Combining blended capital approaches and systems thinking can help address the lack of capital for underserved entrepreneurs by taking a holistic and collaborative approach to investment and support.
Blended capital approaches offer an important tool to address critical challenges to gender and racial equity. The term is used to describe a type of financing that combines different sources of capital, such as grants, loans, and equity investments, in such a way that leverages the strengths of each type of capital while mitigating the weaknesses. Blended capital models can be a powerful tool for supporting BIPOC- and gender-diverse entrepreneurs facing barriers to accessing capital due to the financial, cultural, social, educational, and other systemic barriers, creating a customized solution that addresses the unique needs of each entrepreneur or initiative.
Systems thinking encourages us to consider the interconnectedness of different elements in a system and how they contribute to outcomes, providing a toolkit to avoid the pitfall of equating correlation with causality. Said differently, a systems thinking approach offers us a way of understanding the world that frames current outcomes and disparities due to the complex systems that produce them rather than inevitable or circumstantial conditions. One of the key concepts in systems thinking is the idea of feedback loops, which are loops of cause-and-effect relationships within a system. These feedback loops can be either reinforcing (positive feedback) or balancing (negative feedback), and they can significantly impact the behavior of a system as a whole.
When considering the lack of capital for underserved entrepreneurs, a systems thinking approach would encourage us to look beyond just the lack of capital itself and consider the other systemic barriers that may be contributing to this issue in a reinforcing or positive feedback loop, such as historical and ongoing discrimination, lack of access to education and support, and limited access to well-resourced social networks. Consider, for example, how a gap in the average wealth of Black and White business owners can reinforce and grow the racial credit gap we see in small business financing, further deepening the wealth gap. Data collected by the Black Wealth Data Center shows that the median assets of White individuals in Pennsylvania are $101,325, while the median assets held by Black Pennsylvanians are just $8,780 (Racial Wealth Equity Database, 2023). This means that it is often impossible for Black entrepreneurs to source the necessary start-up capital from friends and family to initiate commercial activity. Moreover, household incomes and home values are lower for Black business owners versus White business owners, meaning less disposable income to invest in their businesses and a stunted ability to secure small business financing due to the need for assets to secure a business loan (Gorman et al., 2017) During the pandemic, Pennsylvania, New Jersey, and Delaware lost 627 bank branches, mostly in low-income, non-White census tracts, further limiting opportunities for residents to access capital and accrue wealth (Barca et al., 2023). As the credit gap grows, the opportunities for Black businesses to own and leverage their personal assets are diminished, further reinforcing the wealth gap.
Blended capital approaches can be particularly effective in addressing these systemic barriers, as they allow for the kind of flexibility and collaboration that can provide wrap-around support for diverse business owners. One blended capital model approach might leverage a partnership between a foundation addressing the racial wealth gap and a local CDFI, using philanthropic dollars to fund programs like PAGE that provide training and mentorship for entrepreneurs of color, while sourcing market-rate debt capital from the lending community to fuel business growth amongst local entrepreneurs. This type of investment would catalyze the impact of the foundation’s philanthropic dollars by connecting diverse entrepreneurs directly to aligned capital resources, while mitigating the risk taken on by the community lender via the support offered to their borrowers as they operate and grow their businesses. In another example, philanthropic dollars can serve to de-risk follow-on investment by an impact investor at a later fundraising stage, thereby unlocking unprecedented impact for communities of color and the regional (and even national) economies in which they live. This can address the risk aversion many investors may have towards investing in underserved entrepreneurs and provide critical early-stage support to help a business to scale and succeed.
At the Economy League’s PAGE program, we’ve attempted to implement this approach through a pilot grant fund called the Hurdle Fund. In partnership with ImpactPHL and the American Sustainable Business Network, we provided 6 grants totaling $125,000 to an array of local, diverse businesses working with several of our anchor partners needed to cover small, fixed-cost investments such as insurance, certifications, and equipment. By providing a strategic, philanthropic intervention at the point of a probable contract between institutions and BIPOC businesses, these grants allowed the businesses to capitalize on important opportunities that will lead to sustainable growth. Within 3 months of the grant disbursal, business owners reported over $1.9MM in contract revenue that would not otherwise have been obtained without removing their requisite hurdles. In two cases, the assets purchased with Hurdle Fund dollars and the subsequent acquisition of multi-year contracts with reputable anchor institutions played a critical role in the business receiving follow-on capital from local lenders who noted a significant reduction in the risk profile of the firm. These sorts of chain reactions are just one example of the catalytic power of blended capital approaches to business growth.