Venture Capital for Minority Founders: What to Consider

Increased Funding for Black Entrepreneurs: A Shift or Just a Moment?

In the first six months of 2021, funding directed towards Black entrepreneurs in the United States reached almost $1.8 billion. This represents a quadrupling of investment compared to the same period in the prior year.

Despite this significant increase, a study by RateMyInvestor and Diversity VC reveals that the vast majority of venture-backed startups continue to be founded by white, male graduates of Ivy League universities, primarily located in Silicon Valley.

The Question of Lasting Change

With venture capital firms increasingly pledging support for Black and minority founders, and with the emergence of government initiatives – such as New Jersey’s $10 million allocation for a seed fund targeting Black and Latinx startups – the question arises: will these efforts lead to genuine, systemic change?

Alternatively, will the venture capital industry find itself revisiting the same discussions regarding shortcomings in representation within its funding structures?

Concerns About Capital Access

An analysis by Crunchbase of the venture-backed startup landscape confirms the anxieties of many industry observers. Many believe that substantial alterations to the status quo are unlikely.

As a Black fintech founder myself, I contend that venture investors often prioritize lower-risk investments. This frequently translates to funding for companies in later stages of development, rather than those in the early or pre-seed phases.

The Challenge for Founders Without Networks

A critical issue remains: what resources are available to minority founders who lack the support of family, friends, or established networks to secure initial funding – often around $250,000?

While venture funding can be difficult to obtain, there are strategies that startup founders can employ to navigate the system effectively.

Strategies for Securing Funding

• Explore alternative funding sources beyond traditional venture capital.
• Focus on building a strong network of mentors and advisors.
• Develop a compelling pitch deck that highlights market opportunity.
• Consider bootstrapping or seeking angel investors initially.

Understanding the Challenges Faced When Seeking Venture Capital

Securing initial investment from venture capital firms presents a significant hurdle, particularly for founders from minority backgrounds who may initially underestimate the complexities involved. A common misconception is that staying informed through publications like TechCrunch and analyzing publicized VC deals will automatically translate into positive responses and engagement.

However, this approach often proves ineffective, as media portrayals and company narratives frequently oversimplify the funding process. The unique path minority founders must navigate to obtain funding is often overlooked in these accounts.

Prior to successfully raising $2 million for Bleu, a mobile payment platform leveraging beacon technology for streamlined and secure transactions, I personally endured numerous rejections. The effort required to simply secure an introductory meeting with a VC fund is substantial, demanding a dedicated, full-time commitment to pitching both the business concept and yourself.

Even when meetings are secured, inherent biases can emerge during funding discussions. The offers presented to minority founders can be surprisingly unfavorable. While the full requested amount may be proposed, it’s often not delivered as a lump sum.

This staggered funding approach, which I believe stems from a lack of confidence, effectively places the founder under constant scrutiny. Founders from underrepresented groups must acknowledge the extended timeline and inherent disadvantages they face when seeking venture capital.

Despite these obstacles, success is attainable, but requires considerable patience and resilience. It’s crucial to recognize that the playing field isn’t level from the outset.

Key Considerations for Minority Founders

• Be Prepared for Rejection: Expect a high volume of rejections, understanding they may be influenced by unconscious biases.
• Understand the Funding Timeline: The process will likely be longer and more arduous than anticipated.
• Scrutinize Funding Terms: Carefully evaluate any offers, particularly those involving staged funding releases.
• Focus on Self-Advocacy: Effectively communicate your vision and value proposition.

Ultimately, navigating the venture capital landscape as a minority founder demands a realistic outlook, unwavering perseverance, and a keen awareness of the systemic challenges that may exist.

Preparing for Funding Challenges

After realizing the complexities inherent in securing funding, my primary strategy became identifying ways to monetize existing business concepts, independent of venture capital.

Consider this: how can revenue be generated without relying on institutional investors, personal connections, or established networks? Experiencing repeated rejection – even 100 times – can surprisingly fuel a stronger entrepreneurial drive.

This resilience is often seen in minority businesses facing similar hurdles, allowing them to gain a competitive advantage through supplementary ventures or platforms like GoFundMe and Kickstarter.

The Value of Ancillary Businesses

While often viewed as secondary, ancillary businesses can establish a consistent income flow and support your primary business objective. Critically, generating revenue outside your core offering proves to investors your ability to develop desirable products and cultivate customer loyalty.

Identifying a specialized market and conducting thorough client surveys is essential. Gather feedback on specific needs, then develop a product incorporating that input and release it to a select group of beta testers.

Upon public launch, consider utilizing resellers to minimize internal staffing costs and create a recurring revenue model.

Potential Pitfalls of Ancillary Revenue

However, don’t underestimate the challenges of ancillary businesses. Over-reliance on this revenue can lead to payment complications, distractions from client or partner customization requests, and disruptions within the supply chain.

For example, I developed a point-of-sale (POS) software platform for merchants. This provided an independent revenue stream that seamlessly integrated with Bleu’s payment technology, helping to sustain the core business while seeking further funding.

A Growing Trend: Independence from Venture Capital

In 2019, The New York Times published an article titled “More Start-Ups Have an Unfamiliar Message for Venture Capitalists: Get Lost.” This article underscored a growing trend of entrepreneurs actively choosing alternatives to VC funding and forming independent movements.

If the fundraising process becomes excessively difficult, remember that viable alternatives always exist.

Gaining Momentum Through Accelerator Programs

Accelerators provide a valuable opportunity for new businesses to refine their offerings, rapidly expand their professional connections, and gain access to influential circles that would otherwise be inaccessible. For me, applying to accelerator programs as a founder from a minority background proved pivotal. It was through one such program that I connected with a key investor.

