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Funding Minority Entrepreneurs: The Next Viral Challenge?
There’s been a lot of focus lately on the lack of gender diversity in tech, and the specific hurdles female entrepreneurs face. I’m thinking about a different diversity challenge though, namely the funding gap facing entrepreneurs of color. What drives it, and how can we in the startup ecosystem move the needle?
Minority Entrepreneur Stats
Maybe it’s an occupational hazard, but I always like to start with the numbers! According to a study from CB Insights, minority entrepreneurs received only 1% of VC funding in 2010. This figure excludes Asians, who received 12% that year. A different study, this one from the University of New Hampshire’s Center for Venture research, cited a meager figure for angel funding, with only 14.7% of minority entrepreneurs receiving angel funding in 2013 versus a nearly 21.6% funding rate for all businesses seeking funding that year.
Why is this the case and what can we do to change this?
Limits on Minority Entrepreneurship
“Pattern recognition” is one big driver. Many potential investors stick with the tried and true, so to speak. As VC Marlon Nichols put it in a recent interview on SFGate, “As investors, you tend to look for patterns, as one way to predict the future is to look at the past.” That means a disproportionate amount of funding for entrepreneurs who not only mirror the founding teams of previous successful firms, but also reflect the demographics of the VC investor base and its reliance on existing networks to source deals. Look at the “About Us” page at most VC firms and you’ll see a narrow range in terms of schooling, background, color, and gender. If you don’t have common contacts, school ties, or social networks, it’s that much harder for you to be in their opportunity set.
Access is another, related hurdle. When entrepreneurs ask me the best way to connect with VCs, the first thing I always advise them to do is to leverage their networks for warm introductions. But just getting in front of potential investors is often harder for minority entrepreneurs. Often this is because, as I mentioned above, there’s no overlap in terms of common contacts, school ties, or social and business networks, limiting opportunities for scoring a warm introduction that could lead to funding.
So what should you do if your network is light on those types of connections?
Increasing Access to Capital for Minority Entrepreneurs
Draft an investor hit list and look for opportunities to meet as many of potential funders on the on the list as you can. That could be through joining an accelerator, attending events at your co-working space, participating in pitch competitions, or one of the gazillion meetup events taking place in various startup communities.
Target investors. When you’re putting together your list, be sure to target investors with a track record of investing in businesses at your stage of development and in your targeted arena.
Tap investors with a track record of funding similarly situated entrepreneurs. As the funding disparity for minority entrepreneurs gains more attention, more funds and organizations are trying to help close it. Here are some to check out:
When you do make contact, whether that’s securing face-time or a warm intro, don’t forget to focus on the value add: what potential investors can bring to your business in terms of relationships, involvement, commitment, and expertise. And be sure to take the opportunity to ask for an introduction to someone else in their network (again, refer to your hit list) who can help you.
While crowdfunding, authorized by the Jumpstart Our Business Startups (JOBS) Act of 2012, might help at the margin, the amounts you can raise this way are small, up to a maximum of $1 million each year. It certainly sounds promising, and I’m definitely supportive if it helps entrepreneurs get up and running. But the jury’s still out at this point.
There is still lots of progress to be made, but I’m bullish that with concerted effort, we can move the needle on the funding gap.
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David Ehrenberg is the founder and CEO of Early Growth Financial Services, a financial services firm providing a complete suite of financial and accounting services to companies at every stage of the development process. He’s a financial expert and startup mentor, whose passion is helping businesses focus on what they do best. Follow David @EarlyGrowthFS.