over the constitutionality of financially supporting BIPOC (Black, indigenous, and other people of color) entrepreneurs.

Most recently, the American Alliance for Equal Rights — a conservative activist organization that opposes affirmative action — initiated a lawsuit against the Fearless Fund, which awards $20,000 Strivers Grants to Black women entrepreneurs. The suit claims that the Fearless Fund violates the Civil Rights Act’s prohibition of racial discrimination in business contracts because other races aren’t being considered for venture funding.

This new impediment to securing financing opportunities for BIPOC entrepreneurs is disconcerting. It’s made even more complicated by the alarming statistic that of the $214 billion in venture capital funding allocated in 2022, a slim 1.1% went to companies with minority founders. Plus, entrepreneurs of color who seek debt financing are still likely to be offered inferior loans, even when they’re stronger applicants than their white peers, according to the Journal of Marketing Research.

Confronted with these challenges, angel investors and investment groups that fund BIPOC entrepreneurs must remain committed to keeping vital early-stage capital flowing.

The Black and Latino Angel Investment Fund, which was launched by the Center for Urban Entrepreneurship at Rutgers Business School in 2021, is a group of individuals (including me) who have each committed between $25,000 and $50,000 to invest in promising startups owned by founders of color.

Based on my experience as a business school professor at Rutgers as well as an angel investor with the Fund, I have three recommendations to ensure that capable, ambitious, and primed-for-success BIPOC entrepreneurs attain the equity capital that they need for growth:

Invest in crowdfunding campaigns that support BIPOC entrepreneurs

Crowdfunding provisions that permit early-stage businesses to offer and sell securities were established in the Jumpstart Our Business Startups Act (JOBS Act), launched by President Obama in 2012. It’s a smart option that allows BIPOC founders to connect with potential funders who will embrace their entrepreneurial zeal and recognize that their ideas will be considered in the context of their culture.

A notable advantage that crowdfunding offers to underrepresented entrepreneurs is its democratic nature. This inherent color blindness removes a structural impediment that blocks minority investing within the conventional venture capital fund structure.

For example, on the equity crowdfunding platform Republic, 25% of investments have gone to companies founded by Black or Hispanic founders. Eleven percent of all campaigns on the platform Honeycomb have been run by Black founders, and SeedInvest has seen 12% of campaigns run by Black founders. This activity level is nearly proportionate to the percentage of Blacks in the U.S. population (13.6% according to Census.gov as of July 2023).

A noteworthy startup that turned to crowdfunding to secure initial financing is pocstock.

Launched in 2019, pocstock offers a curated media library featuring photos, videos, and illustrations of Black, Asian, Hispanic, Indigenous, LGBTQIA+, and differently abled people of color for the ad/marketing campaigns of Fortune 500 companies and global advertising agencies.

In March of 2023, pocstock raised $129,000 in crowdfunding via Wefunder. It leveraged this momentum to close on $500,000 additional venture capital in July 2023. By the end of next year, pocstock is on track to ramp up from $600,000 in annual revenue to over $2 million. It expects to close on another $500,000 of equity in 2024 as it maintains its growth.

Open your network to include striving BIPOC entrepreneurs

When the Black and Latino Angel Investment Fund was formed, many of the first people who committed to be investors were not only intrigued by the opportunity but also wanted to be personally involved in assisting, guiding, and advising the entrepreneurs whose ideas showed promise. This participation could be replicated in similar programs across America. It enables committed individuals with deep business experience and wisdom to expedite the learning curve — and catalyze private sector investment capital through their personal networks — for BIPOC entrepreneurs.

Most cities and states offer a variety of accelerator programs and incubators for early-stage entrepreneurs. Get involved with minority business ecosystems in your backyard — and provide real-time mentorship like removing obstacles and facilitating introductions to prospective investors and business partners.

Go Locker, a solution that offers safe and protected delivery of packages for shoppers and brands (its clients include Amazon, Poshmark, and Thrive Market), engaged a logistics CEO turned mentor to help hone the company’s business model. This unique relationship led to Go Locker securing funding through traditional sources and raising over $1 million to move the business forward.

The company, which was founded by a BIPOC entrepreneur who emigrated to the States from Grenada, scored a massive win in 2023 by partnering with the city of New York’s Department of Transportation to provide secure sidewalk lockers for pickup of packages by local residents.

To support BIPOC entrepreneurs as a mentor, look at the initiatives available at the Polesky Center at the University of Chicago, the Russell Innovation Center for Entrepreneurs in Atlanta, and the Center for Urban Entrepreneurship and Economic Development at Rutgers.

Establish intentionally inclusive investment criteria

If you’re looking to start a fund or get involved with a syndicate and are concerned about legal challenges, establish intentionally inclusive investment criteria that typically relate to BIPOC-owned startups. These would include entrepreneurs who attended or graduated from an HBCU (historically Black colleges and universities), live in or grew up in a low- or moderate-income community, or have at least one founder or member of the company management be of minority background.

Remember that intentionally inclusive does not mean exclusive, narrowly defined, or restrictive. It simply represents a transparent effort to provide patient and flexible capital to Black entrepreneurs and insulate against suggestions that non-BIPOC entrepreneurs are receiving discriminatory treatment.

Defining intentionally inclusive criteria in your fund/syndicate may also open the door to additional funding opportunities for BIPOC entrepreneurs. For example, the New Jersey Economic Development Authority offers an Angel Match program that matches direct investment in early-stage product-based technology companies with unsecured convertible notes from $100,000 to $500,000.

While the legal endpoint of lawsuits from agenda-driven actors such as the American Alliance for Equal Rights is yet to be determined, it has had a chilling effect. However, funders who wish to support BIPOC entrepreneurs shouldn’t sit on the sidelines to wait and see how things play out: Efforts to deliver critical equity capital must endure.

Persistence, ingenuity, and creativity are necessary to achieve this goal. Arian Simone, the CEO and co-founder of the Fearless Fund, exemplified this tenacity in an interview with BET: “We do have to pause on some work. But it doesn’t change or alter our mission. The work will continue.”

The three above pathways offer effective options for funders who are ready to move forward. Each can quickly and efficiently provide business builders of color with the required capital to move their ideas forward, bring their output to the marketplace, and generate returns for savvy investors.