Meritocracy Myth

Edward Dugger III, president of Reinventure Capital and an early pioneer in impact investing, explores the intersection between the venture capital community and racial equity.

I could not have been more excited. It was September 1988, and I was on a flight from Boston to Los Angeles to meet with Michael Milken. Several months earlier I had received a call from his representative asking for a meeting. “Ed, you are a venture capitalist who has pioneered in providing entrepreneurs of color with equity investments, and we think you can help us,” he said.

Our conversation confirmed what I already knew. Milken and his firm, Drexel Burnham Lambert, had concluded that there was a huge, untapped investment opportunity in the form of entrepreneurs of color, who were essentially invisible to the rest of the investment banking market.

More importantly, they had declared their intention to capture that overlooked market opportunity. To do so, they would bring billions of dollars to market. Now they were undertaking a methodical process of aligning existing sources of equity capital for founders of color, and partnering to create new ones. The first of these was Georgetown Partners, a US$ 100m fund. Other partnerships were under discussion. Mine was one of them.

Heading for LA, was I actually seeing the dawn of a new era in America? One for which generation after generation of people of color, aspiring to the American dream, had been waiting?

Does it Dry Up Like a Raisin in the Sun?

As an African American, it was hard not to think about how far we had come. The civil rights battles for human dignity and justice under our Constitution had already been fought in Montgomery, Selma, Birmingham and countless schools, public facilities, and places of worship across the country. Was Wall Street next? The first generation of people of color whose lives the movement had changed were emerging as seasoned educators, scientists, politicians. Surely now at last Black entrepreneurs would begin to emerge and move into the mainstream of American business in ever increasing numbers.

As I grew up, I had witnessed up close the barriers to entrepreneurship for Black folks. I watched my uncle search for the financial backing required to launch a significant business. A chemist at the MIT Lincoln Laboratory, a U.S. Department of Defense research center, my uncle did advanced research on materials. Later he filed for and received several material patents. His dream for decades was to use his patents to build a global family business. When his first patents had nearly run their course, he used his savings to file for more.

But his dream was never fulfilled. There were no investors or banks interested in backing him. All the “friends and family” money he could ever expect to raise would fall far short of the amount needed to commercialize his inventions. As his patents expired, his dream — the American dream of turning hard work, innovation, and determination into family financial security for generations to come — slowly faded as well.

There were sources of capital my uncle could have turned to. The numbers dealer, the loan shark, or maybe the benevolent wealthy white guy. And many Black entrepreneurs, facing no alternative, went to these sources of capital. But, like my uncle, most decided not to, firm in the belief that the stakes were too high and the rewards would most likely accrue to someone else.

A new generation of entrepreneurs of color awaits our support. Many of whom are creating scalable businesses that deliver much-needed solutions to pressing social and environmental issues, while also creating life-changing jobs.
Edward Dugger III

Maybe it Just Sags Like a Heavy Load.

The wealthy white guy I was on my way to see was clearly cut from a different cloth. Milken had set his brethren in the investment banking world back on their heels by being extraordinarily contrarian. He didn’t buy the entrenched belief that a relatively small group of companies rated as “investment grade” deserved exclusive access to Wall Street’s capital. Pouring billions of dollars into hundreds of small, private and previously “un-bankable” companies, he had launched the likes of Ted Turner’s Cable News Network (CNN), Craig McCaw’s McCaw Cellular (now AT&T Wireless) and Steve Wynn’s Mirage Resorts and put into motion a structural shift in global finance. He had also unleashed a wave of entrepreneurial activity changing the landscape of American business.

Then he crossed the tracks: he backed Reginald Lewis, a Black lawyer and entrepreneur, whose business success beforehand was limited to the acquisition and operation of the US$ 50m McCall Pattern Company. Where prevailing Wall Street wisdom saw Lewis as modestly accomplished at best, Milken saw something else. He saw someone like Ted Turner, Craig McCaw and Steve Wynn, whose business acumen went far beyond the small platform he had masterfully built. Just Black and overlooked.

