The Other 1%–How Institutions Enable Financial Inequality

  • 5 min read

Simon Sinek wrote a best-selling book called, “Starting With Why.” When it comes to financial inclusion, however, we are going to be starting with where: Where do venture capital and private equity firms get their money? Understanding the where, or source, of funds helps us understand the flow of money and “why” so little of that funding is used to support and/or back Black founders leading viable startups with game-changing products and solutions.

Investors in VC funds are typically large institutions such as pension funds, financial firms, insurance companies and university endowments—all of which put some percentage of their total investible funds into high-risk investments. This includes VC funds that invest less than 1 percent of venture capital dollars in Black founders, but this is not the 1 percent that Black founders are trying to get into. This less than 1 percent that ends up with Black founders becomes even more interesting once you understand that VC funds typically receive a management fee of 2 percent of the total fund amount and keep 20 percent of the profits based on fund performance according to 

Another important bullet point is that the billions of dollars allocated by pension funds to fund VC firms comes primarily from state employees, local employees and teachers paychecks as part of their pension deductions. According to the Center for State and Local Government Excellence, African Americans represent 18 percent of the U.S. state and local workforce, and state and local governments employ about 19 million workers. 

Institutions, including state and local retirement funds and university endowments, are at the heart of the structural issues that perpetuate deep and broad economic disparities and are essentially a key part of the wealth gap problem we continue to face in America. According to Statista, pension funds in the U.S. have over $24 trillion in assets.

In the spirit of attacking the problem and not the person, I’d like to expand on that a bit for context purposes.

  • Attack poverty, not the poor. 
  • Attack the wealth gap, not the rich. 
  • Attack the education gap, not the teachers. 
  • Attack the structure that enables, not the people who promote it.

What we stand for has everything to do with where we sit and what rooms we are in. Investing in good humans–especially those who are underserved, but happen to have brilliant ideas that can be executed on with equal access to capital–should be baked into the culture of all  institutionally backed VC funds. Fiduciary responsibility has to include measurable financial equality when it comes to where and to whom VC firms deploy capital. If/when we attack the problem, we have a much better chance of actually working together to solve some very real problems to create some very positive outcomes.

Some data points are morally indefensible and economically egregious, including:

  • White unemployment fell to 12.4 percent in May, from 14.2 percent the previous month, while Black unemployment rose to 16.8 percent from 16.7 percent.
  • Income and wealth inequalities have made no progress since 1968, as white household wealth continues to be 10 times that of Black households.
  • Less than 1 percent of VC dollars are invested in Black founders.

Yet, very intelligent people prop up these lazy thinking notions that are divorced from reality on so many levels. The call to action and a huge step in the right direction to solve economic inequality is for institutions to stop funding VC and private equity firms that are absent of Black founders with equal access to the same resources as other founders in their portfolio. 

The ask is simply, equal access to capital. A few leading firms that have begun investing and leaning into Black founders to move the needle in the right direction include Capital Factory, Backstage Capital, Precursor Ventures, Google for Startups, SoftBank, Goldman Sachs, Lightspeed Capital, Moonshots Capital, MEI Capital Fund, and Vista Equity Partners.

We cannot omit private equity from the conversion since some of these VC-backed companies ultimately graduate to levels that attract private equity funding and/or acquisitions. Thus, they are part of the lifecycle that drives the wealth gap by being non-inclusive when it comes to funding/backing companies with Black founders.

Essentially, institutions are perpetuating the systemic economic inequalities while expanding the wealth gap year after year and fund after fund. Institutions could adopt a fair and equitable framework to investing while maintaining and/or outperforming their fiduciary responsibilities. These are not individual acts of economic exclusion. These are obvious and systemic issues that have been ignored for decades. 

Let me be clear, Black founders are not hiding from VC investors. Investors and institutions alike can no longer afford to be oblivious to the data that shines a bright light on a major source of these economic gaps. These opportunity disparities have been amplified since the onset of COVID-19.

Fun Fact: If you google “fund black founders” or “who’s investing in black founders,” you will get no results that take you to a VC firm that Black founders can engage with. This begs the question: How does a Black founder with limited relationships and resources get access to early-stage venture capital firms?

VC firms are always willing to engage in the risk that creates profit for them and their investors. However, they should also proactively diversify that risk by including Black founders as a good investment. It’s not about equal outcomes, it’s about equal access to capital that can lead to wealth-building opportunities for Black founders. Institutions are essentially accountable for the flow of VC funds or lack thereof to Black founders. Ultimately they are responsible for baking equality in with their fiduciary responsibilities along with incorporating investment inclusion into their investment strategies to eliminate economic inequities that perpetuate the wealth gap.

Equal access creates greater opportunities for equal outcomes and we all have a responsibility to interrupt inequality when we see it happening.

With a passion for driving financial inclusion, Dennis is a technology executive with over 20 years of successful entrepreneurial experience along with a distinguished multi-national cross-border M&A track record across leading FinTech, SaaS, business applications, and technology-enabled companies. Dennis led the M&A Delivery Team at PwC where he served as Managing Director and Co-Head of Application Integration. Prior, Dennis was Co-Founder and CEO of Uptown Financial Group where he oversaw the launch and scale of three business applications before successfully exiting. Dennis received a BS in Computer Science from and MBA in Finance from Southern Methodist University Cox School of Business.

  • Originally published October 29, 2020, updated May 5, 2023