- What Diverse Founders Must Do to Combat Funding Bias - August 2, 2019
It is no secret that the funding world has a diversity issue.
As an industry, a recent analysis found that 70 percent of the venture capital industry is white. The study also noted that just 3 percent of venture capitalists are black, while merely one percent are Latinx. Further, about three-quarters of U.S. venture capital firms still have zero women partners.
These are shocking statistics, and it is such an issue that Democratic Presidential hopeful Elizabeth Warren has made the inequality part of her campaign; writing the typical black entrepreneur starts a business with $35,000 in capital, which is a third of the startup capital for the typical white entrepreneur.
For the moment, this is the harsh reality that founders of diverse backgrounds must navigate. It is sad but true that diverse founders often must pitch harder and more often in order to achieve a similar result. Despite these challenges, diverse founders still have opportunities to excel.
I have started two companies that have raised over $30 million in total. In my experience, there are a few things that helped us to push through; this includes perfecting the pitch, aligning with larger networks, and tenacious work ethic.
Perfect the pitch
Pitching matters for everyone, but it is especially important to those from diverse backgrounds. Entrepreneurs of diverse backgrounds need to pitch many more people on average before an investor commits, so fine-tuning the message is vital.
People often forget that pitching is really just sales, and sales is often all about relationships. When pitching a business, founders are literally selling securities (or sometimes debt) in their company. It is also selling yourself and your vision. When you think about “rainmakers” who continually haul in huge contracts or deals, it is often because they have established the best relationships in their industry.
Diverse founders are less likely to have these relationships in the beginning, since systemic bias exists at all levels of business. In my experience, I’ve always felt that my pitch had to be much stronger than average. In order to improve, I studied pitch decks made by the most successful fundraisers. I found commonalities between their companies or sectors and my company. I practiced the pitch over and over again. I also showed my presentation to experts who had already seen hundreds or thousands of pitches. I took their feedback and iterated further. Rinse and repeat.
Align for the cosign
One successful approach we’ve used is to partner with a venture accelerator. There are a ton of early-stage programs and investors out there that welcome “cold” approaches. Techstars, Y-Combinator, 500 Startups and many others, for example.
If you lack that crucial network of friends and family investors, these programs can help to build one. They also have a strong track record of preparing founders to build better businesses through best practices used by portfolio companies that have graduated in the past.
Aligning with a larger name can give you additional credibility and show potential partners and investors that the founder is onto something big. If nothing else, these organizations can serve as a “screen” or “filter” that lets future investors know that the business has been vetted and decided there is something of value.
Have urgency, but be patient
Fundraising almost universally takes longer than most entrepreneurs think it will.
Often, founders find themselves reading a headline that “Company X” just raised millions of dollars. It sounds like an overnight success, but it’s more likely that the process took six months or longer from start to finish. Further, that doesn’t count the many months or years typically required to build a business to the point that it is ready to pitch to investors.
This report by Harlem Capital identified just 105 entrepreneurs of color who had raised at least $1 million, for a total of $2.7 billion. Those raises took place over a number of years, and venture capital is a $100 billion industry, meaning people of color take only a tiny slice of the pie when it comes to venture capital.
A good tip is to talk to others who have done it. Be meticulous when planning and ensure you have the personal and financial freedom to compensate for an overly long fundraising process.
The future of diverse funding
The good news is that there are cultural and political signs that diversity in funding is growing. As mentioned, presidential candidates are honing in on the diversity disparity and political pressure could be on the horizon. Perhaps more importantly, there is plenty of evidence to suggest that diverse teams enjoy better business outcomes.
Research from Harvard Business Review shows that homogeneous teams lead to poorer decision making and worse investment outcomes. The report notes that uncertain competitive environments require creative thinking, and teams composed of diverse collaborators were better equipped to deliver it.
I have no idea what will bring about change, but based on all the intelligent, hard-working, diverse founders I meet, I can only assume that we’re headed in the right direction.
Soon, I think investors will realize that they are missing an opportunity for higher returns on their money. Hopefully, that will add to the pressure to back more diverse founders. In addition, investors like to pattern match. The more success stories these investors see from diverse founders, the more they may start seeking out the great opportunities that so many are missing out on today.