Community Why Equitable Access to Capital is Essential for Growth

The banks behind Black business

When many banks failed at the height of the Great Depression in the 1930s, Jessie H. Mitchell raised funds from local Black businessmen to stand up Industrial Bank, Washington, D.C.’s only Black-owned bank at the time.

According to the DC Preservation League, Industrial Bank “contributed to the growth of Washington’s Black middle class by offering mortgages and business lending and by hiring African Americans when white banks refused to do so well into the mid-20th century.”

Black-owned banks like Industrial — which today fall under the federal designation MDI, or Minority Depository Institution — have been key in turning the tide, lending to Black people who have been locked out from capital opportunities with other institutions.

Following in his grandfather and father’s footsteps, Doyle Mitchell Jr. has served as president and CEO of Industrial Bank since 1984.

“Most of the 4,000 business clients we have are small businesses, many mom-and-pops, and then you've got others that range between $1 million and $10 million a year in revenue,” explains Mitchell, who goes on to note that about 90% of Industrial Bank’s customers are Black and have had a long history of leveraging bank services to finance their first house or car.

As businesses were forced to shut down across the country as a measure of protection against the coronavirus, government support skipped over more vulnerable business populations early on. According to several analyses, the majority of the first wave of SBA Paycheck Protection Program dollars, earmarked to help businesses from going under, went to white-owned businesses.

Mitchell says that, despite the loss of over 41% of Black-owned businesses during the pandemic, in 2020 Industrial Bank still managed to lend upwards of $25 million in business and commercial real estate loans to its business customers, and over $29 million in home mortgages between its D.C., Baltimore, MD, and Newark, NJ, branch locations.

But many Black MDIs themselves have also faced a troubling financial outlook in recent years. Since 2001, their ranks have shrunk by more than half, and as of the end of 2020, only 20 remain in operation. Much like other Black businesses, barriers to capital to sustain and grow their operations puts them at risk.

Equitable venture capital

Other forms of financing have also been historically discriminatory — and venture capital is no exception. Less than 3% of all venture capital dollars went to Black founders in 2020, with VC firms historically favoring white and male founders. “Pattern matching,” where venture capitalists have traditionally invested in the same archetypes, has persisted for decades.

But these trends have been slowly shifting as access to capital becomes democratized across racial groups and geographies. And the pandemic and subsequent racial uprisings sparked institutional investors and traditional venture capital firms to direct more funding to invest in Black founders.

“Investors need to understand that instead of applying the same expectations that they have for the stereotypical founder who's 22 and came up with something in his dorm room, not everyone's going to fit that profile,” says Rashmi Pendse, a Senior Vice President within the Citi Impact Fund.

In January 2020, Citi established the Citi Impact Fund, a social impact investment initiative targeting companies focused on sustainability, workforce development, and other physical and social infrastructure solutions. A particular area of focus was increasing investments in women and minority-led companies.

Later that year in September, Citi made a $50 million capital commitment of its $200 million in equity capital specifically for Black founders. Since then, nine of the first 24 investments by the Citi Impact Fund were directed to Black founders, accounting for 40% of the Fund’s portfolio and 20% of the Fund’s total equity invested to date.

Others at the table working to capitalize Black founders and business owners include Black-led venture firms like Lightship Capital, Backstage Capital, Black VC and Panoramic Ventures. 

“We have received amazing support from individuals and foundations in the Midwest, and large tech firms on the coasts,” says Brian Brackeen, co-founder of Cincinnati, Ohio-based Lightship Capital.

Brackeen believes that community foundations can play a critical role in economic justice to help close racial wealth gaps by making investments in Black-led firms well-positioned to help Black entrepreneurs grow and scale. 

Having raised over $50 million for the fund in 2020, Lightship Capital has made more than 10 investments into people-of-color-led companies thus far, including the cooking oil filtration pod company FreshFry, led by Black founders in the Midwest.

Options for capital empower Black business owner success. A move toward removing barriers by banks, institutions, and investors, could spark a new era of opportunity for both businesses and communities.