In 2016, the Center for Global Policy Solutions reported that due to discriminatory financing practices and a bias towards companies primarily operated by white males, America is losing out on over 1.1 million minority-owned businesses. As a result, the economy is foregoing over nine million potential jobs and $300 billion in collective national income. Four years later, the problem still persists—and then some.
People of color have faced economic inequality for hundreds of years in this country, but the recent Black Lives Matter protests have made generation-spanning problems into a hot button issue of our present time. As hundreds of thousands of Americans across the country peacefully protest against systemic racism and police violence—all during the coronavirus pandemic that disproportionately kills Black people—they are turning a spotlight on institutional bias throughout all corners of our society. One area that requires systemic change?
Entrepreneurship and the venture capital system that fuels it.
The United States remains inequitably behind when it comes to connecting and putting dollars into companies led by Black entrepreneurs. Major VCs are risk-averse and look for existing patterns of success prior to making an investment. But before they even reach the stage of pitching a firm, Black and minority would-be entrepreneurs have a lack of access to capital that would allow them to get their ventures off the ground in the first place.
For decades, an invisible barrier has prevented numerous founders from reaching their full potential. As a historical product of the racial wealth gap—the inherent disparity in median wealth between people of different races—most Black entrepreneurs do not have access to a network that can provide them with a type of investment known as a “Friends and Family” round. As a result, they’re rarely able to make that crucial first step toward jump-starting a business. This factors into their lack of access to other outside capital, because banks are unreliable without significant collateral and proximity to accredited investors is limited. In addition, the venture capital community has not prioritized or sourced from underrepresented groups to place investments.
Because minorities comprised just 8.5% of entrepreneurs pitching their businesses to angel investors early last decade, and only 15% of these minority companies successfully translated a pitch into dollars, not enough Black-owned business ideas even get a chance to try. Even when founders get into the room to make a pitch, the chance of getting follow-on capital or later-stage investments is almost zero.
As the founder and president of Venture Noire—a nonprofit and venture catalyst partner that provides curriculum, mentorship, and access to capital for diverse entrepreneurs—I see this vicious cycle day in and day out.
People have called out diversity issues in the entrepreneurial space for years, especially as places like Silicon Valley continually made nonminority millionaires and billionaires overnight. It’s shocking but not surprising that, for example, the latest funding round for the electric scooter startup Bird totaled more than the VC funding received by all Black women in 2019, combined. In terms of hiring, just 4% of the venture capital workforce is Black. Of the few Black
venture capitalists that exist, even fewer are in decision-making positions.
People are taking notice, with venture capital firms issuing public statements condemning racism and all its forms. Other heavy hitters like Andreesen Horowitz and Softbank pledged initiatives aimed at underserved founders and other entrepreneurs of color.
These are good steps, but there needs to be an immediate impact for Black-owned and Black-founded businesses. One way to do this is to accelerate diversity representation at executive and board levels in current structures. At the same time, there needs to be immediate accelerated investment in diverse entrepreneurial endeavors, even despite institutionalized barriers.
To make the startup, entrepreneurial, and investing process more equitable, progressively led and owned groups must collectively propel underrepresented founders through the discriminatory obstacles they face. Funneling more dollars into underrepresented groups within the community means you create jobs. Jobs then grow resource platforms, which creates an ecosystem of shared resources, like legal services, financial modeling, and even development expertise. Density often creates success.
There are too many narratives out there that make it sound like Black people are complaining because things aren’t “fair” in business. That argument doesn’t work well because American business doesn’t factor for fairness. Business leaders and investors can’t only approach this problem from a fairness standpoint. They need to understand that it’s about missed opportunity as well. Minorities as a consumer group represent nearly $4 trillion in buying power and significantly influence the mainstream. The fact of the matter is that investing in underrepresented communities is just smart and lucrative business.
The financial and investment community need to join diverse leaders on the mission to lessen the income inequality gap by catalyzing the success of minority-owned businesses. Through the creation of more businesses, we’re creating more jobs and creating more income for a group that is historically underfunded and underutilized. We still have a long way to go, but fueling the growth of minority-owned businesses is the right way to establish an equitable entrepreneurial ecosystem—and a thriving U.S. economy.