I learned a shocking statistic recently: Less than 1 percent of venture capital funding goes to black founders. This must change.
Minority founders are, in general, more in need of outside financial support. For many people of color, the “friends and family” plan for raising seed money, which so many founders rely on — asking parents, aunts, uncles and grandparents for support to get their ideas off the ground — isn’t an option, because their family members don’t have the resources to offer such funds. While white families in the U.S. have on average $100,000 in net worth, African American families, for example, have on average just $7,500.
When funders fail to give entrepreneurs of color a fair chance, it’s everyone’s loss.
The exclusion of minority entrepreneurs from funding streams was discussed in panel after panel at the recent Social Capital Markets (SOCAP) conference, which brings together thousands of impact investors and social entrepreneurs to discuss their approaches to solving the world’s toughest challenges. New research presented shows that even the high-tech accelerators and incubators whose mission is to increase funding for underrepresented groups often have recruitment and selection biases that prevent diverse entrepreneurs from having access and exclusive programs that don’t feel inviting to women and minority entrepreneurs.
The reasons for the funding gap are multiple. First, bias is without question at play. Much of this may be implicit rather than explicit. While explicit bias is conscious discrimination, implicit bias is unconscious, largely the result of cultural messages, such as stereotypes. For example, studies have shown that even managers who do not believe they are biased tend to hire people like themselves. When 76 percent of the partners of venture capital firms are white and nearly 85 percent of foundation board members are white, we must expect that unconscious bias skews funding decisions.
Broadening your pipeline is a great way to do good and do well at the same time.
Second, many minorities do not have access to the education about the informal “rules of the game” of seeking funding that so many of those who are awarded funds receive, whether by upbringing or by attending an elite school, or both. In his 2010 book Invisible Capital, Chris Rabb describes these rules, which provide a powerful advantage in networking and in the fierce competition of pitching to funders.
Another reason for the gap is that venture capitalists or philanthropists often are unaware of the importance of the problems that minority founders are seeking to tackle. For example, the co-founder of Groundwork Ventures, an accelerator for entrepreneurs of color, Marcus Carey offered the case at the SOCAP conference of a black entrepreneur, Diishan Imira, pitching a business model for creating a supply chain for hairdressers in communities of color. The problem is that young women of color seeking hair extensions regularly confront poor consumer experiences, an issue that a white man who doesn’t know about the culture of these communities would not immediately relate to.
On the positive side, presenters at SOCAP offered a wealth of solutions that funders can easily implement to begin leveling the playing field. Here are just a few:
- Create “innovation funds” dedicated to providing more access to seed capital for people of color. The crucial first phase of successful entrepreneurship is getting seed money. If more minorities are granted these funds, they will be able to develop their ideas enough to have a much better fighting chance of obtaining larger venture capital investments.
- Actively expand outreach to minority entrepreneurs. Because access to networks is a huge barrier for minorities, the onus is on the funding community to create more access. According to Julie Menter, a principal at New Media Ventures, which seeks to create a more diverse pipeline of investments to consider, the firm seeks referrals from more than 150 different institutions, from nonprofit to academics, situated in the communities from which they want to recruit. Carmen Rojas, CEO of The Workers Lab, recommended attending conferences that are focused on issues directly impacting people of color, such as Facing Race, or events hosted by Color of Change, to meet with aspiring minority entrepreneurs.
- Take more meetings with entrepreneurs of color. Imagine if VCs and foundations opened up their calendar to meet with even just one entrepreneur of color per month or per week. Shannon Farley, co-founder of Fast Forward, an accelerator for tech nonprofits, suggested setting making time for “serendipity meetings,” where you agree to set aside a certain amount of time every week to sit down with people who you don’t hear about through your typical networks.
- Offer introductions and advice. Even if the idea of an entrepreneur of color is not a fit for your portfolio, offer them advice on how to get to the next level in launching their company or organization, or provide introductions to other funders who might be interested.
Capital markets have never been more competitive. If you’re a VC looking to get an edge, broadening your pipeline is a great way to do good and do well at the same time. Take the investments of Mitch Kapor, founder of Lotus Software, whose investment firm Kapor Capital focuses on investing in founders from underrepresented communities. In the firm’s current portfolio, 38 out of 74 investments have been made in companies whose founder is a woman or is from an underrepresented minority community.
According to Ross Baird of Village Capital, which trains startup entrepreneurs focused on real-world problems, Kapor’s $500,000 investment in African American entrepreneur Jerry Nemorin, CEO of LendStreet, a company creating financial instruments for the poor, has grown to administer $40 million in funds to help poor Americans get out of debt. This proves that inclusive funding can lead to large payoffs, for funders, for the funded and for us all.