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From The Editor’s Desk: Unequal Access To Capital Exacerbates COVID’s Toll

From the Editor's Desk

The disparities in venture funding to Black and other minority-founded businesses in the U.S. are well-documented. Perhaps even more troubling is a parallel problem playing out in the traditional small-business world, which has been hardest-hit by the economic effects of the COVID-19 pandemic.

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A recent national reporting project by American City Business Journals found that small-business lending to Black-owned businesses over the past decade has cratered. The number of Small Business Administration-backed loans to Black-owned businesses fell by 84 percent since peaking before the 2008 financial crisis, the report found, based on data obtained from the agency. That dramatic decrease came despite a decade-long economic boom, a massive increase in bank deposits and an 82 percent increase in commercial loans overall. 

Last year, just 3 percent of the loan dollars in the SBA’s flagship 7(a) loan program went to Black-owned businesses, although about 9.5 percent of U.S. small businesses are Black-owned. 

As Crunchbase has found in our own diversity data, the figures are equally dismal on the venture side of funding: Just 2.6 percent of U.S. VC dollars in 2020 have gone to Black- or Latino-owned businesses, for example.

Unequal access to capital is playing out in real time as the economic effects of the pandemic take their toll. According to a Stanford University study cited in the Business Journals’ reporting, an astonishing 41 percent of Black-owned businesses in the U.S. have ceased operating since April. Among white-owned businesses, that figure is 17 percent.

“I don’t think most Americans understand the severity of the problem,” Orv Kimbrough, CEO of Midwest BankCentre, a community bank in St. Louis, told the Business Journal. “I call it corporate redlining.”

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What I’m reading

As I wrote last week, there’s a lot for startup entrepreneurs and investors to be concerned about in the Congressional antitrust report released earlier this month. Business Insider reports that the issue raising the most concern in the startup ecosystem is the report’s recommendation that all acquisitions by Big Tech companies be “presumed anticompetitive unless the merging parties could show that the transaction was necessary for serving the public interest.”

The report presumes that such acquisitions are fundamentally nefarious and requires that the acquirer show “that similar benefits could not be achieved through internal growth and expansion.” 

Certainly, the dominance of the largest players in the market influences which types of startups get funding and traction. Crunchbase News reporter Joanna Glasner last week went looking to see how many startups in the search space are getting funding, and her list came up pretty short. Given that, “it’s hard to argue that Google’s overwhelming market share, combined with its willingness to spend on in-house innovation to maintain and expand its search dominance, aren’t having any effect,” she writes. “At the very least, U.S. startups aren’t positioning themselves to become ‘the next Google.’ ”

Even so, the idea that every potential acquisition has to pass a litmus test feels like a “guilty until proven innocent” approach that angel investor Ali Partovi said “feels inconsistent with basic American principles.” 

“Many founders start companies with the dream of selling them, and this dream has fueled innovation and investment for decades,” he pointed out when speaking with Protocol earlier this month.

Illustration: Dom Guzman

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