New Majority Capital: Closing racial and gender wealth gaps through small business ownership
Havell Rodrigues is the CEO of New Majority Capital, a U.S.-focused capital fund providing equity investments and management support to enable aspiring entrepreneurs from underrepresented backgrounds to acquire and run existing small businesses.
New Majority Capital’s stated purpose is to close the wealth gap. What is this gap, and where did it come from?
[Rodrigues] In the United States, we are confronted with a growing racial and gender wealth gap. As the name implies, this is the disparity in wealth accumulation, or “net worth,” between minority groups and more historically privileged demographics.
There are various systemic reasons and policies that have led to this gap, and most in U.S. history are rooted in inequities in asset ownership, such as land, means of economic production, and real estate. The displacement of Indigenous Americans, the institution of slavery, discriminatory housing policies, biased government support for military benefits, biases in hiring, and more have all contributed.
According to a report from Prosperity Now and the Institute for Policy Studies, people of color will make up a majority of the U.S. population by 2043, and yet the wealth divide between White families and Latino and Black families will have doubled, on average, from about $500,000 in 2013 to over $1 million. We are heading towards a worsening situation with no demographic equity.
Unlike many other initiatives that focus on training and incubating brand-new businesses headed by aspiring leaders from underrepresented communities – including Black and Indigenous Americans – New Majority Capital takes the unique aim at helping them acquire existing businesses. Why are you focusing on this approach?
[Rodrigues] Asset ownership has proven itself as a means to create current and inter-generational wealth. We have seen historically how real estate that has been passed down through generations has created a safety net for families and opened opportunities to tap into the equity ownership benefits in their real estate assets.
Small business asset ownership provides the same benefits. Owning a business doesn’t just allow our NMC Fellows to draw a good salary, it also enables them to tap into the excess cashflow distributions that come from being an owner of that business. As the business value appreciates over time, they are also building valuable equity as they hold on to this asset or if they decide to sell it.
Small business ownership typically comes from two options: start a business from scratch or acquire an existing business and grow it.
Given that there is a 70% success rate in taking over and running a small business versus the 75% failure rate of starting a new business from scratch, we are all in on acquiring and running an existing business. In addition to the benefits of inheriting a loyal customer base, established operations, and knowledgeable staff, small business acquisition is currently on the cusp of a huge window of opportunity. Over 12 million small business owners will be retiring in the next decade, and they will need help transitioning over their business to new owners.
How do you connect aspiring entrepreneurs with opportunities to go into business?
[Rodrigues] NMC is a fund manager and a B Corporation, which allows us to put impact over profits. We work with mission-aligned investors with the goal of driving impact around closing this wealth gap. The fund provides the necessary financing to transition ownership from a current business owner to a qualified entrepreneur. Very often the seller takes on a 10% seller note, accepting some of the purchase price as deferred payments after acquisition, and therefore has a vested interest in the transition and success of the business, even after their exit.
We also have aligned partners to help us accelerate our mission. NMC Foundation, a 501 c(3) non-profit organization runs two free programs: The Succession Ready program helps business owners get ready to transition ownership of their business to their next of kin, to their employees, or to third party individuals, and the bETA program trains interested BIPOC or Women entrepreneurs on the path to entrepreneurship through acquisition. Successful NMC Fellows (graduates of the bETA program) go on to acquire a business from a seller who has gone through Succession Ready training or from a seller who is represented by a small business broker. Quite often, we see existing employees of a business for sale complete our program to move into a position of acquiring the business from their employer.
How is New Majority Capital helping its aspiring business owners to overcome challenges in business knowledge and financial and legal services?
[Rodrigues] NMC’s bETA accelerator program has been specifically designed with help from faculty at Babson College to ensure bETA Fellows are 100% prepared to engage in the process of business acquisition and be successful post-acquisition. Each individual goes through a specially developed online Finance course which verifies that they have the required financial knowledge to run and grow a business and are qualified as capital-access ready. The program curriculum demystifies the process of business acquisitions, trains Fellows on how to work with sellers and brokers, and teaches breaks down what to look for in the due diligence process to ensure businesses are producing quality revenue (recurring is preferred), are profitable and are a good lifestyle fit for them. It also teaches the process of establishing an LOI (Letter of Intent), structuring the deal and finalizing the purchase and sales agreement.
NMC introduces Fellows to our selected service providers, who provide them with need-based access to pre acquisition loans that can cover due diligence services and provide access to “entrepreneur-friendly” capital for the final acquisition. Our entrepreneur-friendly capital solutions take into account the character of the person purchasing the loan (rather than their credit score or credit history). The pre-acquisition loans are also offered at close to 0% interest rates. The capital for the acquisitions is paid back over time as a percentage of the net income and is designed to be flexible and patient with a cap on it.
How many entrepreneurs has New Majority Capital connected with asset-ownership so far?
[Rodrigues] We have connected with 200+ entrepreneurs in NMCs first year of operation. Nearly 20 of them are close to acquiring businesses in the next quarter. Our first bETA program trained 30 BIPOC entrepreneurs who are all eager and ready to acquire businesses.
Why do you think that racial and gender disparity is a persistent problem in business leadership and asset ownership?
[Rodrigues] There are systemic reasons that have led to this. Typically, to successfully obtain a loan to acquire a business, an individual needs to own real estate that can be pledged as collateral or have enough savings in the bank. Funding is also needed to pay for legal and accounting services to get started with the search and due diligence process. Hence, we live in a society where you need money to make money and we work within a system that perpetuates this inequity. The playing field is not level when it comes to access to these opportunities.
More traditional venture capital funding for BIPOC and Women entrepreneurs is starting to grow but that model favors unicorn businesses, which carry high risk and high rates of failure, so access to that type of funding is only available to entrepreneurs chasing really big ideas.
We need a different form of capital that is not rooted in current models and “fit the box” criteria, otherwise current capital market structures and solutions will perpetuate these wealth gap problems.
What aspect of your work do you wish other investors and companies would adopt and do more of?
[Rodrigues] I would hope to see more support for entrepreneurship through acquisition training programs. Most of the Ivy League schools expose their students to the idea and opportunity of entrepreneurship through acquisition and search funds, however, this training does not spread beyond these elite campuses. In the U.S, we have a network of historically black colleges and universities (HBCUs) whose founding missions are the education of Black Americans. I hope that some of our programs can be adopted by HBCUs and made available to their talented entrepreneurial alumni and current graduates.
NMC would like to see corporations provide succession planning resources to their supplier base and promote ownership transition to BIPOC and Women entrepreneurs to help diversify their supplier base and retain good jobs in their communities.
We believe in training for future entrepreneurs regardless of their credit-worthiness. We hope to see banks partner with us to deliver our programs and view successful completion of our programs by NMC Fellows as a proxy for investment readiness.
Finish this thought for us: “Business is at its best when…”
[Rodrigues] Business is at its best when it serves the greater societal good.