This investor was instrumental in establishing our credibility and unlocking access to new networks, potential investors, and valuable client opportunities. A proactive approach to identifying accelerators specifically seeking minority founders is highly recommended.

Platforms like F6S can be utilized to locate programs and early-stage growth initiatives dedicated to fostering innovation across diverse global sectors, including financial technology. I discovered the VC FinTech Accelerator in 2016 through this method, a program where minority founders comprised a significant portion of the cohort.

Subsequently, Bleu was selected for the 2020 cohort of the IBM Hyper Protect Accelerator. This accelerator is specifically designed to support groundbreaking startups operating within the fintech and health tech landscapes.

These programs typically provide startups with intensive workshops, expert technical and business guidance, and crucial connections to a broad network of partners, customers, and stakeholders.

To make a strong impression on accelerator programs, develop a concise pitch deck and a compelling company video – ideally under two minutes in length – showcasing both the founder and the product. Actively participate within the fintech community to generate awareness.

Exploring Alternatives: Government Funding

While government funds represent another potential funding source, their track record of successful startup investment is limited due to a variety of factors.

Generally, government funding adopts a less interventionist strategy compared to venture capital. This is because government funds aren't subject to the same performance pressures from their limited partners (LPs), which include both institutional and individual investors.

Minority founders often require an investor who actively participates in the growth of the company. However, government-backed funds often have less stringent requirements regarding capital returns.

It’s important to consider whether governmental entities are genuinely focused on identifying and supporting the most promising minority-owned startups capable of delivering substantial returns on investment.

• Key Takeaway: Accelerators offer a more engaged partnership than typical government funding.

Expanding Business Reach Through International Investment

Within the United States, subtle social preconceptions, ingrained stereotypes, and unconscious biases frequently influence decision-making. These cultural norms, however, can differ substantially in other nations, particularly concerning evaluations of teams or founders and their historical experiences with discrimination.

Observations indicated that investors originating from Southeast Asia, Nordic nations, and Australia demonstrated a greater propensity for risk-taking, specifically concerning emerging contactless payment technology. This inclination correlated with declining cash usage within their respective regions, as evidenced by the achievements of companies like Klarna and Afterpay.

Initial Market Assessment

Prior to seeking international funding, comprehensive market research was undertaken. This involved analyzing annual reports and publications like Nielsen reports, PaymentSource, and official government documents and white papers to determine global cash utilization rates.

The research highlighted Australia as a leader in fintech adoption, with approximately 80% of the population regularly employing contactless payment methods. Furthermore, the financial services industry significantly contributes to the Australian economy, generating roughly $140 billion in GDP annually.

Securing Australian Investment

Following these findings, consultation with the Australian Department of Foreign Affairs and Trade (based in the U.S.) led to recommendations for relevant regulatory payment groups.

A subsequent trip to Australia facilitated direct engagement with the banking sector. An Australian investor, keenly aware of the growing demand for mobile payment solutions, was identified through networking.

This experience contrasted sharply with responses from U.S.-based investors who still heavily relied on traditional cash and card transactions, and showed little interest in the proposed technology.

Key Takeaways for Founders

This situation underscores the critical importance of proactive market research and actively pursuing investors, rather than passively awaiting their interest. Success isn't based on a formula; it requires leveraging existing networks and utilizing platforms like LinkedIn to connect with potential funders.

Addressing the Imperative for Internal Diversity in Venture Capital

A more inclusive approach to VC funding is essential, specifically regarding women and minority groups. This necessitates addressing both the limitations within the existing funding pipeline and the lack of diversity present within VC funds themselves.

Currently, venture capitalists frequently rely on networks originating from prestigious university programs like Stanford, MIT, and Harvard. Students from more affluent backgrounds are uniquely positioned to benefit from these established, yet often outdated, networks.

The disproportionately low amount of venture capital directed towards Black and Latinx founders is, in part, attributable to a significant information gap. Many female and minority entrepreneurs are simply unaware that VC funding is a viable option for their businesses.

Should you successfully secure seed funding, it is crucial to disseminate this information within your professional circles to empower others. Inclusion must begin at the educational level, but the underrepresentation of Black and minority students at elite institutions underscores the need for greater diversity among venture capitalists.

Even a modest increase in representation within VC firms would represent a substantial and positive shift. A growing number of funds are publicly announcing initiatives focused on investing in minority-owned businesses, and thorough investigation of these programs is recommended.

However, it’s equally important to scrutinize the internal demographics of these firms. What proportion of executive leadership positions are held by individuals from diverse ethnic backgrounds?

Transforming the venture-backed startup landscape requires a fundamental change, starting with diversifying the individuals who authorize funding. Funds led by Black entrepreneurs, such as Sequoia, and those prioritizing diversity – like Women’s Venture Fund, BackStage Capital, and Elevate Capital Inclusive Fund – are pioneering solutions.

These initiatives will ultimately better reflect the demographic diversity of the United States. The broader investor community must proactively cultivate relationships with, and provide capital to, a wider range of women and minority-led startups.

Despite the obstacles minority founders encounter when seeking VC funding, an increasing number of funding pathways are emerging as these disparities gain media attention. As the conventional system evolves, resilience is key.

Entrepreneurs should prepare for potential rejections and actively seek out appropriate accelerator programs to expand their networks. If securing VC funding proves challenging, exploring alternative strategies – such as bootstrapping or targeting international markets – may present viable opportunities.

Alternative Funding Strategies

• Bootstrapping: Self-funding your business.
• International Markets: Exploring funding opportunities in different countries.
• Accelerators: Programs designed to help startups grow.

These options can provide crucial support and open doors to new possibilities.