So he helped Reginald Lewis leverage his success in the pattern business into the acquisition of the US$ 1 billion Beatrice International, a business consisting of 64 companies operating in 31 countries. At one fell swoop, this icon of Wall Street partnered with Lewis to create the first US$ 1 billion company controlled by a Black entrepreneur.

Milken and Drexel’s decision to back Lewis was driven by financial returns, not social impact. They had taken a cold, dispassionate look at their business opportunities. Their research and understanding of the changing demographics of America led them to a sharply contrarian conclusion: entrepreneurs of color, historically deprived of capital to grow their businesses, were a large untapped market representing a significant source of future growth for Drexel Burnham. Reginald Lewis’ test case had proven them right. Recent breakthrough successes by Black entrepreneurs, such as Oprah Winfrey (Harpo), and Bob Johnson (Black Entertainment Television), building significant business in the media industry backed by white benefactors, were likely just the tip of the iceberg. A serious institutional infusion of capital into communities of color would unleash a much larger wave of entrepreneurial energy — and commensurate financial returns.

The breakthrough success of Black entrepreneurs in the 1980s, such as Oprah Winfrey with her production company Harpo, epitomized the ubiquitous, fizzing entrepreneurial energy waiting to be realized. Pictured, right, with Dwayne “The Rock” Johnson, Atlanta, Georgia, U.S., January 2020.

I intended to play an active role in unleashing that wave, and I was thrilled to contemplate the possibilities for both financial returns and social impact.

When my flight landed, I received a message stating flatly that my meeting was canceled. Drexel Burnham was in hot water.* The initiative died before it even started.

Or Fester Like a Sore—

More than 30 years have passed. Drexel is gone. The architects of its visionary plan to invest in entrepreneurs of color have dispersed. A new generation of investment bankers and private equity managers has emerged, but rather than seizing on Drexel’s insight, they are satisfied to provide financial services to a narrow network of clients just like them. They are apparently unaware of the vast missed opportunity, and blind to their complicit contributions to our nation’s simmering social and economic inequities.

An entire generation has come and gone, but the new era has yet to arrive.

Or Does it Explode?

Today, a small but growing number of investment firms, including my own — Reinventure Capital — have built on the conclusion that the Legend of Wall Street reached so many years ago: that entrepreneurs of color, still deprived of capital to grow their businesses, are a vibrant untapped resource pool representing a mighty investment opportunity.

Our work is amplified by a growing number of social investors who, in seeking both market financial returns and transformative social impact returns, seek to support businesses launched by people of color.

A new generation of entrepreneurs of color awaits our support. Many of whom are creating scalable businesses that deliver much-needed solutions to pressing social and environmental issues, while also creating life-changing jobs.

Let’s defer no longer.

Langston Hughes: “Harlem” (1951)
Hughes’ iconic short poem explores the lives of the Black community in Harlem, and considers the harm that is caused when the dream of racial equity is continuously delayed. Inspired by blues and jazz music, it poses one of American literature’s most famous questions: what happens to a dream deferred? The theme of mobilizing for equity and the notion of a promise perpetually beyond reach echoes throughout American art and culture, from Broadway to Dr. Martin Luther King Jr.’s speeches. Will the dream one day burst outward, demanding to be recognized and fulfilled?


*In September 1988, Drexel Burnham Lambert was sued by the SEC for insider trading and other unlawful acts, which involved Milken’s corporate finance department. The case was settled in 1989. In 1990, Drexel filed for bankruptcy.

Edward Dugger III

Edward Dugger III is a founding partner and president of Reinventure Capital. An early pioneer in impact investing, he also has had careers as a real estate developer, business strategy consultant, and interim CFO. In his more than 30 years as a venture capitalist, he has helped launch some of the nation’s most successful Black-owned companies, both private and public, and assisted them in attracting over US$ 2 billion in conventional capital, while achieving 30% diversity among managers and employees and generating over 7,000 family-supporting jobs. Based in Boston, Ed is a graduate of Harvard College and Princeton University.