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Finance

4 steps toward funding models that support entrepreneurs of color

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How can entrepreneurs of color thrive in a financial system built on exclusion? Discriminatory policies in financing and venture capital continue to marginalize racial minorities, as practices such as redlining — denying financial services based on demographics — persist in modern-day forms. Now, financial influencers are grappling with how to eradicate those policies and the worldview that perpetuates them.

On Jan. 14, MIT Sloan hosted “Uncovering Capital: Creating New Funding Models for BIPOC Entrepreneurs” to discuss ways to move forward. a former Berkshire Bank executive vice president and current MIT Sloan lecturer who focuses on inclusion in the innovation economy, moderated the conversation. Financial activist Lynne Hoey, head of lending at the Candide Group, and social entrepreneur Konda Mason, president of Jubilee Justice and strategic director of the Runway Project, joined her for a candid discussion.

The conversation included ways that leaders in banking and finance can reform their organizations and industries to lay the groundwork for funding models that support entrepreneurs of color. Here are four ways to start.

Institutions must confront racial capitalism

Change isn’t merely about devising new ways of doing business. It means acknowledging flawed long-term ideologies that perpetuate marginalization.

“The whole financial system, as far as I’m concerned, is just broken, and it has created a broken world. It goes deeper than tactical ways of doing [business]. It’s the mindset that has created the problem that has to be changed,” Mason said.

That means starting with confronting racial capitalism, the practice of extracting wealth and resources from people based on race. The term was first used by Cedric Robinson in his 1983 book “Black Marxism: The Making of a Black Radical Tradition.” Historical examples of racial capitalism include the theft of land from Indigenous people, as well as theft of labor, beginning with slavery and continuing today with convict labor and unfair pay practices.

“We have to change the mindset of extraction to the mindset of regeneration,” Mason said.

Traditional funding models have been created so returns accrue to capital holders, Hoey said, not to the community. That is “very intentional, in order to keep certain structures in place within our capitalist society,” she said. “These models have worked for a very specific percentage of the population, predominantly white men.”

Leaders must conduct this work on a personal level

For systemic change to happen, it’s important to inspire privileged people — typically those white men — to modify their outlook. The way to do this is not just through education but also exposure to diverse people, said Hoey, who heads up lending for Candide’s Olamina Fund, focusing on impact-oriented loans to private debt providers led by people of color.

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“I think the change actually happens on a very deep personal level, that then goes to a corporate level, that then goes to a policy level,” she said. “I think the incentives come from knowing folks, having the experience, and putting yourself out there. It also comes from really listening to people within your own organizations about what’s happening to them and being held accountable.”

Hoey recommended two books: “The Color of Money: Black Banks and the Racial Wealth Gap” and “Decolonizing Wealth: Indigenous Wisdom to Heal Divides and Restore Balance.”

And organizations should go beyond simply funding businesses of color and do internal work by supporting their own employees, promoting equitable policies, and making racial justice a key tenet of their culture, Hoey said. This buy-in is important for long-term behavioral change as opposed to lip service.

Organizations must plan before jumping in

It’s essential to do this anti-racism work before “jumping straight to solutions” for funding entrepreneurs of color, Hoey said. Otherwise, even well-meaning people could be doomed to repeat the same mistakes. That’s happened with the impact investing model, which directs investments to organizations that produce a social or environmental benefit, she said.

“Impact investing’s biggest marketing phrase is, ‘Do well by doing good,’ and we basically recreated the existing financial system within impact investing but felt a little good because we had some social goals that were being met,” she said. “I think that's something that these new models have to be very mindful of not actually recreating the system that we are saying we don't want to see.”

Lenders must shed the savior mentality

Many institutions maintain foundations that grant money to entrepreneurs of color, but their credit side is stuck in the past, still perceiving investing in those entrepreneurs as risky.

“You end up keeping [lenders] in this philanthropic charitable mentality,” Hoey warned, wherein financial leaders approach banking for racial minorities through a lens of altruism instead of empowerment. To combat this, lenders should use what Hoey called an integrated capital approach. Typically, this method combines financing through means such as low-interest loans and recoverable grants

And philanthropy, Mason said, has been stuck in a “plantation mentality of ‘I own this wealth, and you have to jump through these hoops to get this,’” though she said she has recently seen more people in the industry recognizing that the problem exists.

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