5 Reasons Why the 1% Is the Worst for Entrepreneurs and Investors
I recently went to Black Tech Week in Miami and heard some great speakers that have been pioneers in the tech and investment space. I heard great advice from the Founder of HopStop on how he started his tech company and sold it to Apple. John Lewis Jr., Global Chief Diversity Officer of Coca-Cola, discussed how our generation (millennials) purpose is to move beyond financial stability to economic prosperity. I also was inspired to hear from one of the youngest venture capitalist (22 years-old), Delane Parnell, about how he built his enterprises and is now advising other entrepreneurs on growing their companies. But the one thing that stuck out the most to me was a stat given by an investor on how out of all the venture capital-backed companies in the country, only 1% have African-American founders and only 8% have a woman founder (CB Insights). One percent?! Wait, African-Americans make up over 13 % of the population and women make up over 50%. So why are we only in the single-digits for receiving venture capital?
These percentages are way too low for me to feel comfortable with it. I’m blessed to be in the 1% and 8%, since my company, BOLD Guidance, has received venture capital. You can read How to Raise $1/2 Million For Your Tech Startup When You’re Not a Techie to learn some tips on how I did it. However, why aren’t more women-owned and African-American-owned tech companies receiving venture capital support? I think the reasons lie with both the companies and investors.
Entrepreneurs Need Access to Advisors: Mentors are highly important when starting a new company. The knowledge they bring from their experience of starting and managing a successful company is invaluable. They can help you strategize and navigate building a company that meets necessary milestones that makes you appealing to both customers and investors.
Startups Need to be Investment-Ready: In many cases, because minority and women entrepreneurs do not have access to experienced mentors, they don’t know exactly what investors are looking for in companies. They don’t understand the different phases of investment investors provide. Also many companies do not know what key customer & revenue traction or company milestones need to be met to meet each investment phase. Having this understanding is critical for getting funding.
Investment Is About Relationships: As mentioned in my previous post How to Raise $1/2 Million For Your Tech Startup When You’re Not a Techie, investment is really about building relationships with investors and not simply just asking them to write a check. However, some founders do not have access to large circles of investors. A founder usually has to court 10 times the number of investors needed to receive the funding they need. Therefore, if they need 5 investors to invest $1 million in their company, the founders need to meet at least 50 investors. Many African-American and women founders do not personally know that many funders, so there is extra effort (and sometimes travel) that has to take place for them to access the right circles of investors.
People Invest in What They Know: Investors are more than a big check. They bring expertise and connections to your company to help you grow and be successful. Therefore, if 76% of venture capitalists are white men, how do they bring expertise to an industry that is unfamiliar to them? This means diverse entrepreneurs have to do extra work in educating investors on their industry and the market rather than simply selling them on the opportunity. Also, a growing number of African-Americans and women are becoming wealthy; however, many of them don’t invest. Some reasons include learning about the startup investment space and becoming comfortable it. There also needs to be an environment where these entrepreneurs and wealthy individuals can connect with each other. Luckily, there are some venture capital firms that are actively seeking women and minority entrepreneurs, including Kapor Capital, Camelback Ventures, National Minority Angel Network, 37 Angels, and Golden Seeds to name a few.
With the growing change in demographics, overlooking women and minority entrepreneurs for venture capital, simply means:
Venture Capitalists are Missing Out. Women and African-Americans are the largest consumers in the country and who understands this group better than women and African-Americans! Women account for 85% of all consumer purchases. Moms represent a $2.4 Trillion market. African-American buying power is projected to be $1.1 Trillion this year (Nielsen Company). Investors are losing money by not investing in companies that develop services targeting this market or created by a founder in this demographic.
There are some amazing women and African-American entrepreneurs that have started great companies – many of them I have met or mentor. There are also some wonderful investors that support companies and help them successfully grow or exit. But we have to do better about connecting this group of entrepreneurs and venture capitalists together. I plan to help bridge this gap by making more entrepreneurs investment-ready (more on that big announcement to come later). Ultimately, going beyond the 1% makes economic sense.