Impact Alpha
March 29, 2021
Georgia is throttling voters. The South’s financial system is doing the same to its entrepreneurs.
By Beth Bafford is Vice President, Syndications and Strategy at Calvert Impact Capital.
…Today, my day job is focused on shifting the behavior of the capital markets to be more inclusive and equitable. We – alongside incredible community lenders and leaders across the south – recently announced an effort to expand access to credit for small businesses in the region called the Southern Opportunity and Resilience (SOAR) Fund. In this context, I have been digging into data on banking and access to capital in the south and the disparities are staggering.
Power shift
So what do voting rights and access to capital have in common? It’s all about power.
While the South’s deep history of voter suppression is well known, its poor record on access to financial services does not get much attention. The region lacks access to financial products of every type: venture capital, banking, lending, and philanthropy.
In 2019, Georgia saw just $63 per person in venture capital funding vs. $1,559 per person in Massachusetts. We all know Massachusetts is one of the top states for venture capital, but Georgia lags behind states like Michigan and Pennsylvania too, despite having similar populations. And Georgia is one of the states with the most venture investments in the region. Less than $8 million in venture funding went to Mississippi businesses in 2019 – that is the equivalent of one seed round in Silicon Valley.
For banking, Georgia and Massachusetts have similar numbers of banks per population, but drastically different asset sizes. Georgia has 4.5 times fewer bank assets than Massachusetts, which leads to much less lending. Overall, the south has 34% of American households but nearly 40% of the underbanked population.
Finally, philanthropy. The south gets $0.56 of every philanthropic dollar granted in other regions, according to a study done by the National Committee for Responsive Philanthropy. For giving characterized as supporting “structural change,” it is $0.30, despite the fact that there is a critical need for structural change. The south is the least upwardly mobile region in the country, particularly for people of color, and most states in the south have drastically higher than average portions of their population living in “distressed” communities, as defined by the Economic Innovation Group. Nationwide, 16% of the population lives in a distressed community. In Mississippi, Louisiana, Alabama, Arkansas, and Oklahoma, it is more than 30% of their populations.
If there are limited funds flowing to the south’s entrepreneurs, small business owners and community organizations, we are leaving opportunity on the table. Like voting, access to capital grants people the ability to create their own future – in this case by generating income and building intergenerational wealth. When there is limited supply of capital, those making investment or lending decisions hold more power than they would in markets where demand doesn’t vastly outstrip supply. Those holding that power have no incentive to promote a more functioning capital market – much like politicians in the south who would lose their positions of power if every person in their state could vote.
These limited capital flows are not due to lack of ideas, innovation, or talent – many states in the south are leading the nation in starting new businesses. And our new remote reality, paired with lower cost of living and warm weather, suggests that population growth will bring more purchasing power to the region. But we will have failed if it is only the transplants who drive new economic growth and wealth creation. More than half of the Black population and more than a third of the Hispanic population lives in the south – and we are seeing much greater growth in new business creation from women, particularly Black and Hispanic women. But they are, as we all know, chronically underfunded across all asset types.
Purpose-built
Luckily, there are strong local and regional community finance organizations (called community development financial institutions, or CDFIs) growing to meet this demand. We have the privilege of working with 13 of them through SOAR – Accion Opportunity Fund, Access to Capital for Entrepreneurs (ACE), Ascendus, BCL Texas, Black Business Investment Fund, Communities Unlimited, LiftFund, National Development Council (NDC), Natural Capital Investment Fund, Pathway, People Fund, Southern Bancorp Community Partners, and TruFund.
These organizations – and many other CDFIs and minority depository institutions (MDIs) in the region – have been built to serve the large gap in the market for commercial lending and investing and will play a critical role in supporting the region’s equitable economic recovery. But they too have struggled to attract capital and resources at the scale that is required to fully dismantle the structural inequities in the region….