I’ve been working with John Sebesta on a question that kept nagging at me while I was writing Capital Evolution and even more so when we wrote The New Builders*: why do so many obviously good businesses have such a hard time raising money? John holds the Koch Endowed Chair of Entrepreneurship and directs the entrepreneurship program at the University of Denver’s Daniels College of Business, and he’s spent years interviewing founders and funders across the country. What his research turned up lines up with what boht my experience and our research for the books has showed: the barrier isn’t mostly prejudice. It’s practice.
Inc. just published a piece John and I wrote together under the headline “America’s Capital Markets Fund 2 Kinds of Companies. Productive Businesses Get Lost Between Them.” You can read it at Inc., and the full text is below.*
The Capital Gap Isn’t a Diversity Problem. It’s a Dynamism Problem. By Seth Levine and John Sebesta — Inc.
America’s capital system is leaving economic growth on the table. Every year, it passes over thousands of capable entrepreneurs — companies with paying customers, growing revenue, signed contracts — who can’t access the capital they need to scale. The jobs they would create never appear. The tax revenue never materializes. The innovations never reach their full potential. This is often described as a diversity problem, but that framing misses the bigger point. It’s a dynamism problem, and it’s making the entire economy less prosperous.
It’s worth calling out the obvious: “diversity” now generates more heat than light, and we have no interest in relitigating it. Ours isn’t an argument about fairness. It’s an argument about growth. America systematically overlooks productive entrepreneurs who don’t fit the models our capital markets were built to fund. The result is slower growth, fewer jobs, less innovation, and lower tax revenue. That’s not a social grievance. It’s an economic inefficiency.
To understand the problem, start with how capital actually moves through the economy. America relies on two financing systems that work remarkably well at what they were designed to do. Banks fund stability: businesses with collateral, credit history, and predictable cash flow. Venture capital funds explosive growth: companies with software-like economics and a plausible path to outsized returns. Each model is rational on its own terms. Banks are doing exactly what banks should do. Venture capitalists are doing exactly what venture capitalists should do.
The problem is everything else.
Millions of businesses fall into a financing desert between those two systems. They have customers, revenue, signed contracts, and opportunities to grow, but they don’t fit either model. They’re too ambitious for a conventional bank loan and not scalable enough to produce venture-style returns — a specialty food company that has outgrown its commercial kitchen and needs capital to open its own facility; a childcare provider opening a second center in a neighborhood with a long waiting list; a commercial landscaping company purchasing equipment to serve municipal contracts — these are often strong companies with clear paths to growth, yet they struggle to access the capital they need. Not because they’re bad businesses, but because the available capital was designed for something else. One female founder described her experience as follows: “I’ve had my business seven years; we’ve been profitable for six of the seven years… and we cannot get bank financing. We cannot get bank financing. I’ve got a healthy balance sheet, but the cash numbers, we just can’t get to.”
The founders most affected are disproportionately women and people of color. Women-led companies receive only a small fraction of venture funding, and Black founders receive even less. But those outcomes are largely symptoms of a deeper structural problem. The system rewards businesses that fit a narrow set of financing models, while overlooking many that do not. Founders we interviewed described it as “an exclusive club I don’t know how to get into.” After years of studying founders and funders across the country, the pattern stopped looking like a series of individual decisions and started looking like infrastructure. The system wasn’t failing. It was operating exactly as designed. The question is whether that design still serves the economy we have today.
The consequences reach far beyond the founders who can’t get funded. Entrepreneurship has historically been one of America’s most powerful engines of upward mobility. But America’s capital markets are increasingly optimized for a narrow set of outcomes. Venture capital has become more concentrated in fewer sectors, fewer geographies, and fewer business models. Banks remain focused on collateral and credit history. Between them lies a growing financing gap for companies that are creating jobs, serving customers, and expanding steadily, but don’t fit either model.
When the businesses we finance become more concentrated, the ownership, wealth, and opportunity they create become more concentrated too.
The stakes are national. In 1940, 90 percent of American children grew up to outearn their parents. For millennials, it’s about half. Today, it is easier to climb the economic ladder in many European countries than it is in the United States. An economy that finances a shrinking share of its builders is an economy quietly narrowing its own pathways to opportunity.
The encouraging finding from our research is that the problem isn’t primarily prejudice. It’s practice.
Equity investing runs on pattern-matching: the résumé that looks fundable, the warm introduction, the growth curve that resembles the last winner. Debt runs on collateral and credit history. Both are rational shortcuts. Both are calibrated to reduce risk. And both systematically overlook entrepreneurs who fall outside the model. The funders we interviewed were actively working to serve these founders but were constrained by institutional structures and mediating practices that scaffold and sustain their professions. Talk is abundant. But what we’ve created is a language of inclusion (at least in some sectors of our economy), but without practices to support it.
Which is also why the problem is solvable.
Practices, unlike ideologies, spread when they pay.
Consider what happened when KKR began granting equity to every employee at many of its portfolio companies, including the factory floor. It wasn’t pursuing a social program. It was testing a business hypothesis: people who own a piece of the outcome help create more valuable companies. The results were difficult to ignore. When KKR sold CHI Overhead Doors in 2022, hourly workers received payouts averaging $175,000. Across dozens of companies and more than 190,000 workers, broad-based ownership has coincided with stronger retention, engagement, and returns.
Nobody passed a law. One firm changed its assumptions about who should participate in value creation, generated superior outcomes, and others began to follow. That is how change moves through a market: not by decree, but because the first movers discover value others have overlooked.
The same principle applies upstream when funding entrepreneurs. The answer isn’t to replace markets. It’s to improve how markets discover value. Banks can underwrite cash flow and contracts, not just collateral. Investors can build structured sourcing systems rather than relying solely on warm introductions. Venture firms can study the companies they pass on as carefully as the companies they back. Community lenders and alternative financiers can test and scale new models in collaboration with traditional funders. None of these ideas is theoretical. They are all working somewhere today. The institutions that adopt them first gain access to value that others overlook.
For decades, we’ve argued about whether America needs more capitalism or less. That’s the wrong question.
A dynamic economy doesn’t need more or less capitalism. It needs more capitalists. More builders. More owners. More people with a real stake in the businesses they create.
The founders our system is built to overlook aren’t a charitable cause. They’re the growth we’re leaving on the table.
Fix the practices that determine where capital flows, and capital will find them. The reward isn’t fairness for its own sake. It’s a more dynamic economy, broader ownership, greater mobility, and faster growth.
That’s not a diversity program. It’s how an economy stays alive.
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Seth Levine is a partner at Foundry and co-author of The New Builders and Capital Evolution: The New American Economy. John Sebesta is the Koch Endowed Chair of Entrepreneurship and Director of Entrepreneurship at the University of Denver’s Daniels College of Business.