There’s a gaping hole in venture capital and other sources of funding for women-of-color-owned businesses in the U.S. Numerous articles outline why excluding and withholding funding from an entire segment / race / gender of business founders is not only morally unsound, but unprofitable. Investing in women — especially women of color — as both workers and innovators is necessary to ensure a healthy economy society, and for investors’ returns.
Where we must focus now is revealing the ways in which investors are complicit (perhaps unintentionally but in practice) in perpetuating biases and creating blockades for innovators based on their gender, race and ethnicity, plus the intersections among these three. Investors can right this wrong by calling out the biases that permeate the venture-capital and financial-services industries. Here are some steps to take to turbocharge the U.S. economy with fresh entrepreneurial energy:
Seek out women-of-color-owned businesses
Relying on your not-as-diverse-as-you’d-like network or hopping on the latest bandwagon of trendy tech jargon to source your investments is a lazy and unproductive practice. It’s also problematic. When your view is limited to those with access, connections and “friends and family” seed money, you’re unable to see the countless other potentially lucrative businesses serving new markets.
Chances are if your investment portfolio is homogenized with monoculture leadership, you need to make an the effort to identify and support diverse-led teams, which studies regularly show tend to be more innovative, productive and profitable. There is no “pipeline problem” in funding, but there is a lack of opportunity for women-of-color-owned businesses.
The 2021 Astia Edge report explains this best: “Historical inequities, combined with the racial segregation of business and social networks, meant that companies often lacked access to early funds (the term of art for this early funding is ‘friends and family funding,’ which belies the profound barrier it creates in the market), access to serial entrepreneur networks, or connections to leading business services such as legal advice to enable venture investment into the company.”
In the first quarter of 2021, for example, $953 million was invested in Black- and Latinx women-founded companies, with the majority of this ($657 million) going to three so-called unicorn companies: Cityblock Health, BlockFi, and Savage x Fenty. This still leaves investment for Black and Latinx women at less than 1% of all venture capital funding.
Considering that 61% of Black women self-fund their startups, there is a clear disconnect in the rate at which Black-owned companies are launched and given tools needed to sustain and thrive.
Reevaluate why you trust some founders over others
While trusting and believing in a founder is key in early stage investing, determining who is charismatic and worthy of leadership is often based on its own set of implicit biases. Someone who is seen as an innovative go-getter by some may be perceived as “aggressive”, “bossy” or “difficult” by a more biased person. On the flip side, this also means that someone who is genuinely unqualified to do the job might go far if they’re charming enough or “leadership material” based on a set of implicit biases.
We’ve witnessed recent and unfortunate examples of charismatic founders who swindled investors based on their charisma and false promises. There’s Elizabeth Holmes, the “dropout” founder of now-disgraced biotech company Theranos, who was recently found guilty of investor fraud. Or look at Adam Neumann, who caused We Work to burn out just as quickly as it boomed.
Then consider the Black woman founder who has had to listen to a venture capitalist tell her she was “just not the right person” to take her product to market despite having the ideas, tech and even revenue to back her up. The data is clear: diverse teams led by women are more profitable and more successful.
Reconsider bias against founders who have not secured previous funding
A lack of generational wealth among people of color essentially eliminates the ability to have a “friends and family” round. A 2021 Astia Edge report found that Black women CEOs tend to raise early-stage funding in small amounts over many years. Moreover, a women-of-color-owned business might not have prior funding due to systemic racism and opposition to attracting investment. Refusing to fund a brilliant idea led by a talented CEO due to lack of previous funding further perpetuates bias and kills innovation in its crib, which stifles economic development.
Closing the racial wealth gap would inject up to $1.5 trillion into the U.S. economy by 2028. For America to emerge from the COVID-19 pandemic stronger than before, we must democratize access to capital. The demographics of the U.S. population are changing dramatically. All great ideas and great founders should get the funding they need, whether via loans, equity investment, revenue-based financing and other means — no matter what they look like. To do otherwise is to leave money on the table and hamper the potential explosive growth of the U.S. economy.
Cheryl Contee is CEO of The Impact Seat Foundation and founder & chair of the mission-driven digital agency Do Big Things. She is the author of Mechanical Bull: How You Can Achieve Startup Success (Lioncrest Publishing, 2019).