How Black Founders Can Access Venture Capital
As VC firms pledge reforms, overlooked Black owners should capitalize.
First, the good news: The number of Black-owned businesses in the United States has significantly increased in a span of less than two decades. The U.S. Census Bureau reported that in 2002, there were 94,518 Black-owned businesses with paid employees. But by 2017, that number had increased to 124,000.
Now, the bad news: When it comes to securing venture capital (VC), Black business owners still remain far behind their white counterparts. A recent Crunchbase study reports that Black and Latinx founders received less than 3% of VC funding in 2020, and since 2015, have represented just 2.4% of the total VC raised.
Meanwhile, according to the National Venture Capital Association (NVCA), investment partners at VC firms are 80% white, 15% Asian/Pacific Islander, and 14% female, with only 3% Black, African American, Hispanic, or Latino partners assuming such roles. The cost of this lack of diversity, from both an entrepreneurship and VC perspective, can run hundreds of billions of dollars. In fact, Morgan Stanley coined it “The Trillion-Dollar Blind Spot.”
The Challenges Black Founders Face
So why aren’t Black-owned businesses having more success in the venture capital arena?
There could be several reasons, including investors’ negative biases against their race, their fears of a larger risk of failure with Black-owned businesses, and, as mentioned, a lack of representation at VC firms. Also, Black owners may lack access to financing networks or have lower net worths to use as collateral.
One interesting fact about Black-owned businesses is that over one-third of them are headed by women, marking the highest share of businesses within any racial or ethnic group.
But while there has been a notable increase in the number of Black women opening businesses since 2007, they are still more likely to encounter greater lending discrimination. Still, problems like discrimination don’t just affect women, but Black business owners in general.
How to Overcome the Challenges
While Black-owned businesses continue to face funding challenges, a sea change of sorts is taking place in the VC world. In the wake of protests over the killings of George Floyd, Breanna Taylor, and other Black citizens lost to police brutality, many VC firms have expressed their commitment to increase efforts to address systemic racism. The VC industry’s newfound emphasis on diversity signals that it’s time for Black business owners to renew their efforts and put that commitment to the test.
Before you decide to take that crucial step, however, it’s important to do your homework, talk to people in the know, and prepare your presentation based on what you learn. This will allow you to pitch to the right firms at the right time with the right information. There are two key steps you should first take.
Understand What’s Involved in VC Funding
If you decide you still want to pursue venture capital, start educating yourself on the industry. Venture capitalists are looking for a good investment that has a profitable rate of return within a specific timeframe. Are the firms you plan to approach and/or pitch to exclusively technology-focused? What types of funding do they provide—seed capital, startup capital, or bridge financing? VC firms may also expect to get a piece of the pie—for example, the deal may include a requirement for an ownership stake or other business partnerships.
Determine if your business is adaptable to the changes that may be necessary to accomplish gaining the funding. However, approach propositions with the knowledge that terms are negotiable.
Create the Perfect Pitch
This is more than just a standard elevator pitch. You must make it memorable. Know who is in the room (or on the screen) and customize your presentation to address their concerns. Share your vision, but more importantly, share the pertinent facts and figures. Be prepared to answer questions as they arise.
VC firms are looking for indicators of stability and potential market success. Be prepared to show that your company has strong leadership, a viable product or service that is needed in the marketplace, and an established and growing customer base (referred to as traction).
There are several pitch competitions held by business incubators and other organizations each year, including one at SXSW. These competitions allow you to introduce your business to many VC capitalists, media representatives, and prospective customers at once.
Practical Tips for Black Founders
Along with developing a sense of understanding of the VC world and finessing your pitch, there are certain practical tips you should keep in mind as you set out to obtain VC funding. In an email interview with The Balance, Washington, D.C.-based entrepreneur, investor, and CFO of Epigen Technology Rashad Howard offered some words of advice to Black business owners.
“Most likely, your new product or service will not ‘revolutionize’ the industry, [but] may bring a new nuance to or improve what already exists,” Howard said. Coming into a meeting with an exaggerated version of your product or service offering shows that you have not adequately studied the market.
Howard advises that you should be willing to accept hearing “no” a lot of times before you hear a “maybe” or “yes.” “You need to be persistent,” he said. “Call 1,000 times if it takes that to get a meeting.”
Raise Some Capital
Convince family, friends, and other acquaintances to invest in your company.
Howard said, “If you are not able to convince people who know you of the value of your proposition, it is going to be hard to convince investors who have to mitigate their risks and do due diligence.”
Show Your Accomplishments
Having some level or success, such as a strong customer base and existing contracts, helps make your case. Howard noted that if you can prove your business can generate a profit, you have a better chance of convincing investors.
Know Where You Fit in the Marketplace
Present clear financials when asked and have a good understanding of who your competitors are and how your product or service will operate within the current ecosystem.
Resources for Black Founders
While Black business owners can potentially capitalize on the diversity oaths and commitments of VC firms, there are several other programs and resources that are perhaps more readily available for VC funding help. These include:
- Venture Forward: NVCA’s 501(c)(3) nonprofit supporting organization conducts on-going research on diversity, equity and inclusion through the VC Human Capital Survey.
- Mid-Atlantic Venture Association (MAVA): MAVA has established programs and events like Surge and Forefront to help firms that share a commitment to improving access to capital for all founder groups.
- US. Small Business Administration (SBA): The federal agency’s Small Business Investment Company (SBIC) program can help Black business owners identify firms willing to invest in their businesses.
- Gust: Formerly Angelsoft, Gust has a searchable database for locating investors and you can contact a VC firm and apply for funding on its website.
- Black- and minority-owned VC firms: New York City-based Harlem Capital Partners and Atlanta’s Fearless Fund, for example, are changing the game of venture capital by bringing new insights and opportunities to the industry—and to you, the Black business owner.
- Additional government resources: Check out the U.S. Black Chambers (USBC) and the U.S. Chamber of Commerce for help with obtaining alternative sources of funding and support.