A lack of capital continues to keep women, people of color and LQBTQ+ people from starting and expanding high-growth businesses. Data show that merely 5 percent of all venture capital deals go to them.
And within this subset, the numbers are even bleaker for Black and LGBTQ+ founders, who see roughly 1 percent of their projects funded. Even more sobering: only 34 black women founders raised more than $1 million in venture funding from 2009-2018.
It’s difficult to look at these statistics and say that these issues are not systemic, or that it’s simply an entrepreneurship issue.
In fact, the best way to look at this issue is broader. America’s entire financial system is beset by a lack of diversity. The problem is deep. The solutions will be deep, too. While establishing mentoring programs or setting up diversity funds might have been the first step forward in the right direction, they aren’t enough. If VCs represent an ocean of money, creating special funds for minority founders is like building a few wading pools for them to splash around in.
Not only is the ‘over-mentored, under-funded’ approach to boosting minority founders objectively patronizing, but it’s also not working. Minority founders continue to find a cultural disconnect with VCs; 90 percent of which are led by white men.
VC/PE firms and investors need to move beyond mentoring minority founders or directing them to diversity funds. They need to provide these groups real opportunities to earn funding.
How Bad is it Actually for Minority Founders Who Need Money?
COVID-19 shed additional light on the magnitude of this problem. only 12 percent of Black and Latino business owners who applied for PPP loans reported receiving their desired amount of funding, according to a survey by Global Strategy Group.
It’s no secret that minority-owned businesses have struggled to obtain capital from banks for a long time. This global pandemic and the ensuing economic crisis only highlighted the tenuous relationship between the financial system and founders outside the norm. It is also worth noting that this was the first time some minority founders had ever sought a bank loan.
Now, banks are getting increasingly constrictive in lending, and with minority and women founders already restricted in access to limited capital, the current credit squeeze has hindered these groups’ access to funding even further.
What are the immediate things venture finance leaders can do to improve access to capital? What can minority founders do?
When looking for new companies to add to their portfolio, VC firms should move beyond the familiar and prepare to feel a little uncomfortable.
Most VCs are introduced to new enterprises via networks based on college alumni, colleagues, and peers. This obviously excludes women and minority founders who might not have access to the same networks.
On the other side of the coin, minority and women founders need to expand their search into VC firms, incubators, and competitions that provide opportunities, such as our recent Chicago Bulls Venture Competition. Be proactive. If you are a minority or woman founder, seek out employees, advisers, and other stakeholders who have voiced a commitment to your shared values. A supportive network is a productive network.
There’s also a public policy component to ensuring minorities and women have access to the opportunities they need. Even as the private sector needs to create more value, government entities similarly need to pledge support via credits and grants. For their part, elected officials should stress the economic value — especially in terms of job creation and growth — of supporting more early-stage ventures led by diverse founders. This message should be stressed across the local, state, and federal levels.
What can VC and PE firms do to integrate minority businesses into their overall business strategies?
First, actively seek out minority representation on venture capital boards and on advisory teams. Listen and make it a priority to understand the needs of minority communities. Understanding diverse demographics doesn’t simply empower minority and minority-owned businesses: It funds the items communities actually need, rather than another software platform pitched by a hoodie-clad tech bro.
For example, my firm LOUD Capital is devoted to staking creative solutions making a difference. Our motto is “Venture for People,” a phrase purposeful in its duality: one, how can we make an impact with our capital; and two, how can we drive profitability? Our goal is to empower phenomenal entrepreneurs and invest in under-tapped communities. We seek out the projects that stand to make an impact for these demographics and in these communities. Whether it’s a source of jobs for the recently incarcerated or helping people have reliable transit for commuting or picking kids up after school, we support the startups whose returns to the market are not only monetary. Sometimes it requires a bit more digging to find these projects and entrepreneurs, yes. But as venture capitalists, it’s incumbent on us to find and fund the projects that will make a difference.
Case in point: We recently launched the $10 million LOUD Capital: Pride Fund, which supports LGBTQ+ founders. The feedback so far has been encouraging, with the fund getting coverage in Vogue’s business vertical. Earlier this year, our pitch competition with the Chicago Bulls drew significant interest from minority and female founders, with the winner being a pair of female entrepreneurs whose product benefits underserved populations.
What’s Next for VCs and Minority-Owned Businesses?
Diversity significantly improves financial performance on measures such as profitable investments at the individual portfolio-company level and overall fund returns. There are 8 million minority-owned firms in the US and the greatest source of jobs is via small businesses, which account for 50 percent of employment. Do the math.
Actively ensuring that more VC funding goes towards women- and minority-owned businesses isn’t simply about fairness. It’s also about ensuring the long-term health of the economy.
Kamala Harris said in a Wilmington, Delaware, before she introduced President-elect Joe Biden, that Black women are “too often overlooked, but so often prove that they are the backbone of our democracy.”
The lessons of this year’s election carry over to the economy. Under-tapped founders are backbone of our economy. When we recognize and invest in them, we’ll make their companies stronger, earn returns and benefit our economy as a whole.
We have barely scratched the surface when it comes to enveloping women and minority founders into the fold of alternative investments. We can do better.
Nishad Parmar is senior partner, CIO, LOUD Capital. This op-ed was based on remarks delivered at a recent panel discussion hosted by the National Minority Supplier Development Council (NMSDC).