Black founders receive roughly 1.2% of all venture capital funding in America. One reason cited is that Black venture capitalists make up only around 2% of the venture capitalist pool. Of course, that’s part of the problem. Still, other sticky issues make it difficult for entrepreneurs of color to get their innovations off the ground. This article looks at some challenges, successes, and VC firms working to disrupt the funding status quo.
You Need Early-Stage Funding to Launch
As a founder, you know the importance of early-stage funding. Accessing capital is challenging for every entrepreneur, but it’s even more difficult for Black startup entrepreneurs.
“The market is hugely competitive, and the system is fraught with inequities.”
The lack of early-stage funding is an impenetrable barrier to success, resulting in very few Black-led startups in the consumer, tech, and other non-service-based industries.
However, the picture is improving.
According to Crunchbase, Black entrepreneurs secured almost $1.8 billion during the first half of 2021, surpassing the total $1 billion invested in Black founders in 2020.
Black female startups are seeing incremental increases in venture capital funding. Yet, it’s still only around .34% of the total venture capital spent in America in 2021. (Crunchbase data)
Also making it to the “good news” chart was the first IPO for a venture-backed US company with a Black founder and CEO, Compass, founded by Robert Reffkin. The company went public in April with a valuation of $8 billion on the first day of trading.
What’s fueling the change for entrepreneurs of color?
More Black investors are launching their funding startups, and more investors of color have moved to partner level at the major venture capital firms.
Of course, one can’t ignore the impact of the George Floyd murder and the Black Lives Matter movement. This was undoubtedly a pivotal catalyst that has impacted Silicon Valley and the mainstream venture capitalist community.
However, 1.2% of roughly $147 billion in venture capital invested in American startups in the first half of 2021 is still a tiny number. Thus, the challenges for entrepreneurs of color persists.
What Can Entrepreneurs of Color Do To Access Seed Funding and Venture Capital?
Tay Sweat, founder of Secure the Bag with Tay, offers tips for Black Americans seeking funding and investors to startup small businesses:
- Improve your financial literacy and learn about investing, so you can cover the initial costs of your startup yourself. Then, of course, you’ll still need angel investors, but at least you can kick off your great idea.
- Learn how to build a network. It’s always about who you know; it doesn’t matter the topic. Recommendations from friends and colleagues play a significant role in securing angel funding. Having a network is critical to business success and even more so when applying for early-stage financing. Joanna Smith, the founder of AllHere, an edtech startup, says she used two accelerator programs to learn how to pitch investors. “The hardest part is, honestly, access to the network,” she said.
- Use Crowdfunding platforms. Make use of the Black Owned Businesses sub-page and market your concept.
- Research Non-profits. There are dozens of non-profit organizations focused on funding Black entrepreneurs, do your research and submit applications. Some examples are EnrichHer, Runway Capital, Collab Capital.
The things you need to do to secure venture capital and seed funds are the same for all entrepreneurs.
- Write a comprehensive business plan that includes your vision, mission, and marketing strategy. Emphasize what you’re going to do and what problem you come to solve. Include two-to-three-year growth scenarios and realistic financials.
- Build relationships with your local banks and community stakeholders.
- Create an advisory board, people with experience in your industry, not friends and family.
- Validate your market. Don’t rely on anecdotal evidence gathered by others in your industry. Instead, talk to real people, engage in conversations to validate your assumptions, confirm that you’ve identified your customer personas accurately.
They Don’t Understand Your Mission
One of the challenges entrepreneurs of color face is that venture capitalists rarely appreciate the market they want to serve.
Jorge Rios approached many venture capitalists to request seed money to launch his messaging app, Bridgefy. His technology relies on Bluetooth and mesh networks rather than the internet. The funds he approached didn’t understand his mission—to provide a real-time communications tool for poor people with no internet connection. Likewise, Rios says they didn’t understand that there are people in the world without access to the internet. Finally, Mac Venture Capital gave Rios the crucial funding he needed.
Nor Appreciate The Business Model Of Entrepreneurs of Color
Lori Shao faced significant hurdles accessing venture funding for her startup, Finli, an innovation designed to relieve afterschool programs, daycare operators, tutors, martial arts centers, and others from tedious paperwork. Shao noted that these small businesses can’t scale because they’re burdened with paperwork and don’t have the time to market. With her startup, these small businesses can outsource their entire back-office operations to Finli, leaving time to focus on growing and serving their customers.
But, Shao says the venture capitalists she approached didn’t appreciate her business model. Instead, they questioned why she wanted to waste her time on a lower-income consumer base. Her technology, they suggested, could easily be sold to more affluent and established businesses. So Mac Venture Capital invested $1 million in Finli toward its initial round of $3.5 million, which was a lifesaver for Shao.
Mac Venture Capital was founded in 2019 when two smaller funds merged, successfully raising $110 million for its inaugural fund.
Seed Funding and Venture Capital for Entrepreneurs of Color
Brown Venture Group
Best Buy recently announced its $10 million investment in the Brown Venture Group, a venture capital fund with a mission to provide startup capital to entrepreneurs of color. The Best Buy investment will move them closer to their goal of raising $50 million. The focus is on pre-seed funding and early-stage companies led by Black, Native American, and Latino entrepreneurs with innovative ideas ready to bring to market.
Sinai Capital Partners
Sinai Capital Partners, based in Los Angeles, is one of the largest Black-led venture capital firms. They raised $600 million in 2020, which they will invest in media, entertainment, and technology startups.
This investment firm provides early-stage funding to entrepreneurs of color in Massachusetts, Northern California, or the Bay Area. The Fund operates like “friends and family” early-stage seed fundraising and also provides coaching.
This investment fund supports Black founders ready to launch sustainable, innovation-centered businesses.
Hustle is a venture capital fund that provides pre-seed and early-stage seed investment to startups operating in the fintech, digital health, and B2B space.
As one of the first accelerators serving early-stage founders of color, NewMe has helped its clients raise more than $47 million in VC funding. The accelerator offers an entrepreneurship program for early-stage founders and their teams and provides mentorship. It is perfect for founders of color who are at the beginning stages of formulating their new business.
Black Business Accelerator
On June 15, 2021, Amazon announced that it’s committing $150 million over the next four years into an accelerator that will provide financial support, mentorship, business education, marketing, and branding support to Black entrepreneurs. Amazon formed the initiative with the U.S. Black Chamber of Commerce, Amazon’s Black Employee Network, and the US Minority Business Development Agency. Amazon says its mission is to “help build sustainable equity and growth for Black businesses.”
Sesie Bonsi, founder and CEO of Bleu, a fintech platform, says that accelerators help founders further define their services or products. Accelerators also provide an ecosystem within which minority founders can build networks. He suggests looking for accelerators that are open to minority founders by using platforms such as F6S.
Pitchbook.com produced an extensive list of “53 Black founders and investors to watch in 2021.” On the list is Harlem Capital Partners, an early-stage venture capital firm, and the Fearless Fund, which provides pre-seed, seed level, and Series A funding to women of color-led startups.
The inability to access early-stage seed funding is a serious impediment to the ability of founders of color to advance their innovations to the startup phase. While progress has been made, there is still much work to be done. In the meantime, improve your financial literacy, learn about investing, network, collaborate, crowdfund and write your business plan.
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